Light & Wonder Navigates Tariff Headwinds with Margin Strength and Strategic Acquisitions

Light & Wonder (LNW) continues to demonstrate resilience in a challenging macroeconomic environment, leveraging margin expansion, supply chain agility, and transformative acquisitions to position itself for sustained growth. Despite near-term headwinds from trade tariffs and softness in certain segments, the company's Q1 2025 results reveal a disciplined focus on high-margin products, strategic capital allocation, and geographic diversification. Let's unpack how these factors could drive outperformance in 2025 and beyond.

Margin Expansion: The Engine of Resilience

Light & Wonder's Q1 performance underscores its ability to grow margins even as top-line growth moderates. Consolidated AEBITDA surged 11% year-over-year to $311 million, with all segments contributing to this improvement. The Gaming division led the way, with margins expanding 200 basis points to 51% as premium product sales and higher installed bases in North America (up 9% YoY) drove profitability. The company's focus on premium tables and systems—now 51% of its North American installed base—creates a flywheel effect: higher-margin products attract casinos willing to pay a premium, reinforcing repeat sales and servicing revenue.

SciPlay, despite a 2% revenue decline, saw AEBITDA margins hold steady at 32%, thanks to its shift toward a direct-to-consumer (DTC) model. The DTC segment now accounts for 13% of SciPlay's revenue, generating $27 million in Q1—up from 7% in 2023. This trend suggests a strategic pivot to higher lifetime value users, a move that could stabilize margins even if payers decline. Meanwhile, iGaming's AEBITDA margins rose to 35%, supported by U.S. market expansion and record wagers processed ($25.2 billion).

Supply Chain Optimization: Mitigating Tariff Pressures

Trade tariffs on Chinese-made gaming hardware remain a near-term challenge, but Light & Wonder's proactive supply chain adjustments could limit their impact. The company is diversifying suppliers, relocating production to Mexico and other tariff-free regions, and optimizing logistics to offset costs. These steps, combined with cost-control measures, have kept the business on track despite a 30% year-over-year increase in North American unit shipments—a sign of operational efficiency rather than margin erosion.

The results are visible in free cash flow, which rose 20% YoY to $111 million. This liquidity buffer, along with a manageable net debt leverage ratio of 3.0x, positions Light & Wonder to weather tariffs while investing in growth.

Grover Gaming: A Transformative Acquisition

The pending acquisition of Grover Gaming's charitable gaming business for $850 million marks a bold move to diversify revenue streams and enter new regulated markets. Charitable gaming—common in the U.S., Canada, and Australia—offers recurring revenue through ticket sales and software licensing, complementing Light & Wonder's existing B2B and B2C businesses. The transaction is financed via a new $800 million Term Loan A facility, which keeps leverage within the company's 2.5x–3.5x target range.

Crucially, Grover's integration could unlock cross-selling opportunities. For instance, Light & Wonder's existing casino clients could adopt Grover's digital platforms for charitable events, while iGaming's regulated partnerships could expand into new jurisdictions. The deal's Q2 2025 close target suggests minimal execution risk, and synergies are expected to bolster margins further.

Investment Considerations: Near-Term Nuance, Long-Term Clarity

While Light & Wonder's shares have underperformed peers in 2025——its fundamentals warrant a closer look. Near-term concerns include:

• SciPlay's revenue softness: The segment's reliance on legacy casino games may face secular declines as players shift to mobile/social platforms. However, its DTC pivot and rising ARPDAU ($1.06) suggest a path to recovery.
• Grover's regulatory hurdles: U.S. and Canadian approvals are critical, though Light & Wonder's track record in regulated markets (e.g., iGaming) reduces uncertainty.

On the upside, catalysts include:
1. Premium product momentum: The North American premium installed base's 19th consecutive quarterly growth signals a structural shift toward higher-margin products.
2. U.S. iGaming expansion: With 34 states now legalizing sports betting and 16 states advancing online casino laws, Light & Wonder's partnerships with operators like DraftKings and PointsBet could fuel revenue growth.
3. Grover's accretive earnings power: At $850 million, the acquisition is priced at ~6x SciPlay's 2024 EBITDA, suggesting immediate margin benefits.

Conclusion: A Buy on Margin Discipline and Strategic Vision

Light & Wonder is executing a textbook playbook for a mature, capital-intensive industry: prioritize high-margin segments, optimize costs, and acquire complementary assets. While tariffs and legacy business declines pose near-term risks, the company's AEBITDA target of $1.4 billion (pre-Grover) remains achievable, and its free cash flow generation supports shareholder returns (e.g., $166 million repurchased in Q1 alone).

For investors, LNW is a compelling “value plus growth” opportunity. The stock trades at ~10x 2025E EBITDA, a discount to peers like Aristocrat Leisure (~14x) and Scientific Games (~12x), despite its superior margin trajectory and diversified revenue streams. The pending Grover deal and U.S. iGaming tailwinds could narrow this gap, making LNW a top pick for portfolios seeking resilience in volatile markets.