Brightstar’s 2026 Q2 Earnings Call: Mega Millions Pricing, Lotto Cash Flow Timing, and Capital Allocation Signals Clash

Date of Call: Aug 4, 2026

Financials Results

• Revenue: Revenue was flat year-over-year, $37 million in cash from operations.
• EPS: $0.24 adjusted EPS year-to-date, with $0.47 per share non-cash service revenue amortization in Q2.
• Gross Margin: Reported EBITDA margin of nearly 49% and 42% excluding upfront license fee amortization.
• Operating Margin: In line with global same-store sales growth, ongoing benefits from Optima cost savings program and lower restructuring costs.

Guidance:

• Expect accelerated revenue and profit performance in the second half of the year.
• Q3 organic revenue growth expected to double compared to Q2, achieving about 4% organic growth.
• Italy same-store sales expected to be flat in Q3 due to calendarization but maintain low single-digit growth for H2.
• U.S. expected low single-digit growth in instant and draw games, offset by a $1.8 billion Powerball jackpot impact.
• Adjusted EBITDA for Q3 expected to be in line with first two quarters, slightly down versus prior year.
• Reaffirm full year 2026 revenue, profit, and cash flow outlook.

Business Commentary:

iLottery Growth and Digital Expansion:

• Brightstar reported 23% iLottery growth in Italy and 29% in the U.S., with Italy's growth led by e-instances and the U.S. driven by expansion in Kentucky and Georgia.
• The strong performance was attributed to the enhanced digital offerings, including new bonusing and loyalty programs, and the launch of the MyLotteries Play app.

Retail Network and Digital Adoption:

• The company has recruited about 23,000 retailers to drive digital adoption and traffic to the MyLotteries Play app.
• This initiative is part of a broader strategy to leverage the retail network as a strategic asset to support digital sales and improve player engagement.

Service Revenue Amortization Impact:

• Non-cash service revenue amortization impacted adjusted EPS by approximately 94 cents this year, covering the current annual dividends.
• The amortization is related to upfront fees for new contracts and affects the company's reported earnings, but the underlying business performance remains strong.

Capital Investments and Shareholder Returns:

• Brightstar has returned $106 million to shareholders year-to-date, including cash dividends and share repurchases.
• The company continues to invest in growth initiatives, such as new market opportunities and product development, while maintaining a balanced capital allocation strategy.

Optima 3.0 Cost Savings Program:

• The third phase of the Optima 3.0 program aims to achieve $100 million in savings by accelerating cost optimization efforts.
• This includes reductions in facilities costs and a focus on management structure changes to support ongoing efficiency improvements.

Sentiment Analysis:

Overall Tone: Positive

• Management states: 'The heaviest investment period is largely behind us. Our growth initiatives are in place and beginning to scale, and the market has not fully reflected or priced this inflection point.' Also: 'We've achieved meaningful progress on foundational initiatives... The Bright Star story is straightforward. Revenue will move beyond the current peak CapEx cycle. That expected cash generation reinforces our commitment to growing shareholders.'

Q&A:

• Question from Jeff Stanchel (Stifel): Could you just update us on the Italian B2C expansion and the milestones? Is the expectation for the 1% incremental growth uplift part of the 2028 targets to be hit as early as this year?
  Response: Italy B2C is ahead of schedule and virtually complete, with 33,000 retail locations. The focus is on customer satisfaction and increasing monthly active users, with the goal to reach a 1% incremental growth run rate in the second half of the year.

• Question from Jeff Stanchel (Stifel): Are you seeing a shift in incumbent win rates for iLottery contracts in the U.S., with states broadening points for AI implementation?
  Response: Competition is increasing, but Brightstar maintains a leadership position. They focus on lottery-specific experience and technical scores. AI is seen as a game-changer for future efficiency, but the loss of bids is often on price, not technology.

• Question from Steve Pizzella (Dutch Bank): Can you walk us through the biggest drivers that bridge to the normalized free cash flow level of over $400 million annual?
  Response: The path involves reducing capital expenditures, benefiting from lower interest and taxes, and a significant drop in service revenue amortization after the lotto payment. Free cash flow is expected to grow as the capex cycle ends and EBITDA improves.

• Question from Steve Pizzella (Dutch Bank): Given the attractive valuation and completed lotto payment, how are you thinking about share repurchases moving forward?
  Response: The company plans to continue nurturing shareholder returns consistently with its balanced leverage target, having ample capacity to manage buybacks while investing in future growth initiatives.

• Question from Barry Jonas (Truist): What is the update on Mega Millions and Powerball price points and any initiatives to drive growth?
  Response: Jackpot activity has slowed, and there is some consumer comfort with the $5 price point. The consortium is still considering changes, but marketing efforts focus on game innovation and availability across price points.

• Question from Chad Bannon (McCurry Capital): With elevated gas prices, have you seen a shift in distribution to convenience stores, and could a drop benefit you?
  Response: Impact on digital transactions is minimal; retail distribution growth remains strong. The company's focus is on game innovation and retailer expansion, with new hardware and vending machines expected to drive sales regardless of gas prices.

• Question from David Katz (Jefferies): Are there any contracts approaching extension periods that could be productive, like the scratch and win?
  Response: Contract extensions like Oregon and Washington are possible but not guaranteed. It is too early to comment on the scratch and win renewal; the process depends on the new concession and bid timeline.

• Question from Domenico Ghilotti (Equita): Is the midpoint of the guidance a matter of prudence? How are operations performing in Brazil, and how should we model the lotto payment's impact?
  Response: The guidance midpoint is achievable, considering H1 performance, ongoing investment impacts, and headwinds like multi-state jackpot comparisons. Brazil operations in San Paolo are ahead of schedule, with iLottery launch planned for 2027, and the lotto payment has been fully accounted for.

• Question from Joe Stoff (Susquehanna): How does the new digital offering in Italy handle competitor products, and is there cross-marketing opportunity from retail purchases?
  Response: The digital platform includes competitor products but uses AI to optimize the player experience and serve up games effectively. Retailer interactions are a key opportunity for digital account activation and cross-marketing, though KYC functionality is not yet required.

Contradiction Point 1

Mega Millions Price Point Impact and Consortium Deliberations

Contradiction on consumer reception and consortium decision-making timeline for the Mega Millions price increase, impacting future game strategy and revenue expectations.

What were Barry Jonas's key comments during the Truist earnings call? - Barry Jonas (Truist)

2026Q2: The $5 price point for Mega Millions has been well-received, with players showing comfort... The consortium is 'fully on board' but is still deliberating on potential model changes. - Vince Sadesky(CEO)

Could you provide an update on Mega Millions' $5 price point and discuss initiatives to drive growth following recent changes? - Barry Jonas (Truist Securities, Inc.)

2026Q1: Consumer dissatisfaction with the $5 price point is evident as sales are below prior year levels. ... No decisions have been made by the consortium on game tweaks. - Massimiliano Chiara(CFO)

Contradiction Point 2

Cash Flow Recognition for the Final Lotto Payment

Contradiction on when the cash flow impact of the final lotto payment is recognized, affecting leverage forecasts and capital allocation flexibility.

Domenico Ghilotti (Equita) - Domenico Ghilotti (Equita)

2026Q2: The $1.7B lotto payment was made in full. The related cash flow impact is fully recognized in the first half. - Max(CFO)

Is the guidance midpoint (EBITDA) conservative, how are operations performing in Brazil (Sao Paulo), and when does the lotto payment cash flow start for modeling? - Barry Jonas (Truist Securities, Inc.)

2026Q1: Leverage is expected to peak around 3.5x (low end) and then decrease gradually over the next few quarters. - Massimiliano Chiara(CFO)

Contradiction Point 3

Nature of the iLottery Competitive Environment

Contradiction on whether competitive losses are due to price or technology, influencing the company's strategic focus and competitive positioning.

Jeff Stanchel (Stifel) - Jeff Stanchel (Stifel)

2026Q2: In RFPs, losses are typically on price, not technology. - Vince Sadesky(CEO)

How is the competitive environment evolving, particularly with recent iLottery contract wins and RFP processes, and are incumbent win rates changing materially or states expanding requirements for AI and broader tech innovation? - Jeffrey Stantial (Stifel, Nicolaus & Company, Incorporated)

2026Q1: The UK transition negatively impacts revenue by ~2% per quarter. - Massimiliano Chiara(CFO)

Contradiction Point 4

Italy B2C Digital Initiative Timeline

Inconsistent timeline for Italy B2C digital impact and growth contribution, affecting growth projections for the region.

Jeff Stanchel (Stifel) - Jeff Stanchel (Stifel)

2026Q2: The Italy B2C platform is 'virtually complete' and has been handed over... The goal is to grow the monthly active user base and drive digital revenue growth. The company expects the 1% incremental growth target to be achievable by year-end. - Vince Sadesky(CEO)

Looking forward, what are the key upcoming milestones for the B2C initiative, including efforts to drive online conversion in Italy, and is the expectation for a 1% incremental growth uplift (as guided for 2028) to occur as early as this year or is the ramp more of a 2027 target? - Jeffrey Stantial (Stifel, Nicolaus & Company, Incorporated)

2025Q4: For 2026, same-store sales are expected to be around 1% year-over-year, led by U.S. and rest-of-world, with Italy being flattish. New product launches and the Italy B2C digital initiative in the second half are expected to contribute to growth. - Vincent Sadusky(CEO)

Contradiction Point 5

Cash Flow & Capital Allocation Outlook

Contradiction on financial flexibility and capital return strategy post-Lotto payment, impacting shareholder value and investment outlook.

Steve Pizzella (Dutch Bank) - Steve Pizzella (Dutch Bank)

2026Q2: With the lotto payment behind and net debt leverage at 3.2x (below target), BrightStar has the flexibility to continue nurturing shareholder returns. The company will maintain a 'balanced capital allocation strategy'. The recent $10M tranche of buybacks ($85M total in 2026) demonstrates this commitment... - Max(CFO)

How will the completion of the final lotto payment affect share repurchase plans and leverage given the attractive valuation? - Jeffrey Stantial (Stifel, Nicolaus & Company, Incorporated)

2025Q4: Over $1 billion has been returned to shareholders in 2025 via dividends and buybacks, utilizing 60% of the authorization. The company remains disciplined, considering commitments like the Lotto license payment, but will evaluate future opportunities for capital returns. - Massimiliano Chiara(CFO)