Light & Wonder Faces Potential $150 Million Loss Due to Legal Battle Over “Dragon Train” Slot Machines

October 8, 2024 World Crime & Legal

Light & Wonder Inc. (L&W) faces a significant financial impact following a legal dispute over its “Dragon Train” slot machine product.

According to a recent analysis by David Bain, an analyst at B. Riley Securities Inc., the total costs associated with changing the disputed version of the game in the North American market could reach approximately $28.6 million. This estimate, which was reported by GGRAsia, includes replacement costs and additional expenses related to the ongoing litigation.

The legal troubles began when Aristocrat Technologies Inc. secured a preliminary injunction from a Nevada court against Light & Wonder. The ruling came after Aristocrat accused its competitor of infringing on its intellectual property regarding dragon-themed slot titles. The legal proceedings began in March when Aristocrat filed the lawsuit, claiming that L&W’s “Dragon Train” product violated its patents.

In his memo, Bain indicated that court-related damages and other legal remedies could cost Light & Wonder between $50 million and $150 million. This range highlights the potential severity of the situation as the company grapples with the legal ramifications of its product offerings.

In response to the court’s injunction, Light & Wonder’s president and CEO, Matt Wilson, announced plans to develop a new version of the “Dragon Train.” The company aims to replace around 2,000 units currently deployed in North America to comply with the judge’s order. Wilson mentioned that the original “Dragon Train” title was launched in Australia last year and made its U.S. debut in early March.

Bain also reported that Light & Wonder sold approximately 4,800 “Dragon Train” units in Australia. However, the company halted sales of the game there following the U.S. court order. So far, Light & Wonder has not made any announcements regarding the conversion or replacement of “Dragon Train” units in the Australian market. Should this occur, B. Riley Securities estimates it would involve costs of about $62.4 million.

Bain outlined that the estimated replacement cost per unit, including expedited installations, stands at around $13,000. With Light & Wonder possessing roughly 2,200 “Dragon Train” units on lease in North America, the company is under pressure to act quickly to mitigate the financial fallout from this legal dispute.

Despite the challenges, Bain suggested that the market reaction to the court ruling has been overly harsh. Since the announcement, Light & Wonder’s stock has fallen by $19 per share, a decline of 17%. Bain believes the cumulative negative impact on the stock price from the “Dragon Train” disruption may amount to approximately $6 per share, which he argues is manageable for the company.

As Light & Wonder works to replace the existing “Dragon Train” machines, Bain noted that the company is in active communication with its customers, and these discussions have yielded positive results. Many customers are reportedly willing to accept the game replacements, which is crucial for the company’s recovery strategy.

Looking ahead, Bain referred to the anticipated replacement product as “Dragon Train 2.0.” He emphasized that while some elements of the game’s math models are in dispute, other features such as art, sounds, animations, and branding remain unaffected. This suggests that the game franchise could continue under a new framework, even if it employs different mathematical models.

Light & Wonder has maintained its guidance to investors, projecting earnings before interest, taxation, depreciation, and amortization (EBITDA) of $1.4 billion for 2025. Bain noted that “Dragon Train” accounted for less than 5% of this forecast, translating to an expected contribution of nearly $70 million in the upcoming fiscal year.

Additionally, B. Riley Securities highlighted recent merger and acquisition activity in the gaming technology sector, pointing out that it positions Light & Wonder as a unique public global gaming supplier with valuable assets. The firm noted that several competitors have either been acquired or are no longer viable trading peers, thereby enhancing Light & Wonder’s market standing.