International Game Technology (IGT) Q1 2022 Earnings Call Transcript

International Game Technology (IGT -0.07%)
Q1 2022 Earnings Call
May 10, 2022, 8:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and thank you for standing by. Welcome to the International Game Technology Q1 2022 earnings conference call. [Operator instructions] I would like to have a conference overview speaker today, James Hurley, senior vice president of investor relations. Please go ahead.

Jim Hurley -- Senior Vice President of Investor Relations

Thank you for joining us on IGT's first quarter '22 conference call hosted by Vince Sadusky, chief executive officer; and Max Chiara, our chief financial officer. After some prepared remarks, Vince and Max will be available for your questions. We are presenting from multiple locations, so please bear with us if we encounter any technical difficulties. During today's call, we'll be making some forward looking statements within the meaning of the federal securities laws.

Forward-looking statements are not guarantees, and our actual results may differ materially from those expressed or implied in the forward-looking statements based on a number of factors and uncertainties, including those related to the effects of the COVID-19 pandemic. The principal risks and uncertainties that could cause our results to differ materially from our current expectations are detailed in our latest earnings release and in our SEC filings. During this call, we may discuss certain non-GAAP financial measures. In our press release slides accompanying this webcast and our filings with the SEC, each of which is posted to our investor relations website, you will find disclosures regarding these non-GAAP measures, including reconciliations of these measures with comparable GAAP measures.

And now, I'll turn the call over to Vince Sadusky.

Vince Sadusky -- Chief Executive Officer

Thanks, Jim, and hello to everyone for joining us today. 2022 is off to a strong start with a terrific first quarter. Our strategy to grow, innovate, and optimize is delivering results, as revenue grew 7% at constant FX, above the target of 22 to 25 range disclosed on investor day, driven by the strong gaming and lottery product sales. Operating margin of 24% exceeded expectations, bolstered by a 37% lottery margin, which is also above the 2025 target range of 33% to 36%.

At constant currency, EBITDA matched the prior year's record level and was among the highest quarterly margin ever. This is a remarkable achievement considering the significant discrete lottery benefits we had in the first quarter of 2021 and incremental omicron impacts and higher supply chain costs that we had this year. And importantly, we returned a record 80 million to shareholders through dividends and share repurchases for the second consecutive quarter. Let's delve a bit deeper into our operating segments, beginning with lottery, which represents most of our revenue and over three quarters of IGT total profit.

As expected, lottery same-store sales were down from the prior year's record levels that benefited from pandemic-related restrictions. Nevertheless, the Q1 '22 results confirmed a strengthening in the multi-year compound annual growth rate and the attractive margin profile of this business. Instant ticket games, which account for most of the lottery wagers in our portfolio, grew at a 7% compound annual rate from Q1 '19 to Q1 '22, up from about 4% in the 2015 to 2019 period. This is consistent with our research, which indicates that players intend to play lottery games at higher levels in the pre-COVID period.

It also supports our long-term outlook for the lottery segment. We will work with our customers to drive clear demand through continuous innovation as we have done in the past. One exciting example is IGT's proprietary draw-based game, Cash Pop. For a new draw-based game, it is a significant accomplishment to carve out a distinctive place in the market as Cash Pop has.

The game's easy-to-understand strategic playing experience, something that can be enjoyed across retail and digital channels, has shown staying power since its 2019 launch. In Q1, Florida, South Carolina, Virginia, and West Virginia, lotteries became the latest to offer Cash Pop, bringing the total number of U.S. lotteries with the game to seven. Missouri is slated to launch the game in late May.

Let me turn now to instant ticket printing, an area of incremental growth opportunity for IGT. Infinity Instants, a product that incorporates a unique ultra-high resolution instant ticket printing technology is an example of exciting innovation that differentiates IGT. The Infinity process provides full color, variable printing on the ticket front-back and on play and prize symbols. This technique affords designers and lottery product managers the capability to create game mechanics and customized graphics that significantly enhances product value and the player experience.

Seven Infinity instant games are now available in four U.S. jurisdictions. We hope and expect the success that the Infinity tickets are ensuring will continue to drive further adoption. iLottery is another important area of focus and opportunity for us.

IGT's iLottery sales increased over 20% in the first quarter, including over 40% growth in North America. Today, all our U.S. iLottery customers have successfully transitioned to our cloud-based ESM platform. We are rolling it out to international customers over the next 12 months.

Just like the land-based business, game innovation and portfolio optimization are important drivers of wager growth. We have invested in talent to increase new game production and to leverage our unique mix of strong creative game content and digital knowhow. With a current library of 130 games, IGT's newly launched ESMs are performing stronger than ever based on their increased quality and complexity of gameplay. The Georgia Lottery launched its first progressive jackpot game in Q1, and it became the strongest first-month performer by a wide margin.

Global gaming segment was a clear standout in the quarter, with revenue increasing by more than 40%, propelled by higher unit shipments, average selling prices, IP royalties, and active installed base units. Our product positioning around the world is as strong as it's been in a long time. We've invested heavily in key hardware and content initiatives over the last three years and are seeing the benefits in the success of recent launches. It sets us up very well for 2023 and beyond.

Momentum behind the Peak family of gaming machines is accelerating and broad-based from the newly launched, large-format Peak65 cabinets to the industry-leading Peak49, PeakBarTop, and PeakSlant32, that has consistently held the No. 1 spot for a multi-screen cabinet in North America for more than a year. We're also excited about the upcoming launch of the DiamondRS cabinet, our first new mechanical wheel cabinet in many years. The success of the new hardware is also a function of compelling game content.

You've heard us talk a lot about our focus on multi-level progressive games, an area where IGT has historically been underrepresented, especially in the U.S. Our efforts are paying off. Our North American MLP installed base has increased by nearly 20% since the end of 2020. On the lease side of the business, Money Mania is maintaining strong productivity of 2.5 to three times house average.

And Prosperity Link, launching soon, is among the strongest test bank titles we've had to date. Wolf Run Eclipse, our first MLP offered for sale in the U.S. is performing strong out of the gate at about two times house average. Apart from MLPs, Regal Riches and Stinkin' Rich, Skunks Gone Wild, and other high -- are very popular for sale titles.

Continued strength in the U.S. GGR trends, which remain about pre-pandemic levels in local and destination markets, is very encouraging. The potential player base has expanded with the younger demographic increasingly visiting casinos. This gives us confidence that, with the Q1 unit sales momentum, the recent win of nearly 1,400 VLTs for the Atlantic Lottery Corporation, and the strength of our sales funnel, U.S.

and Canadian shipments have the potential to reach 2019 levels this year. Our good progress is being recognized. IGT was named Casino Supplier of the Year for the second year in a row at the Global Gaming Awards in London. We won several top prizes at the Casino Awards 2022 and we were named Multichannel Supplier of the Year at the International Gaming awards for our leadership in cross-platform content and technology.

That's a nice segue into digital embedding where our first quarter revenue rose over 20%, primarily on strong U.S. iGaming and sports betting trends. During the period we went live with our iGaming content in West Virginia, bringing our U.S. iGaming footprint to five states, serving a record 56 operators.

In addition, since April, we've gone live with several commercial operators in Ontario as market opportunities opened there. We also added new customers for our sports betting platform and turnkey solutions during the first quarter and are currently live in over 20 states, powering more than 70 sportsbooks. The turnkey pipeline remain strong in the next year. Perhaps the biggest digital embedding news is the recently announced acquisition of acquiring iSoft Bet, a leading iGaming content provider and third-party game aggregator.

This is a unique opportunity to add significant complementary scale to our PlayDigital business. The high quality management team is a very good cultural fit. The transaction advances several strategic initiatives much faster than we could do on our own, which greatly enhances our talent pool, digital native content library, and global reach, including the opportunity to distribute proprietary IGT content in regulated European markets. For context, the transaction more than doubled our PlayDigital content library to approximately 225 proprietary games and should enable us to create up to 70 new game titles per year, once again more than doubling PlayDigital's historical rate.

In this business, the velocity of new game launches is an important growth driver, and iSoftBet brings us more of a digital-first mentality. iSoftBet's aggregation technology should greatly simplify the integration of new studios and content and enable faster and more impactful entrants into new markets. It also provides a robust data analytics platform that will help our customers make focused, strategic decisions on their game portfolios. We expect to launch iSoftBet content and the aggregation platform in the US and Canada in the second half of 2022 and to bring IGT's proprietary content via iSoftBet's platform in the European regulated markets in the same time frame.

Over the last few months, I spent a lot of time meeting with employees. I'm encouraged by the high integrity and incredible energy of our people. They exhibit the qualities of true leaders. The priority they place on creating and nurturing an inclusive culture and good corporate citizenship is truly inspiring.

This has always been a part of IGT's DNA and it is important to me personally. I'm impressed with the team's efforts to consistently raise the bar here. There are several recent examples such as joining the science-based targets initiative and issuing a formal human rights policy statement. The broad scope of our effort is being recognized.

Earlier this year, IGT earned the Best Place to Work for LGBTQ Plus Equality designation from the Human Rights Campaign Foundation and was also named the Best Diversity and Inclusion Employer at the Casino Awards. The power of our portfolio is clear. The strong first quarter results and progress on key strategic initiatives gives us confidence in delivering on our financial outlook for the year. I'm pleased with the momentum and outlook for the long-term recovery of the gaming business, as well as increased levels of lottery play from pre-COVID periods.

The strong margin profile highlights the attractiveness of the lottery business and the success of structural cost reductions even as we continue to invest in product development and other growth opportunities. The company is in a great operational and financial shape as we focus on executing our long-term goals. And now, I'll turn the call over to Max.

Max Chiara -- Chief Financial Officer

Thank you, Vince, and good day to everyone. We had a strong first quarter, notably with better revenue and profit at constant currency versus the previous year. This was achieved without the lottery discrete benefits we enjoyed last year in an outstanding first quarter performance and despite some omicron impacts and cost inflation this year. So, all in all, we are very pleased with the performance our teams delivered.

In a nutshell, we generated over a billion dollars in revenue, up 4% year over year, 7% higher at constant currency, and in line with our expectations. It is evident that our cost structure is benefiting from the strategic actions we took as part of the OPtiMa cost savings program. The structural changes we made to the business, in addition to ongoing legal around cost and invested capital, helped drive 252 million in operating income and 433 million in adjusted EBITDA, which, at constant currency, matched the record level achieved in the prior year. We achieved a 24% operating income margin in the quarter, making good progress toward our 2025 target of 26% to 29%, and 200 basis points above the high end of our outlook for the quarter.

Adjusted EBITDA margin was 41%, which was among the highest quarterly level achieved in company history. This was despite the current challenges that I just mentioned and which we referenced in our year-end call that totaled close to 50 million in headwinds in the quarter. Fully diluted earnings per share of $0.39 was in line with the prior-year results as well. Revenue growth in the quarter was primarily due to a 78% increase in global gaming product sales revenue, with digital and betting delivering stronger 24% revenue growth.

As expected, global lottery was down as the prior period had about 95 million in benefits from the impact of gaming hall closures in Italy, higher multi-state jackpot activity, and incentive accruals related to LMA agreements in the US. Net of those items, global authoring revenue grew 4% year over year. Focusing more intensely on lottery, the 680 million in revenue highlights sustained strength in underlying player demand. Global same-store sales were down 10% year on year, off 32% growth in the prior-year period, driven by the discrete items I just mentioned.

Elevated jackpot activity in the priority year is having an outsized impact on same-store sales in the quarter, but keep in mind that this is a relatively small part of the overall revenue mix. If you step back and take a longer-term view, you will see that global same store sales grew at a mid-single digit CAGR over the multi-year period from 2019, better than the pre-COVID long-term trend. Product sales revenue nearly doubled to 45 million, primarily driven by terminal and system deliveries related to the contract renewal with the Portland Lottery. The highly resilient profit profile of the business helped drive operating income of 252 million and operating income margin of 37%, the third highest level in over three years, and slightly above the 2025 target of 33% to 36%.

Demand for IGT innovative products and solutions, as well as the continued recovery in the gaming market, drove significant increases in revenue and profit in global gaming compared to the previous year. Revenue of 325 million was up 42% on solid increases in the number of machine units sold, ASPs, IP royalties, and active units. Global unit shipments rose 63% year on year to over 1,700 units, the highest for a first quarter period for us. We saw particular strength in North America where we sold around 5,300 units in the quarter with casino replacement units tripling.

International unit shipments were also higher versus the prior year. North America ASPs of $14,800 were 6% higher than the previous year on an improved product mix. Internationally, ASPs reflect the higher mix of used units and VLTs compared to the previous year, which we do not expect to recur at the same level going forward, so our ASP mix should improve. IP royalties rose in the quarter as a result of our continuing efforts to leverage our market-leading IP portfolio and the recent execution of a broad multiyear patent portfolio licensing agreement related to our game features and LGS Technologies.

The global installed base of over 48,000 unit is relatively stable, down 1% sequentially. North America declined 665 units, with about 60% related to removals and a few isolated customers. And the balance coming from changes in the WLA market in Delaware and New York. We expect additional WLA removals from the balance of the year.

In the rest of the world, the installed base increased close to 200 units, driven by placements in South Africa. Operating income of 52 million was up significantly from the previous year. OI margin of 16% was the highest level in two years and exceeded the full year 2019 level, reflecting the benefits realized from the structural cost savings actions taken as part of our OPtiMa program and high-margin IP royalties. The margin is expected to improve in the balance of the year, putting us on track toward the achievement of our 2025 line margin target of 28% to 30%.

The digital and banking segment continued its double-digit top-line growth trend, generating record 47 million in revenue, a 24% increase over the prior year. About 55% of the increase came from new markets and organic growth as iGaming expanded into Connecticut and saw strong performance in Michigan. And sports betting was adopted in seven additional states, with strong performance in the existing Rhode Island market. The balance was related to the timing of jackpot accruals, which can be lumpy and more difficult to predict.

Profitability reach record levels in the quarter with the delivery of 13 million in operating income, more than double the priority amount, and a 28% operating income margin, nicely approaching the '25 target of 30% plus. These results reflect the high-profit flow-through from top-line growth, partially offset by increased investments in talent and resources to fund future growth. We're very pleased with the progress of the segment and are increasing our investments in talent, infrastructure, and new market expansion, in addition to integrating iSoftBet to support our long-term growth plans. As a result, margins from the balance of the year will be lower than Q1.

We expect a strong return on these investments in 2023 and beyond. We generated nearly 190 million in cash from operations and 115 million in free cash flow during the first quarter. Cash flows were impacted by the timing and collection cycles in Italy due to specific cutoff dates and higher cash outlays for short-term incentives, which were suspended in the previous year due to the pandemic. In terms of capital allocation, payment to minority partners totaled just over 100 million in the first quarter.

As a reminder, these payments are generally concentrated in the first half of the year and are a bit higher this year due to the exceptional lottery performance in 2021. We returned 80 million to shareholders in the form of dividends and share repurchases, with 1.4 million shares purchased in the quarter, and invested over 70 million in the business in the form of capex. The small portion of our capital allocation was funded by short-term borrowings as we continue to optimize the mix of funding sources in our capital structure. We currently have a very manageable debt portfolio with no large, near-term maturities.

And our mix of fixed to floating rate debt is favorably structured in the current market environment. IGT's liquidity profile remain very strong, with total liquidity of 2.3 billion and debt leverage at 3.5 times, already at the low end of our 2022 target range. During the first quarter, S&P and Moody's upgraded our corporate credit rating to BB-plus and Ba2, respectively. This puts us in a solid position in the fixed income market and strengthens our ability to achieve our long-term leverage objectives.

As a reminder, proceeds from the announced sale of the Italy commercial services business will primarily be used for debt reduction. This transaction is expected to close during the third quarter of 2022. Vince highlighted the 160 million euro acquisition of iSoftBet and the many strategic benefits this brings to our business. This transaction is expected to close in the second quarter of 2022.

The combination of these two transactions is expected to have a net positive impact on leverage of about a quarter of a turn. We are reaffirming our 2022 full year revenue and profit outlook based on our solid first quarter results. This includes absorbing a two-point move in the Euro dollar rate and approximately 10 million in higher digital and betting separation project-related cost. We are lowering our capex estimate to around 400 million from the previous 400 to 450.

This change is a result of the iSoftBet acquisition as we previously expected to invest organically. But now, we'll receive world-class content and an advanced platform upon the closing of the transaction. Our outlook excludes the deconsolidation impact from the sale of the Italy commercial service business, which generates monthly revenue of 20 million to 25 million and operating profit of about $4 million to $5 million. While the transaction is expected to close in the third quarter, the exact timing is uncertain, making it difficult to update the outlook at this time.

Given supply chain constraints and recent volatility in the euro dollar rate, at this time, it is prudent to be anchored at the midpoint of our outlook range. We are actively managing these dynamics to the extent we can and will continue to look for cost savings opportunities to offset any negative impact. Keep in mind that changes in currency rates result in translation adjustments to the income statement and balance sheet and have noncash impact. For the second quarter, we currently expect revenue of 1 billion to 1.1 billion, essentially in line with the Q1 level and operating income margin of 20% to 22%.

Now, I would like to wrap up my summarizing the main points of my presentation. We are executing on our financial and strategic plans, delivering solid financial results, enhancing our capital structure, improving our risk profile, and delivering meaningful returns to shareholders with our balanced capital allocation execution on full display. That concludes our prepared remarks. Operator, would you please open the line for questions?

Jim Hurley -- Senior Vice President of Investor Relations

Operator, we're ready for Q&A. Bear with us one second while we find our operator.

Questions & Answers:

Operator

[Operator instructions] Your first question comes from the line of Carlo Santarelli with Deutsche Bank. Your line is open.

Carlo Santarelli -- Deutsche Bank -- Analyst

Max, to clarify. So, within the context of the guidance, you guys are not including -- or, sorry, the guidance does not include the impact of the sale but also, I imagine, does not include the impact of the acquisition.

Max Chiara -- Chief Financial Officer

Sorry. Your line is breaking up. No, the acquisition is --

Carlo Santarelli -- Deutsche Bank -- Analyst

Sorry --

Max Chiara -- Chief Financial Officer

Carlo, the acquisition of iSoftBet is included for the simple reason that is, one, less material; and, two, is closer in terms of timing of happening. Instead, we didn't want to pollute our original guidance with the impact of the deconsolidation of commercial service sale because the time of the closing is still uncertain in the third quarter -- within the third quarter. And I gave you indications of the monthly kind of revenue and profit so that you can run your own math, if you want. But again, the bottom line is we are anchoring to the midpoint of the guidance.

And so, you can easily kind of reflect your estimate of the commercial sales into that.

Carlo Santarelli -- Deutsche Bank -- Analyst

Yup. OK. That makes total sense. And then just, obviously, you know, and I know it's hard to predict, and I think that's probably the answer.

But obviously, the FX rates have moved sort of materially. And clearly, you know, as you guys have said for years, whenever this issue has come up, it's a translation impact and not a cash flow impact. But the decision to [Inaudible], you know, the bench post of guidance as they were, despite kind of a negative headwind that comes from, you know, a little bit more pronounced move in in the U.S. euro rate, should that be taken as kind of an indication of your confidence within the post of that range?

Max Chiara -- Chief Financial Officer

No. Just to speak about our position vis-a-vis the guidance and the outlook, as you know, this outlook came out last November in connection with the investor day. Since then, we have absorbed, when you count the exchange to the spot rate today, close to 200 million of revenue and 150 million of light headwinds, right? Between omicron impact in Q1 and Q2, supply chain incremental impact of another 30 million, right, on top of what we already had in the budget of 30 million last year, and then an FX impact, again, noncash of total 50 million. So, 30 million to the 112, which is our official guidance, plus another 20 million looking out to the remaining part of the year, to the 105.5.

And then on top of it, you've got also about 10 million of project cost associated with the separation of the D&B business. So, again, it's a big impact, and that speaks highly vis-a-vis our ability to offset those headwinds and also kind of our confidence with the outlook

Carlo Santarelli -- Deutsche Bank -- Analyst

For sure. Thank you. That's super helpful, Max. If I could just lastly, you guys have obviously shown progress and we kind of -- we're all aware of kind of the leverage thresholds and kind of the credit agreement thresholds and the baskets of buyback and repurchase authorization.

With the stock kind of where it is today, and, obviously, you guys aren't alone and seeing what the market has done, but, you know, how do you think about the buyback, if those parameters did not exist, you know, just given the difference in the ROI of repurchases today versus, you know, maybe where the stock was two, three months ago?

Vince Sadusky -- Chief Executive Officer

Hello. Yeah. No, I would be a very strong buyer of our of our securities. There's no question.

I know that we're -- as you point out, we're not alone, but we're so close to it. And, you know, we feel very good about the plan. You all have listened to this story for multiple quarters. I think you're hearing some genuine excitement on behalf of the management team about the first quarter and about the outlook.

So, yeah, personally, I believe we would be buying back a terrific amount of shares as, you know, I believe that's the most accretive thing we can do at these trading levels.

Carlo Santarelli -- Deutsche Bank -- Analyst

Understood. Thanks, Vince. Thanks, Max.

Max Chiara -- Chief Financial Officer

Yes. And Carlo, speaking about that, we just concluded the second quarter in a row with record amount returned to shareholders of 80 million, split 50/50 between dividend buyback. So, that justifies our approach to our -- our balanced approach to our capital allocation.

Carlo Santarelli -- Deutsche Bank -- Analyst

For sure. For sure. Thank you, guys.

Operator

And your next question comes from the line of Chad Beynon with Macquarie. Your line is open.

Chad Beynon -- Macquarie Group -- Analyst

Vince, Max, good morning. Thanks for taking my question. I wanted to focus on the strength in the gaming industry or the gaming segment, particularly in the U.S. Vince, you mentioned that replacements were, I believe, triple what you saw last year.

I think we're all trying to get a sense of how the operators are going to manage their budgets this year. I think this was a nice, positive surprise just in terms of the timing. The order flow clearly shows that you're holding share. But wondering if you could talk about your conversations with operators, given the strength in the U.S.

business, if you think these capex budgets could last -- you know, continue to last, or if it was kind of a pull-forward for the first quarter. Thanks.

Vince Sadusky -- Chief Executive Officer

Yeah, sure thing. So, you all have heard from the operators, they've had a very strong first quarter; feel good about their outlook for that for the next quarter, and for the most part, the remainder of the of the year. And the conversations I've had with our customers very much so represent that, you know, increased velocity of customers coming through their doors, higher game play. Several have observed younger demographic included and all that is primarily individuals without having, you know, the full benefit of the business, convention business back.

So, we saw 2021 was a record year for U.S. casinos. Momentum appears to be good as far as, you know, the industry can see going into 2022. As you know, several of our casino customers have new projects, either spending capital expenditures around redoing facilities or building new facilities.

The first quarter, slight ETR versus 2019 and you know, kind of our last benchmark, you know, "normal year" is up somewhere in the range of 15% and even more on the Las Vegas Strip. So, I think the sense right now is very good. For us, you know, we've seen, you know, in these numbers and in our sales funnel for Q2 and even out of Q3 that we've been gaining momentum through a combination of that pent-up demand, the stronger TGR trends, as well as, fortunately, the strength of our products for a lot of good work that's been done over the last several years. And I think we had somewhere in the range of, Max, you can correct me if I'm wrong, over 7,000, maybe 7,200 units shipped in the first quarter, which is the strongest ever for a first quarter period.

And, you know, the vast majority of that, I think 95% or so, is in replacement units, mostly in the U.S. and Canada. So, I think, you know, these signals are good signals. And I think the operators have a need to upgrade to be competitive in their highly competitive marketplace.

If you spend time walking the floor of our various casino customers and, of course, the Strip is the easiest place to do it, you know, you can recognize pretty quickly the refreshed areas of the gaming floors that, you know, look terrific, have the latest games, you know, very exciting graphics and cabinets, and the areas that are not. And I think that there is there's a lot of areas of the floor that do need to be to be upgraded. And I think, you know, in times of good demand and momentum, and I haven't heard anything from our customers other than they expect the momentum and recovery that came in to continue over many periods. As long as that thesis holds up, I think there is a willingness to continue to upgrade in order to remain competitive.

Chad Beynon -- Macquarie Group -- Analyst

That's great. Thanks. And then we've heard a lot about the monthly cadence from the gaming operators with January being impacted from omicron. I was wondering if the lotteries segment experienced a similar type of phenomenon, maybe with January being, you know, slightly softer? Or was that pretty consistent throughout the quarter? And we're also getting a lot of questions regarding the cadence in Italy as well, given that we're not as close to that market.

Thank you.

Max Chiara -- Chief Financial Officer

Yes, Chad. This is Max speaking. Correct, omicron -- the toughest month from omicron was probably early in the year, January, into the first part of February. The decline is kind of subdued since then.

We're still probably looking into a second quarter that has a difficult comp year on year because last year, we still had the gaming closures in Italy that lasted until June. But definitely, the situation is improving out there.

Chad Beynon -- Macquarie Group -- Analyst

Thank you both. Congrats on the results.

Max Chiara -- Chief Financial Officer

Thank you.

Vince Sadusky -- Chief Executive Officer

Thanks.

Operator

Your next question comes from the line of Barry Jonas with Truist Securities. Your line is open.

Barry Jonas -- Truist Securities -- Analyst

Thank you. You guys conducted research on this last year, but given the volatility in the market, can you talk a little more about what gives you confidence of the sustainability of higher lottery player levels? You know, a lot of concerns on the macro environment, so we'd just like to get more color there.

Vince Sadusky -- Chief Executive Officer

Yeah, sure thing. So, we mentioned at the year-end call that we've done some multi-decade analysis to determine a correlation between inflation and CPI and lottery sales. And there is some level of correlation, but it does not seem to be incredibly strong. And we think, you know, the reason is the value that people get.

The entertainment value of lottery relative to disposable income is is very high. And therefore, it's not a significant amount of out-of-pocket that's required to play a relatively inexpensive form of entertainment. So, it's a good trend when we when we were excited to discover. The other thing as well, you know, we've talked about this, we believe and now the, you know, the results of the first quarter support this, our U.S.

customers are really kind of consolidating a lot of the elevated play levels that we saw in '20 and '21. And we think a lot of that has been a result of the evolution of innovation that we've worked hard to consult with our lottery partners. For example, the third Powerball weekly draw, second euro jackpot weekly draw, add-on games to existing draw-based games, increased price point of draw-based games, and of course, the introduction of not only new draw-based games, but innovation around scratch-and-win and incremental game titles being offered. So, you know, we're doing our part.

You know, we've got the best team in the business that's constantly thinking about innovating in game content. And I think because we have such a massive footprint around the world, we're able to generate creative ideas around both draw and instance and share those ideas and concepts around the world through our various studios. And, you know, the only concern there, of course, would be any impact on the consumer in a very significant way around disposable income. But, you know, we have not seen that.

And again, we we think relative to other businesses, you know, the lottery business is less sensitive on a per capita basis. And we, again, so far, through the first quarter, we've, you know, that thesis has been supported.

Barry Jonas -- Truist Securities -- Analyst

Great. That's really helpful. And just as a follow-up, sorry if I missed this, but what exactly drove the fee for lottery margins in the quarter? Was it just revenue mix was different than what you modeled? Or were cost savings better? I know it was a very strong fee. I just wasn't clear what exactly drove it.

Max Chiara -- Chief Financial Officer

Yeah, I think it was across the board, I would say both in revenue and as well as in better cost management. Keep in mind that on a sequentially quarterly view, Q4 to Q1, we tend to have a bulk of advertising spending in Q4 that obviously doesn't repeat itself in Q1. And that's the reason why we were also able to lift that profit up.

Barry Jonas -- Truist Securities -- Analyst

Got it. All right. Thanks, guys.

Operator

And your next question comes from the line of Ben Chaiken with Credit Suisse. Your line is open.

Ben Chaiken -- Credit Suisse -- Analyst

Hey. How's it going? Just one quick clarification. I may be mistaken, but did you say --Max, did you say you'd find cost saves to offset the FX impact? I may have misheard it, so I just want to clarify.

Max Chiara -- Chief Financial Officer

No. We said that we have a series of headwinds that we have to manage in the current year. And the way we manage those headwinds, including the FX, is through incremental product sales, a higher funnel, and delivery of products in gaming, trigger on cost. So, continuing to look for ways to save money on the cost side, as well as lower D&A as a result of, let me say, a low cycle of capex in gaming in the last two years.

Ben Chaiken -- Credit Suisse -- Analyst

OK. Thank you very much. That's all for me. Thank you.

Operator

Your next question comes from the line of Domenico Ghilotti with Equita. Your line is open.

Domenico Ghilotti -- Equita -- Analyst

Good morning. I have a question on the contribution in Q1 from the intellectual property sales in terms of sales and profitability. And then the second question related to your Q2 guidance, so if I understand properly, so you see strong momentum quarter on quarter in the gaming business. While on the lottery side, we should still expect some say more balanced, more or more flattish trends given the tough comparison.

Is it correct?

Max Chiara -- Chief Financial Officer

Yes. Correct.

Domenico Ghilotti -- Equita -- Analyst

OK. And your intellectual property, are you giving any --

Max Chiara -- Chief Financial Officer

So, on the intellectual property, this is a regular business of us. We have this activity ongoing. Obviously, the activity can be lumpy, but within a certain magnitude of amount, right? So, we have been a little bit higher than normal this quarter. We may be again above or below the threshold.

But again, this is a recurring business of us.

Domenico Ghilotti -- Equita -- Analyst

So, on a full year basis, you don't see like an extraordinary contribution.

Max Chiara -- Chief Financial Officer

Going forward, no, not extraordinary contributions.

Domenico Ghilotti -- Equita -- Analyst

OK. Thanks.

Operator

And your next question comes from the line of Jeff Stantial with Stifel. Your line is open.

Jeff Stantial -- Stifel Financial Corp. -- Analyst

Hi, good morning, Vince, Max. Thanks for taking the questions. Congrats on a nice quarter here. I wanted to hang on and maybe drill into some of your comments on, you know, CPI disposable income.

A hot topic obviously this earnings season has been the state of the low-income consumer. We've focused a lot on this call on domestic trends and trends for lottery. But just curious what you're seeing here internationally. We've heard some comments, you know, across other gaming and leisure sectors on maybe some softness in international countries in the lower end of the consumer.

Curious if you're seeing that across any of your geographies.

Vince Sadusky -- Chief Executive Officer

Yeah, I'd say, you know, what we've heard from our customers and you've heard it as well from the casino operators that any decreases that they've seen as a result of the kind of the lower income player has been offset by older and kind of mid- to high-income players who are coming back as well. So, that's been, you know, positive and encouraging. And, you know, from our vantage point, you know, the direct data we have yields on premium games. And we've seen a nice increase in yields, both in North America and internationally.

Internationally, it has been slower to come back. And I think a lot of that, of course, has to do with the various restrictions in different parts of the world. But we have seen an improvement, especially as now EMEA is mostly open still with a few restrictions like Green Pass in certain markets, but for the most part open. And almost all of our installed base is active.

I'd say, in Latin America, we're seeing something very similar. Most of the installed base, active not 100% yet, but still a few capacity restrictions, but for the most part coming back. In Australia and New Zealand, you've seen Australia life restrictions, New Zealand is relaxing the restrictions, etc. So, I think, overall, the customer sentiment is good.

We've seen strong demand in the sales funnel, which is, you know, one of the primary data points that we have as well. And our visibility around our sales funnel is among the strongest that we've seen. And so, we think the assessment perhaps the player internationally versus the player in North America being slower to come back had a lot to do with restrictions. And again, with our data points the signals are good.

Jeff Stantial -- Stifel Financial Corp. -- Analyst

Understood. That's helpful. Thank you, Vince. And then on the supply chain disruption, so you talked a bit on the call about the incremental headwinds on the cost side.

But just curious, you know, more on the demand side. Are you able to fill call it 100% of the orders as they come in? Are you forced to kind of prioritize certain demand over others? And then, you know, maybe if you could just frame kind of lead times and where you kind of sit today, given some of the supply chain constraints versus how things kind of trend in 2019, that would be great.

Max Chiara -- Chief Financial Officer

Yeah. Look this is the biggest challenge we have right now. We need to achieve all of that you said and more in terms of ideas and actions to be able to fulfill the committed -- the orders at the end of the day. So, we have a strong funnel.

The visibility of the funnel, as Vince was saying, is the highest we have ever had. But again, I think -- we think in our outlook we can absorb some of that funnel slipping into the subsequent quarter as a result of the difficulties that exist in certain areas. It could be in pocket of deliveries. It could be in availability of components.

So, our teams are really focused on trying to get the funnel over the fence and deliver to the best of our abilities. And again, we have probably a little bit of flexibility in that as well.

Jeff Stantial -- Stifel Financial Corp. -- Analyst

Great. That's helpful. Thank you, Max. And if I -- I might just slip in one more kind of housekeeping one.

I believe if memory serves the restriction, the capacity restrictions, in Italy that are impacting lotto sales should roll off here in May. A, am I correct in that? And B, is that still on pace on time, given what you're hearing in the market?

Max Chiara -- Chief Financial Officer

Yes. I mean based on the recent legislative actions and regulations effectively, there are some -- there is some easing coming into play starting in May in Italy. But again, we need to continue to watch out carefully and see how the situation evolves in general.

Jeff Stantial -- Stifel Financial Corp. -- Analyst

Understood very helpful. Thank you both.

Operator

[Operator instructions] Your next question comes from the line of David Katz with Jefferies. Your line is open.

David Katz -- Jefferies -- Analyst

Hi. Good morning, everyone. Thanks for taking my questions. I wanted to just go back to the domestic installed base, and, you know, just reset -- or think about what our expectations should be.

Should we be expecting at some point that the units will go up? Obviously, the yield was up really, really nicely in the quarter. But, you know, what is the vision specifically for that U.S. premium installed base and what can we reasonably expect?

Vince Sadusky -- Chief Executive Officer

Yeah, I'll comment on that. So, a couple of things. First off, the vast majority of our installed base was active in the first quarter, higher than it's been throughout the entire COVID period, including just about 100% in the North American market. I think a lot of the stability that we've been seeing in casino installed base is a result of the great gains that the company has been able to develop and begin to get out into the market.

We mentioned, you know, the awards and the acceptance of the fabulous new peak cabinets and great content that we've introduced into the marketplace. That's been driving a big part of what's been driving demand for us and our visibility into 2022. And also, you know, specifically, in the MLP space. As we mentioned, that's an area where the company needed to be more competitive.

And that installed base -- in addition to the excitement around the new titles and the very, very good performance we've seen in test bank, and we're about to release several those titles into the marketplace. The installed base has grown nearly -- in the MLP category, nearly 20% since the end of 2020. And I think offsetting some of that has been really a couple of things like we've seen some operators looking to reduce operating expenses which we've talked about. So, certain casinos have reduced some of the wide area progressive units.

And then also, in the WLA markets where the company had a historically disproportionate very high percentage of the market in certain states, you know, we're seeing a change there, which are typically lower-yield units. And then we've also had -- as our operators are generating a lot of cash for the conversion of some lease units to sale as well. But I think all in all, as you point out, yields are higher, largely as a result of not only higher play, but also, I think, a better mix of units that are in the marketplace. And, you know, we feel as if these trends will continue going forward.

David Katz -- Jefferies -- Analyst

That's super helpful. And if I can, just follow it up and maybe get a little bit of maybe modeling health, right, because -- you know, should we be modeling to revenue, should we think about some of those units continuing to come down a little bit while the yield continues to grow, notwithstanding any sort of macro outlook or anything like that, right? And how long should we sort of think about those curves, you know, evolving?

Vince Sadusky -- Chief Executive Officer

Well, we think in this current year, based on the first quarter and the visibility that we have going into the year, we believe that our yields will be higher than 2021 as a result of all those things. It is difficult to say, you know, which component of the mix and duration, you know, those things are pretty tough to estimate. But we think, as a result of having more active units out in the market, coupled with, you know, some of the pressure we've seen on wide area progressive units and mitigated by the strong performance of our newer games and our MLP games that are in the marketplace, will -- are the components that will -- that will drive those trends.

David Katz -- Jefferies -- Analyst

Very helpful. Thank you.

Operator

And your last question comes from the line of Zachary Silverberg from Berenberg Capital Markets. Your line is open.

Zach Silverberg -- Berenberg Capital Markets -- Analyst

Hi, good morning. Thanks for taking my question. Just a couple of quick ones for me. I mean can you talk about how you're thinking of using your balance sheet, if there's potential M&A on the table? I mean you guys are at the low end of the 3.5 times to four times range.

Could you potentially use any levers to have a strategic acquisition, in the near future here?

Vince Sadusky -- Chief Executive Officer

Yes. I would say, what we've -- what we talked about in the past was the portfolio being in very, very good shape. We feel as if being so strong in the marketplace, in both lottery and gaming, we've got a terrific amount of expertise and capabilities, worldwide studios, and development expertise. The one area that, you know, we've signaled all along, and then we ultimately consummated with the acquisition of iSoftBet, the desire to potentially accelerate our expertise and our product suite and our studio capabilities in the digital space.

We -- you can expect us to be busy working with the iSoftBet team in the integration -- first the closing and integration of that business with our PlayDigital business. In fact, you know, I'm here in San Francisco today, in our new digital headquarters, spending time with, you know, our team. And we're talking through our strategic plans for the rest of this year and going out several years. So, you know, we're excited, about the progress the company has made and the early leadership position it's gotten off to in the high casino gaming jurisdictions that have opened up in North America.

Europe, you know, we've not been as competitive. That's a long established market with a different set of dynamics. And historically, the digital-first companies have done better in that marketplace. And iSoftBet has been very competitive there.

So, we think that helps to fill a niche for us and gives us a very strong set of competencies and capabilities. And our goal over time is to become the leading casino company as we are in land-based. We have no plans at the moment for incremental M&A. I'll let Max talk to our capital structure.

But we feel as if we've been able -- or we will be able to close this transaction and still, you know, further reduce our leverage as a result of the sale of our Italian payments business. And we feel like that's a very good balance of capital deployment to give us increased capabilities in a high-growth gaming area, yet continue to do what the company has done over time, which, I think, has been a very impressive reduction in debt and lower leverage and a vastly improved capital structure.

Max Chiara -- Chief Financial Officer

Yeah, and my only addition on this point to reiterate our long-term view on the leverage, it is true. We are running at the low end of the guidance for this year, 3.5 times. But again, long term we expect to be in the range of 2.5 to 3.5, so I think there is still work to be done. And hence, we need to further maintain our focus on our leverage, and at the same time continue to work around our balanced capital allocation approach.

Zach Silverberg -- Berenberg Capital Markets -- Analyst

Got you. Super helpful. And maybe just a quick one I might have missed this earlier. But could you just provide some color on the cross-licensing deal that you guys struck during the early parts of this quarter?

Max Chiara -- Chief Financial Officer

Yeah, so we were able to close this important IP license agreement. We're very happy with that. There's a mutual agreement that will reiterate one more time our leading position in that respect. We expect to be able to add a couple more in the balance of the year but probably not to the same magnitude.

Zach Silverberg -- Berenberg Capital Markets -- Analyst

Thank you.

Max Chiara -- Chief Financial Officer

Thank you, Zach.

Vince Sadusky -- Chief Executive Officer

Yeah, I would just add on that, you know, some marketing for IGT. Over the years we've developed the largest portfolio of IP that we negotiate and share with the industry, so we're very proud of the innovation that's taken place. And I think as Max mentioned earlier that's an ongoing part of our business and our revenue stream and profitability. So with that, I'll wrap it up.

I think we're out of time here folks. I'd just like to say thank you all for joining us. I know you all are pretty busy jumping from call to call during this time and kind of a stressful time in the marketplace. I think from our perspective, you know, as we've highlighted our strategy that we set out at investor day to grow innovate and optimize is paying off.

We think we're on a compelling revenue and profit growth trajectory over the next couple of years that's supported by a really strong team and a solid balance sheet. And as we execute on our goals, we do see a really strong clear path to creating significant shareholder value. So, thanks for your interest, and we look forward to seeing many of you in the next few weeks. And have a great day.

Operator

[Operator signoff]

Duration: 60 minutes

Call participants:

Jim Hurley -- Senior Vice President of Investor Relations

Vince Sadusky -- Chief Executive Officer

Max Chiara -- Chief Financial Officer

Carlo Santarelli -- Deutsche Bank -- Analyst

Chad Beynon -- Macquarie Group -- Analyst

Barry Jonas -- Truist Securities -- Analyst

Ben Chaiken -- Credit Suisse -- Analyst

Domenico Ghilotti -- Equita -- Analyst

Jeff Stantial -- Stifel Financial Corp. -- Analyst

David Katz -- Jefferies -- Analyst

Zach Silverberg -- Berenberg Capital Markets -- Analyst

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