Light & Wonder Inc

NASDAQ:LNW

Earnings Call Transcript 2018-Q3

[Operator]

Good day, and welcome to the Scientific Games Third Quarter 2018 Conference Call. [Operator Instructions] Please note, this event is being recorded.

I would now like to turn the conference call over to Mr. Robert Shore, Senior Director of Finance and Investor Relations. Mr. Shore, the floor is yours, sir.

[Robert Shore, executive]

Thank you, Mike. Good morning, everyone. During today's call to discuss our third quarter 2018 results and operating performance, followed by a Q&A period. With me this morning are Barry Cottle; and Michael Quartieri.

Our call today will contain statements that include forward-looking statements under the Private Securities Litigation Reform Act of 1995. These statements involve certain risks and uncertainties that could cause actual results to differ materially from those discussed during the call. For information regarding these risks and uncertainties, refer to -- please refer to our earnings release issued this morning. The materials related to this call are posted on our website and our filings with the SEC, including our most recent annual report filed on Form 10-K on March 1, 2018, as well as subsequent reports filed with the SEC, including our third quarter 2018 Form 10-Q filed this morning. We will discuss certain non-GAAP measures. A description of each non-GAAP measure and a reconciliation of each non-GAAP measure to the most directly comparable GAAP measure can be found in our earnings press release as well as the Investors section on our website. As a reminder, the conference call is being recorded. A replay of the webcast and accompanying materials will be archived in the Investors section of our website at scientificgames.com.

Now I'll turn the call over to Barry.

[Barry Cottle, executive]

Thanks, Bobby. Good morning, and welcome, everyone. On behalf of the entire Scientific Games team, we are pleased to report that our third quarter results marked our 12th consecutive quarter of year-over-year increases in revenue and consolidated AEBITDA.

We remain focused on our central priority of driving AEBITDA growth in each of our businesses in order to delever the balance sheet. To that end, our 4 businesses collectively delivered 7% revenue growth, 9% consolidated AEBITDA growth, $123 million of free cash flow in Q3, which we used to make $110 million in voluntary debt repayments.

The customer feedback we received at G2E was extremely positive, and we are humbled to receive several awards including being named Land-Based and Digital Supplier of the Year. As we showcased at G2E, Game Ops is a major focus of ours and we will drive revenue improvements by making the best games for our customers in the most cost-effective manner.

We've been successfully rolling out the James Bond franchise across the country and look to continue this success by relating 2 additional titles; Tomorrow Never Dies and Live and Let Die in the first half of 2019. We are rolling out the WAVE XL in late Q4 in North America, featuring Jin Ji Bao Xi, which has been a huge overseas success, and we have a strong library of new content including Cash Wizard World and Dragon Spin Age of Fire.

In addition to the revenue opportunities, we're continuing to enhance the efficiency of our supply chain and building games more cost effectively. We expect these initiatives to collectively drive revenues, lower production cost and drive higher cash flows going forward.

We're also looking to aggressively go after markets where we see tremendous upside. As an example, we entered into a long-term strategic partnership arrangement with Gaming Capital Group to distribute slot-related products in the state of Oklahoma. We will be leveraging their extensive distribution and service network in Oklahoma for both sales and leased gaming operations.

The benefits of this partnership is we have secured a minimum purchase and share in their footprint, immediate meaningful operational efficiencies and a significant potential upside with a partner that continues to grow in a very large market. We're excited about the opportunity to grow market share, improve service and compete more effectively in this market.

Gaming Capital Group has consistently been one of our largest customers and this new arrangement strengthens our value proposition for Oklahoma. We believe the combination of our efforts will provide a more meaningful return over the long run when compared to status quo.

Our Lottery business remained strong and new innovations including high-definition specialty printing, the higher denomination tickets are driving retail sales. Our track record of innovation for lottery retailers is continuing with the rollout of SCiQ.

We executed our first significant contract, a 300 unit placement in Ohio with the state lottery determining optimal locations. We're currently piloting SCiQ in 53 locations across 9 states, and the value proposition is proving out by driving increased retail sales, providing added security and operational efficiencies for the retailer.

There are over 220,000 retailers that sell instant lottery tickets within the U.S., and we believe that up to 60,000 of them could benefit from this product.

We are also excited by the success of our iLottery offering in Pennsylvania. Since its launch in May, handle has surpassed $100 million, making it the most successful launch in the U.S.

In digital

[Audio Gap]

successfully launched OpenBet in Caesars before the start of the NFL regular season, and we are now live in New Jersey and Mississippi.

We recently closed on the acquisition of Don Best, which is the leading provider of real-time sports betting data and pricing of North American sporting events. With the inclusion of Don Best and Superbet, we add new capabilities on top of our turnkey solution to operate at state-of-the-art sportsbook, which will allow us to capture a larger percentage of the value chain in the B2B business model.

U.S. sports business -- U.S. sports bettings is in its infancy stage with just 7 states live, which represents only 6% of the adult population.

As we have commented previously, sports betting is a long-term game where the best product will always win out, and we're confident we have it with OpenBet and our other capabilities.

As sports betting rolls out across the U.S., we also anticipate iGaming will be a fast follower. In New Jersey, the only state where iGaming is active, over 50% of GGR is run through our online gaming platform. As the market share leader, we are confident we will maintain this position as additional jurisdictions open based on our unrivaled content and platform.

And finally, in our Social business, the Facebook connectivity issue we experienced in Q2 has been resolved with growing -- resuming in late July, leading to record daily revenues and daily active users in August and September.

During the third quarter, we grew revenue quarter-on-quarter by 5%, which is 14x the market according to estimates from Eilers & Krejcik.

As disclosed in our earnings release, we are considering a possible initial public offering of a minority interest in our Social gaming business in 2019. The Social gaming business continues to experience rapid growth and has achieved significant scale. We believe an IPO would provide greater flexibility to pursue additional growth initiatives specifically designed for our Social business as well as unlocking additional value for Scientific Games' stakeholders. We anticipate that the proceeds from the IPO would primarily be used to repay debt.

Overall, we are pleased with the quarter and our continued growth. As we head into the fourth quarter and look into next year, we will remain focused on achieving our #1 strategic objective of delevering our business through growth in revenue and AEBITDA. We will do this by continuing to make the best games for our customers in the most cost-effective manner to improve gaming -- Game Ops, along with innovation in our lottery and iLottery offerings, continued expansion of our Social business and capitalizing on the rollout of U.S. sports betting and iGaming.

Now let me turn the call over to Mike to provide his review of the third quarter results.

[Michael Quartieri, executive]

Thanks, Barry. Good morning, everyone. As Barry noted, our results continue to be strong. Consolidated revenue rose 7% and AEBITDA increased 9%.

As a result of our improvements, growth and our focus on deleveraging, we decreased our net debt leverage ratio to 6.7x at September quarter-end, down from 7x at the prior quarter-end. While we are pleased with our net leverage ratio going down, we will build on this momentum into 2019 and continue to remain laser focused on strengthening our balance sheet.

Now let me turn our -- to our operating units. First, our Gaming business. Third quarter AEBITDA increased by 5% or $11 million over the prior year despite revenue declining 1%. Our AEBITDA margin improved 320 basis points to 51.9%. Revenue from gaming machine sales increased 4% or -- sorry, $4 million and 3% in the third quarter.

As Barry noted, during the quarter, we entered into a strategic long-term relationship with Gaming Capital Group. In connection with this strategic relationship, a portion of our existing gaming machine footprint in Oklahoma was sold to our partner.

We shipped 7,663 machines globally, including 4,266 replacement units in the U.S. and Canada, with 929 units associated with our Gaming Capital Group strategic relationship, 223 for expansion units and 549 VLTs to Illinois.

Internationally, shipments totaled 2,625 compared to 2,940 units shipped a year ago.

Year-over-year, our average selling price for the quarter was up 3%. I'd remind everyone that last year's third quarter replacements were up 30% year-over-year, which has made for a tough comparison. On the heels of our strong showing at G2E, we continue to expect strong replacement demand in the fourth quarter, with it being the seasonally strongest of the year.

In Gaming operations, revenue was consistent on a quarter sequential basis at approximately $160 million. On a year-over-year basis, revenue was down 10% or $17 million, of which $4.5 million was the result of new revenue recognition accounting for WAP jackpot expense. For comparison purposes, the WAP jackpot expense was $5.5 million and treated as cost of services in the prior year. This change in classification has no impact on operating income, AEBITDA or cash flow.

On a quarter sequential basis, our installed base of WAP, premium and daily fee participation units was down 1,554 units, which includes the impact of our new strategic relationship with Gaming Capital Group and to a lesser extent, the removal of lower yield in Oregon VLT units right at the end of the period, which are currently being redeployed in other jurisdictions.

Our WAP portion of our footprint is up nearly 200 units from the prior quarter, driven by the successful rollout of our James Bond franchise. The bond rollout in terms of placement has been lower than we expected due to the tight pace of state approvals. But the initial performance has been strong with Casino Royale and Thunderball on our own Gamefield 2.0 cabinet comparable to Willy Wonka on Gamescape, our best-performing WAP game to date at the same point in their life cycle.

Revenue from our other participation units was down $3 million on a quarter sequential basis. The installed base was up 152 units quarter-over-quarter. We placed an additional 430 units in Greece, bringing our total footprint there to over 3,400 units. This increase was offset by a decline in units in the U.K. This mix shift of the installed base had a negative impact on our yields.

Gaming systems revenue increased $8 million year-over-year or 12%. The growth is primarily related to our ongoing installations in casinos in Canada, coupled with increased hardware sales for shipments of our innovative iVIEW 4 player interface display units. iVIEW 4 sales continue to be very strong, and we are still in the early innings of the replacement cycle of the existing 300,000 placements of prior versions of the iVIEW. Through September 30, we have placed nearly 88,000 iVIEWs in service since its launch.

Table products decreased $2 million year-over-year or 3%. Strength in recurring utility products was offset by a tough comp in product sales with a prior year, including a large international expansion project.

Turning to Lottery, our third quarter revenue increased $4 million and AEBITDA was up $3 million compared to the year ago. Within our Lottery business, our systems revenue increased $5 million or 8% year-over-year. The growth was driven largely by our new Lottery system installations in Maryland and Kansas and our new investment in Keno in Pennsylvania.

Turning to our Social segment. Revenue continued to grow strongly. Revenue increased 11% year-over-year to $105 million and AEBITDA increased 34% to $27 million. On a quarter sequential basis, our third quarter revenues were up 5% compared to the second quarter. The Facebook connect issues that impacted the second quarter and into July are behind us. And as Barry stated, August and September were both record months for daily revenue and daily active users.

In digital, we generated $61 million in revenue and $12 million in AEBITDA. We have been focusing resources on the development of our U.S. sportsbook and the New Zealand Racing Board implementation. This is being driven by redirecting employees that are generating time and materials revenues in the U.K. to help in the rollout in these markets. Although this redirection will be accretive in the coming quarters, it is negatively impacting our short-term results.

In early November, we disclosed -- sorry, we closed on our acquisition on Don Best Sports Corporation, which is the leading provider of real time sports betting data and pricing in North America sporting events. This acquisition instantly gives us a full turnkey offering to our customers.

We also successfully launched gaming content across 12 new client sites and signed 8 new customers on our OGS platform during Q3.

During the quarter, we recorded $339 million in restructuring and other charges, which includes a $310 million charge related to the verdict in the Shuffle Tech legal matter. We have not made any payments on this matter, and the verdict is still subject to posttrial motion and the appeal process.

Turning to cash flow. We reported $223.5 million in net cash flows provided by operating activity, which is a $114 million improvement over prior year, principally related to improvements in our operating results, permanent enhancements to our working capital and the timing of interest payments due to the refinancing completed earlier in the year. We used this cash from operations to make $122 million of debt repayments, including $110 million of voluntary net repayments under our revolver.

Just to remind everyone, the fourth quarter will include higher scheduled interest payments and our final payment of EUR 90 million for the Lottery instant ticket concession in Italy.

In addition, we recently sold a real estate asset for $40 million in proceeds, which closed in October. We continue to monitor capital markets for the best opportunity to optimize our capital structure, including potential refinancings in order to generate future cash interest savings.

This year includes several -- this includes cash usage related to renewal of our Lottery instant ticket concession in Italy, refinancing expenses and higher CapEx spend on several long-term and highly accretive projects, including ongoing platform development in digital from the expansion in the U.S. and around the world, Lottery systems implementations in Maryland and Kansas and the acceleration of our installed base of leased gaming machines. These projects are generally very long in duration, in initial terms ranging from 7 to 10 years before renewal options. These investments establish a clear path for free strong cash flow in 2019 and beyond.

In summary, I would remind everyone that our commitment remains firmly focused on deleveraging and debt reduction, which will be accomplished by continued growth in revenue and effectively operating the business.

Operator, you can open up the line for questions.

[Operator]

[Operator Instructions] The first question we have will come from Barry Jonas of SunTrust.

[Barry Jonas, analyst]

So first question is -- the stock has been off meaningfully since Q2. What do you attribute that weakness to? And does this change how you approach the business at all?

[Barry Cottle, executive]

Barry, so -- look, first of all, day-to-day changes in the stock don't change how we run the business. We obviously certainly believe there is a disconnect between the share price and the underlying value. Both of us here bought stock at $33 and believe it was undervalued at those levels, but we remain focused on delevering the business by growing predictably and consistently growing the top line revenue and AEBITDA to generate free cash flow. And so we're laser focused on our growth initiatives to grow the company in the right way. Growing Game Ops with improved content and cost-effective cabinets, expanding on [ leading ship ] and wallet share in North America slots, while we see opportunities in international expansion there, continued Lottery growth with innovative offerings like iLottery and SCiQ, a systems business with strong year-over-year growth, market-leading position and demonstrated by winning 45 out of 48 successful recent bids, a solid worldwide digital business with upside in the U.S. for sports and iGaming, a Social business that's growing strongly with record months in August and September and then, focusing our CapEx spend on highly accretive long-term projects to drive continued growth.

[Barry Jonas, analyst]

Great. So I guess, next one, maybe just diving into the Social gaming potential IPO a little bit more. Maybe just some thoughts on what led to this decision, thoughts on the process for reaching a decision whether you'll do it or not would be helpful.

[Barry Cottle, executive]

Okay. And I need to say at the start. there's -- I'm sure everybody is aware that there's very specific SEC rules that limit our ability to discuss the potential IPO further at this time. But I think at a high level, I'd say that -- look, given the rapid growth of the business and its current scale, taking the business public could help position the company to accelerate that growth, realize value and also delever the business.

[Barry Jonas, analyst]

Got it. And then, last one for me. Just coming close to December, how are you guys thinking about potentially calling refinancing the 10% notes?

[Michael Quartieri, executive]

Yes. Barry, we're monitoring the markets on a daily basis and evaluating all the options, but it really comes down to just being a net present value question of where we think we can lock in rates versus the call premium. The calls premiums effective December 1 at 105. You get to 2019, a year from now at 102.5. That's a meaningful step down in the upfront premium, but we are mindful. And when we look at this, we want to make sure that we are doing a transaction that's going to drive a meaningful reduction in our cash interest.

[Operator]

Next we have David Katz of Jefferies.

[David Katz, analyst]

So several questions, if I may, and I'll keep it short. So with respect to the refinancing, where -- let's say, the last time you really commented on it was maybe around G2E. The more specific question maybe, has the opportunity or has that NPV backed up or improved since, say, the past 30 days?

[Michael Quartieri, executive]

I think the market moves every day, especially when you're getting towards the midterm elections. So I think now that, that's passed us, we'll see what interest rates look like over the coming weeks and make a decision accordingly.

[David Katz, analyst]

Got it. Okay. And with respect to the indication about the Social business, Barry, clearly, there is a technology element that are integrated across the whole company and that might apply to the interactive pieces, it might imply to the gaming systems pieces. How did you arrive at it? And we can put aside the gating factors of whether you will or won't and what have you. But how did you arrive at just the Social business rather than the other technology pieces of the business, where there might be similar arguments for unlocked value?

[Michael Quartieri, executive]

I think I'll take that one. When you look at the various business lines that we have, the Social business is the only one that is a B2C business. Everything else that we have is really integrated into our B2B offerings to the casinos and to the lottery. So looking at this, as we said, when we put the -- when we unrestricted it back nearly 2 years ago that this was an opportunity that was out there for us. But we do see a great value chain in what we're able to provide from an integrated basis to the casinos what the products that we have.

[Barry Cottle, executive]

Yes. And to add on to that, just specifically, if you look at the iGaming, one of the core value propositions that we have when we work with partners like we have with Caesars is the integration of iGaming and sports betting to provide a seamless consumer experience both in and outside of the casino in areas where it's legalized. And so those -- the iGaming business and the sports betting over the digital side of real money gaming is closely interlinked with that -- with the retail experience, quite frankly. So -- and one of the, kind of, core values that we bring that a large part of our competitors can't duplicate. So we see those as super important to remain combined with the larger Scientific Game Group.

[David Katz, analyst]

That's fair. One last one, if I may, around 007. I know you touched on it a bit in the release and in your commentary. But just thinking about the trajectory and how we are shaping the premium installed base as we get toward the end of the year, what can you tell us about how 007 has performed so far? And in general, that premium installed base -- what more specifics can you tell us about how those games are executing and the recovery that we are expecting in the fourth quarter?

[Barry Cottle, executive]

Yes. So Q hit on this a little bit. But as you mentioned, the rollout has been, obviously, a little bit slower than expected, given the pace of the state approvals, but we have about 381 installed now across 19 states, 67 casinos. The performance has been extremely strong. The Casino Royale and Thunderball has been -- I think as Q had mentioned, it's comparable to our World of Wonka, which is the best WAP game we've had to date. So the performance of Bond has been really strong and it also has helped us actually add the number of WAP units on a forefront basis as well, I think, to the tune of about 200. The other games also are performing extremely well as well beyond those 2 games. You've got Diamonds Are Forever and Goldfinger are all performing above -- well, well, well above the floor average. And so from a performance perspective, we have been very happy with the Bond games. And then, as I mentioned, I think in my -- we have got 2 more coming out in early next year in first quarter. So we've got -- I think we have a really strong lineup of Bond that we expect to continue to help grow the Game Ops space. And to be honest with you, along with that, we've got a significant other group of products that we showed at G2E alongside of Bond and Game Ops that we think are going to have a really strong impact. And if you look at the Game Ops space over the last 3 quarters, it has been -- from a revenue perspective, have been pretty stable around the $160 million mark. And now with the WAVE XL and the content that we have coming out in the space, we're expecting to really make -- we're expecting to see some real performance enhancement, again, anchored by Bond, but complemented by a lot of great content and new cabinets that we have come into market in Game Ops.

[Operator]

Next we have Brad Boyer of Stifel.

[Brad Boyer, analyst]

First one here is just around the Gaming segment margins. Certainly, a lot better than what we were looking for and what I think most folks were looking for. I know, Barry, you had mentioned when we last spoke that -- you saw an opportunity to take some more costs out of the business. Just curious if you could expand upon what drove the strong margin performance in the quarter? And if you see that as being sustainable as we move forward?

[Michael Quartieri, executive]

This is Q. I'll take that one. So the things that we've commented before, one of our opportunities in looking at gaming is really around the supply chain. And we have been taking a very hard look at that and continuing to make progress on that. We also benefited in the quarter with a slightly higher ASP, which was up 3%. So that had a positive impact on the margin. So would I expect our margins to be right at that 51% overall. No, I think you got a nice little blip there on the ASP side, but we are very cost conscious and very mindful of the environment that we're in. And like I said, the untapped area that we looked at is really around the supply chain. So if you go back to roughly 2 years ago, the low hanging fruit of looking at headcount and the program that we put in place there was successful. We continue to kind of maintain that mantra going forward not only in gaming, but in all of our business segments. And where we're at to now, as I said, it's around the supply chain and making sure that we have got the most efficient manufacturing and supply process that we can.

[Barry Cottle, executive]

And as Q said, we're still -- as we're still pounding through that, obviously that will start to appear. And obviously, going forward, as we work through inventory and work through things of that nature, so it's not something that appears overnight. But the goal is just to continue to keep value engineering not just the existing cabinets -- core cabinets like the J43, but obviously, the WAVE XL as that was coming out. And so as Q said and we talked about earlier, it's -- the core initiative within our group is to continue to keep pounding the table on this, but it's like we're building the best games possible at the most cost-effective manner that we can. And as Q said, supply chain is really where I think there's some opportunity obviously, but it will be a gradual thing as we work through inventory, et cetera, et cetera, on that.

[Michael Quartieri, executive]

And then just one other point to add on that. Just -- as we were talking about before on the game development side, now that we're 4 years removed from the merger and we've got all of our new development all in the common platform, we do have the transferability of games that are being developed today. For example, something like Jin Ji Bao Xi when it comes out is going to be able to be plugged and played on any one of our curved screen cabinets, whether that the V75, the J43, the WAVE XL or even the existing WAVE that's out there. So those types of opportunities are still there, still to be worked on and to come through our operating results accordingly.

[Brad Boyer, analyst]

Appreciate the color there. And then second, I just wanted to see if you could expand a little bit upon this relationship that you guys are building with Gaming Capital Group. And just curious, I know there were some Oregon installs that got converted or taken out. But if you could just speak a little bit about the delta between the onetime purchases by Gaming Capital and the decline in the participation installed base. And then, should we expect any other noise in the installed base over the next several quarters as a result of this agreement or is this a 1-quarter phenomenon?

[Barry Cottle, executive]

Yes. Before jumping specific to that, I'm glad you mentioned it because I do want to emphasize. The deal we did with GCG is really about winning Oklahoma over the long term. They are an incredibly talented and well-rooted distributor, local in Oklahoma. And as you know, the gaming footprint there is about 75,000 today. And so the goal here was really about growing the share of that, both in game ops and game sales. And with the partner -- each of the parties in the partnership kind of bringing to table are assets and expertise and -- again, leveraging their extensive distribution and local service network there. And we believe that we have -- it's a very valuable partnership for both of us, where it's really meant to attack a market that we believe there's significant upside for us relative to our performance today. And as you said, there's some kind of -- it's a complex deal. And so there are some movements in -- or impact to the current footprint, which reflects that. But the overall purpose of the deal was really looking forward long term and winning long term.

[Michael Quartieri, executive]

Yes. I think just -- in your comment regarding the Oregon units, these were units that were placed out there during the year and they decided that they were going to basically not use those from a sales perspective for Oregon. And so therefore, they returned the units right at the end of the quarter. So from a, call it, a revenue perspective, pretty much all those units are in the revenue number. It just happened to be that they contacted us to go ahead and remove the units, which they were allowed to do. And those units right now are being redeployed in other jurisdictions, and we kind of knew that this would happen. That was part of our plan. But unfortunately, just one of those instances where if they would have placed the phone call to remove the units 3 days later, that unit -- which is roughly about 250 in total, would still be in the installed base. But when we get to -- basically almost at this point right now, all of those units are redeployed elsewhere and you'll see back in the footprint.

[Brad Boyer, analyst]

Okay. That's helpful. And then finally, just on the systems business. I wanted to see if you could just talk a little bit about where we are in the rollout cycle in Canada? And how we should kind of be thinking about the system side of that business growing into '19? Obviously, I appreciate that the iVIEW replacement cycle is another segment or area of systems growth as we move forward, but just curious if there's anything in '19 that we should be mindful of above and beyond just kind of the continued growth on the systems side as we think through modeling it for '19?

[Michael Quartieri, executive]

Yes. I think when you're looking at '19, the rollout of the Canada installations is going to continue all the way through '19 and some of these will actually come through in probably Q1 of 2020 as well. So we're not expecting any real significant declines, granted it is going to be lumpy throughout those periods just based on the go-live. So for example, you saw record Q4, Q1, Q2 a year ago, you see a slight decline this year, I think, versus what everybody was modeling. And then, we'll have a good Q4 again with some of the major sites going live with gateway and Ontario and with Alberta in the quarter. I'll just say, we'll still have probably close to 20 additional sites still to go next year. So there's still significant runway going forward in '19 on the revenue side.

[Operator]

And next we have Carlo Santarelli of Deutsche Bank.

[Carlo Santarelli, analyst]

As you think about the business just bigger picture right now, clearly, a ton of moving parts with sports betting, with the Lottery initiatives, obviously, with the core content on the game side. And there has been quite a bit of M&A that you guys have kind of been at the forefront of, whether it be sports betting or some other verticals, Social gaming, et cetera. Could you talk a little bit maybe about kind of what you feel the organic growth rates look like in each of the verticals where there's a little bit less kind of noise from kind of ancillary bolt-on acquisitions?

[Barry Cottle, executive]

Yes. I mean -- well, first of all -- I mean, just to kind of step back and I think you described the M&A, it kind of all fits into a larger picture of what we're trying to own and win in this space. And basically, we want to win wagering across 3 major verticals; Gaming, Lottery and Sports. And we're a strong believer that it's going to be pervasive player activity across both retail and digital. And so we want to make sure we own the core parts of the value chain, both on the innate platform, on the wagering -- enabling wagering piece of it as well as on the top content per se that people use to -- what they play in gaming or engage in with Lottery or in sports betting. And so from an M&A perspective, we feel like we've accomplished that. We're at -- we've now got -- we really own the core pieces of the value chain on the platform side and on the primary content side within that space. And all of those 3 verticals continue to grow with varying degrees of organic growth, whether it's retail or digital. But aggregately, wherever somebody wants to wager, that's where we -- that's what we're going to play and move forward on. And so -- and each of these businesses collectively, as we've described, before, has continued to grow quarter-on-quarter both top and bottom line. So again, we're very bullish both -- on a go forward basis that there's significant growth on a -- if you want to break down each of the different groups respectively.

[Michael Quartieri, executive]

Yes. I would say from a breakdown of individual business units, I think when you look at gaming, the tuck-in acquisitions that have been done, whether that was Tech Art or DEQ are not real substantial to the operating results overall. And so there's really no special call out there. Looking at Lottery, there hasn't been really anything going forward from an acquisition perspective. Lapis was the last tuck-in acquisition we did, which was nearly 2 years ago. On a Social perspective, it's the Social bingo app. But then again, that was purchased nearly 18 months ago. And a lot of the growth that we've seen there is really a result of our management of that process and by applying our data analytics to their business, which is really growing that. And that's reflected in what you've seen in the contingent consideration payments or accruals that we've made that are called out in restructuring and other charges. And so really, it kind of boils down to, it's the NYX acquisition that's really the item that needs to be called out from a, call it, nonorganic growth as that's the acquisition that just took place this year. And that's pretty much verbatim what the increase is in the digital segment, which is why we carved that all out separately and have it as a separate segment.

[Operator]

The next question we have will come from John DeCree of Union Gaming.

[John DeCree, analyst]

We touched on all the high level stuff, so maybe just a couple of small housekeeping questions. In the prepared remarks, did I hear you had your first kind of 300 unit sale or placement of SCiQ in Ohio. And if I heard that correctly, I was wondering if you could provide a little bit more detail on that, if it was purchased by the Lottery, purchased by a large retailer, et cetera?

[Michael Quartieri, executive]

Yes. Sure, John. The order was placed by the Lottery, and the Lottery is in the process of determining which locations they want to put those units into. So it's very early in the rollout stage at this point.

[John DeCree, analyst]

And the economic model there, is it a onetime sale fee plus a recurring revenue stream for you guys? Or is that also kind of being worked out right now with the Lottery?

[Michael Quartieri, executive]

No. That's consistent with what our economic model is. So there'll be a onetime purchase of the equipment, and then there's an ongoing maintenance fee that goes along with that on a recurring basis, which is kind of similar to what you had had in your systems business as there's going to be a system component that will require upgrade and additional functionality that we'll continue to [ call ] out that's tied into those units.

[John DeCree, analyst]

Got it. That's helpful. And then on the asset sale, $40 million real estate sale, was that the Illinois office? And then, does that come with some kind of annual run rate cost savings from carrying costs or property taxes? And is there any other kind of noncore assets like that, that you're still working through that might be on the block next year?

[Michael Quartieri, executive]

Yes. So the 2 assets that we called out as held for sale in the 10-Q in prior quarters was the El Camino location, which I guess was the original Shuffle building before Shuffle never moved in and it became the Bally's building, which eventually became the corporate office for Sci Games. So that's the building that actually sold for the $40 million in proceeds. The cost save associated with that -- since the building went -- got -- or I should say was classified as held for sale, the carrying costs of those assets were put into the restructuring charge as they were noncore at that point going forward. So it should be $1 million to $2 million in savings just from a carrying cost perspective that you'll see year-over-year savings in. The other asset is the Chicago asset and that still remains on the market.

[Operator]

Next we have Cameron McKnight of Crédit Suisse.

[Cameron Philip McKnight, analyst]

So Barry, first question on sports betting. Many deals have been announced in the past 6 to 9 months. How sticky or long term do you think a lot of those deals are? And when do you think sports betting might become -- U.S. sports betting might become material as far as NYX is concerned?

[Barry Cottle, executive]

Yes. So -- look, I think -- we think -- we believe and I think most people believe that you're still in an extremely early stages of the sports betting market, both from a deal-making perspective as well as the rollout perspective. I think, as you know, we mentioned earlier, it's really just about 6% of the population in terms of states that are currently legalized today. Most of the deals that we've seen in the marketplace without speaking specifically to those deals are really deals that were done basically to get -- to -- a 1-state deal not long term in nature at all and to basically get something up and running in New Jersey and as -- for people to get experience essentially in providing sports betting in the marketplace. So we think it's still early. As I mentioned before, we think -- we've seen, we've lived and breathed. We've seen this movie before in the U.K. over the last decade and the best product wins out in the marketplace. And so we feel like we're really well positioned, and we're in -- continue to be in a lot of conversations as it relates to deals on a broader and a longer-term basis. And so I think it still has -- it has ways to play out. I think if you look at kind of the pipeline of states that are to be legalized, I think it'll -- I think you're going to continue to see a lot of state activity over the next 2 to 3 years. And obviously, accordingly, commercial deals being set up as well over that time period. And then, you build into that the launches, the marketing and the execution. It's still, I think, a long-term gain that is probably at least 2 to 3 years out and maybe -- to be material. But I also believe that -- I believe there's a real market there. I mean, I think -- as we all know that sports betting is happening today. There's a market out there. And so I don't think -- I think -- I believe that it's material and it will be attractive obviously is that -- like most markets and we've seen in iGaming and everything. It's just going to take a few years to materialize, but it's still early. And -- but exciting, nonetheless.

[Cameron Philip McKnight, analyst]

Perfect. And then, in terms of the Social business, EBITDA was up 7% quarter-on-quarter. The prior quarter was impacted by some changes that were made at Facebook. Can you talk about how that was mitigated during the quarter? And what should we think of as an appropriate sequential growth rate for EBITDA and Social going forward? Is 3 to 5 the right way to think about it?

[Barry Cottle, executive]

Yes. So I can talk about the Facebook. On the Facebook side, essentially, as they encountered the privacy issues that occurred in the late spring, early summer timeframe, there were changes made, which basically prevented us from being able to authenticate the Facebook token in order to recognize players coming into the game. They had released several releases to that and that caused some disruption in our game and the ability for us to authenticate Facebook players, and in particular, some of the payers that were coming into our games. We consequently made a fix to our games that enabled us that if we -- if there is an issue on the Facebook side, we're still able to authenticate the player and get them into the game to play. And we were able to get that in in July and a proof point basically that it actually worked is that occurred again, as everybody knows, changes were made in August. And yet, we experienced no issues when the issue occurred again. So we have been able to -- that's completely resolved and the game is back to growing as it would have done have we not encountered that issue. In terms of going forward, obviously, as I mentioned before, with the SEC rules that limit our ability to discuss, we can't -- we're not giving guidance beyond today's and previous earnings result related to the business.

[Cameron Philip McKnight, analyst]

Sure thing. And then one final one for Mike. In terms of the refi of the 10% notes, at what rate would it not make sense? Is 8% around about the breakeven point when the call premium is still at 105?

[Michael Quartieri, executive]

That's probably about a fair kind of decision point that we would look at, but it's really going to be dependent on what we see market conditions looking at on a go forward basis. So at 8%, we'd probably start looking at it. But again, it's really going to be depending on what we see the rates doing in the future.

[Operator]

Next we have Mike Malouf of Craig-Hallum.

[Michael Malouf, analyst]

I just want to do a little follow-up on the SCiQ. It sounds like that's a huge opportunity as you look 60,000 opportunities that retailers would benefit. Can you talk a little bit about the model that would drive a retailer to implement this? Why is it so beneficial? And then, just a little bit more detail on the economic model with regards to how much these cost and how much on a percentage of cost that maintenance is?

[Michael Quartieri, executive]

Yes, sure. Let me kind of give you the perspectives from the Lottery retailers. So -- I mean, if you walk into any one of these convenience stores and you look at behind the calendar, you see this large real -- usually, it's a plastic display unit and there's just roles of live tickets behind you. From a retailer perspective, that's no different than cash just sitting out there. And so every time that you do the end of the day, where you're counting down your register and reconciling that to your POS system, the retailer is spending that time counting those tickets to make sure that they balance out to the POS system. With SCiQ, that security enhancement: One, it eliminate theft. So shrinkage of an issue within the retailers themselves across-the-board. Number two, from that -- I'll call it accounting or the revenue side of that business, rather than spending 30 minutes every day counting down those tickets, it's simply pressing a button and getting a report that instantly ties into the POS system. So that labor savings is significant at the retailer. And then also, back in their home offices where they have countless numbers of individuals that are responsible for the accounting and reconciling of those daily revenues on an ongoing basis. And also, the display units of the units we've seen has caused an increase in the revenues. In the pilots that we've done so far in the 53 different locations, we're seeing on average it's roughly about a 10% to 15% increase in retail sales. So there's 3 different benefits there to the retailer itself. From an economic model perspective, we haven't gotten into a lot of the details, which we won't. But from an overall perspective, it is a purchase on behalf either of the retailer or the Lottery itself. And then, there's an ongoing maintenance monthly fee that will be charged in order to maintain the unit and continue the upgrades of the software associated with it.

[Operator]

And next we have Mike Pace of JPMorgan.

[Michael Pace, analyst]

I'd like to pursue maybe the Social IPO consideration a little bit. And I know you're a little handicapped on what you can say. But I guess -- do you think the business is right sized for a public equity event? Do you need any additional tuck-in acquisitions there before you make that decision? And then, I think somebody also mentioned the potential of selling a minority stake. And I'm just wondering, if that is any different than a typical 20% sale or not? And I have a few follow-ups there, too.

[Michael Quartieri, executive]

Yes. Mike, unfortunately, given the rules, we're very limited on what we can really say about what the size of any type of IPO would be, whether it's minority or whatever. So we just got to stay clear of all of that. In regards to the business going forward, we kind of -- just based on where we see the growth in the business in its current scale, we view this as an opportunity to help accelerate that growth, realize value and help us with the deleveraging up at the corporate office.

[Michael Pace, analyst]

And then maybe to follow up on that. This is something that you probably can answer is use of proceeds. You do talk about paying down debt. Just to be clear, that's not a requirement for you to pay down debt with proceeds there. That would be your decision. And then, as structuring goes, if I understand it right, the Social business is an unrestricted entity, but it's owned by a restricted entity. And I just wanted to make sure there would be no change to that ownership or structure post any potential event there?

[Michael Quartieri, executive]

No. We don't foresee any change in that organization structure that would impact the ultimate ownership of our percentage within Scientific Games. And the whole concept around it, as we stated 2 years ago when we put it out as an unrestricted sub, the purpose of this is to primarily pay down the debt within the corporate entity. And when I say primarily, that's just the primary use of all of those proceeds.

[Michael Pace, analyst]

And just as -- not as a requirement, just as a choice. Just to be clear there.

[Michael Quartieri, executive]

I -- either way, it would be the same. It's a deleveraging event.

[Michael Pace, analyst]

Okay. And then just -- on the business, just looking for an update. And apologize if this was mentioned earlier, I jumped on a little late. The Pennsylvania lotto contract update, just curious on expectations, thoughts on if upfront CapEx would be required upon a win. And I don't know if you've disclosed the size of this business, historically.

[Michael Quartieri, executive]

From a process perspective, the expectation is -- new RFP should come out. We are thinking it would be some time after the election. So obviously, we've gotten past the election. Based on meetings to date, as very recently as within the last couple of days, expectation is we should be receiving the RFP sometime early in Q1. As we said, this will be a renewal. And in such instances, where there is a renewal, even though you are the incumbent, there would be a upfront CapEx spend because the states require that all bidders be on a consistent and level basis. And therefore, we would have to put in new CapEx. The CapEx that would be required for a state of this size is somewhere around that $80 million to $85 million mark. We wouldn't expect this to be any different. And from an economics perspective, we've never really commented specifically on economics around any individual contract. However, this is our largest domestic contract we have within the Lottery system business.

[Operator]

Well, at this time, we will conclude our question-and-answer session. I would now like to turn the conference call back over to management for any closing remarks. Gentlemen?

[Barry Cottle, executive]

Great. Thanks, everyone, for joining us today. We appreciate the support and the following. On the heels of G2E, the entire team and I are highly enthusiastic about all the potential ahead. We look forward to updating you on upcoming accomplishments and our fourth quarter results during our next call. Thank you very much.

[Operator]

And we thank you, sir, and to the rest of the management team for your time also today. The conference call is now concluded. At this time, you may disconnect your lines. Thank you again, everyone. Take care, and have a wonderful day.