PlayAGS, Inc. (NYSE:AGS) Q3 2022 Earnings Call Transcript

PlayAGS, Inc. (NYSE:AGS) Q3 2022 Earnings Call Transcript November 12, 2022

Operator: Hello, and welcome to today’s AGS Q3 2022 Earnings Conference Call. My name is Elliot, and I’ll be coordinating your call today. I would now like to hand over to our host, Brad Boyer, Senior Vice President of Corporate Operations and Investor Relations. The floor is yours. Please go ahead.

Brad Boyer: Thank you, operator, and good afternoon, everyone. Welcome to the PlayAGS Inc. Third Quarter 2022 Earnings Conference Call. With me today are David Lopez, CEO; and Kimo Akiona, CFO. A slide presentation reviewing our key operational and financial highlights for the third quarter ended September 30, 2022, can be found on our Investor Relations website, investors.playags.com. On today’s call, we will provide an overview of our Q3 2022 financial performance and offer perspective on our current financial outlook for the business. This conference call will include the use of forward-looking statements. Any statement that refers to expectations, projections or other characterizations of future events, including financial projections or future market conditions, is a forward-looking statement based on assumptions today.

Actual results may differ materially from those expressed in these forward-looking statements, and we make no obligation to update our disclosures. For more information about factors that may cause our actual results to differ materially from our forward-looking statements, please refer to the earnings press release we issued today as well as risks described in our annual report on Form 10-K, particularly in the section of these documents titled Risk Factors. Our commentary today will also include non-GAAP financial measures. We believe the use of these non-GAAP financial measures provides an additional tool for investors to use in evaluating ongoing operating results and trends in our business. These measures should not be considered in isolation from or as a substitute for financial information prepared in accordance with GAAP.

Reconciliations between GAAP and non-GAAP metrics for our reported results can be found in our earnings release issued today. Please refer to our filings with the SEC for more information. With that, I would like to turn the call over to our CEO, David Lopez.

David Lopez: Thanks, Brad, and good afternoon, everyone. I’m extremely pleased with our third quarter as our recent trend of improving financial performance carried over into Q3. While Kimo will walk you through our financial results in greater detail, I would like to draw your attention to 5 highlights from the quarter. First, domestic EGM recurring revenue topped $45 million for the second consecutive quarter, exceeding prior year levels by over 4% and beating our Q3 2019 performance by 8%. Thoughtful capital investment, including the expansion of our premium game footprint for 11 consecutive quarters, continues to drive improved recurring revenue performance as we tactically strengthen the quality of our overall installed base.

Second, our global EGM unit sales increased by more than 50% year-over-year, topping 1,000 units for the first time since Q4 2019. The added depth of our core content portfolio, increased customer account penetration and complementary sales into international markets, combining to drive our EGM unit sales growth in the quarter. Third, our Table Products segment delivered sequential revenue and adjusted EBITDA growth for the ninth consecutive quarter, supported by further customer adoption of our PAX S card shuffler and industry-leading table game progressive technologies. Fourth, supported by our steady improvements in product performance and operational execution, company-wide revenue increased sequentially for the seventh consecutive quarter, while our quarterly consolidated adjusted EBITDA performance improved sequentially for the sixth time in the past seven quarters.

Finally, our strength in operating performance and efficient capital management year-to-date have put us in a position to achieve our year-end net leverage target of less than 4x. While I’m encouraged by the operating momentum, we’ve established year-to-date, I’m even more excited about what lies ahead for our company and our shareholders. My excitement peaked that last month Global Gaming Expo, or G2E, in Las Vegas as we presented our strongest and most diverse new product lineup in my tenure at AGS. My feelings were echoed by many of those in attendance, including our customers, employees and even some of our competitors as the improved diversity of our product portfolio was on display for everyone to see. While there are many highlights for us at G2E, the undisputed star of the show was our new Spectra gaming cabinet, the first new offering in our next-gen family of products.

Spectra’s initial performance has lived up to our high expectations, with the cabinet achieving the top spot and the New Portrait Upright category of the October Eilers Cabinet Report with reported performance at nearly 3x house average. With over 30 titles lined up to support Spectra’s year 1 launch, we expect the cabinet to become a must-have on every casino operator’s floor. In addition to Spectra, we also showcased our first-ever games in the high-denom game content segment. These new titles not only improve and expand our core content offering, but they should also turbocharge our installed base performance and provide our sales team with unique product mix opportunity capabilities of expanding our replacement market share. Like Spectra, our first high-denom games appear to be on point delivering solid performance both inside and outside of operators’ high-limit rooms.

Looking beyond our new cabinet and high-denom content, G2E also further cemented our position in the market’s growing premium game segment, supported by a robust content pipeline, a number of proven AGS brands and an increasingly diverse array of product configurations, I’m confident we can continue to build on our 11 consecutive quarters of premium unit growth. Finally, G2E served as a coming-out party of sorts for our revamped and expanded game development team by providing a formal stage to showcase the team’s true potential. With 3 of our 7 content studios unveiling their first games at G2E, the transformation of our recent investments in content creation from conception to commercialization was on display for all to see. The added depth and variety of our content portfolio truly resonated with our customers, helping to change the way they think about the AGS brand.

Outside of EGMs, customer interest in our expanded suite of innovative table products was equally as strong. While PAX S, our single-deck card shuffler garnered most of the attention, our customers continue to look for opportunities to further leverage our industry-leading progressive technology to optimize their table game operations. I am confident our current table product portfolio, along with our commitment to serve as the innovator and partner of choice within the table product space, should allow us to steadily grow both revenue and adjusted EBITDA for many years to come. All told, while the demand we saw exiting G2E should boost our near-term financial performance, I’m even more encouraged by what the big-picture takeaways from the show will mean over the coming years.

Here are just a few of those takeaways. We have demonstrated a significant expansion in our core EGM content portfolio. Our premium product quality and momentum are making huge strides. EGM hardware and product innovations are notable and highly competitive within what we saw at the show. Our continued success and industry product leadership in the table product space is getting more recognition each year. And finally, our investments in online real money gaming, along with continued cultivation of the international EGM market will provide strong opportunities for years to come. These are just a few examples of the successful work we have done to fuel our future growth and now is the time for our team to execute. With that, I will turn the call over to Kimo to walk you through our third quarter results in greater detail.

Kimo Akiona: Thank you, David, and good afternoon, everyone. I would like to start off today’s call by reviewing a few highlights from the third quarter and providing some perspective on how we see the business trending as we look ahead into Q4. We would also like to address a few items related to our balance sheet and close by sharing some thoughts on our fourth quarter cash flow outlook. It is important to note, my forward-looking commentary contemplates no material changes in prevailing global macroeconomic conditions. Turning first to our domestic EGM gaming operations business, third quarter revenue increased 4% year-over-year to approximately $46 million. The recent positive underlying trends within our domestic EGM recurring revenue business continued into the third quarter, with domestic EGM RPD topping $30 for the sixth consecutive quarter and our domestic EGM installed base expanding for the second straight quarter.

Our ability to further penetrate the higher-yielding premium game market segment continues to simultaneously drive growth in our domestic installed base and reported RPD. At the end of the third quarter, premium gains accounted for 14% of our domestic EGM installed base compared to 9% in the prior year period, with premium mix increasing approximately 200 basis points sequentially. In addition to the tailwinds created by our growing premium game footprint, continued implementation of our installed base optimization initiatives and remarkably consistent GGR trends across our served markets further supported our domestic EGM recurring revenue performance in the quarter. Looking ahead to the fourth quarter, we expect the continued strong performance of our Orion Curve Premium package and the expanded breadth of our premium segment game content and cabinet configuration offerings to drive further growth in our premium game footprint.

Additionally, we plan to begin leveraging our first-ever high-denomination game content to further yield optimize our domestic EGM installed base. These two strategic growth drivers, combined with the historically normal seasonal revenue trends we have observed quarter-to-date, should allow us to achieve sequential domestic EGM installed base growth for the third consecutive quarter and deliver domestic EGM RPD that comfortably exceeds prior year levels, extending our $30-plus RPD streak to a seventh consecutive quarter. Shifting to EGM sales. Third quarter global unit sales increased by over 50% versus the prior year, eclipsing 1,000 units for the first time since Q4 of 2019. The strategic broadening of our customer account penetration, the harvesting of incremental returns from our accelerated R&D investments, further leveraging of our exceptional HHR game performance and complementary unit sales into select international markets drove our improved unit sales performance in the quarter.

Looking ahead to the fourth quarter, we expect the same set of strategic initiatives to underpin our EGM unit sales performance. Additionally, we plan to execute a targeted rollout of our new Spectra gaming cabinet and high-denomination game content in the quarter, both of which are delivering strong initial performance and, in turn, stimulating robust customer demand. Finally, we continue to observe relatively normal customer equipment purchasing behavior as concerns over what lies ahead for the global macro economy have not materially impacted market-level purchasing demand to date. Combined, we believe these factors should allow us to achieve fourth quarter global EGM unit sales that exceed Q3 2022 levels. Third quarter global average selling price, or ASP, eclipsed $19,000 for the fourth consecutive quarter as our premium-priced Orion Curve cabinet accounted for a significant portion of our product mix in the quarter.

Additionally, continued implementation of our price integrity program further benefited third quarter ASP performance. Supported by anticipated favorable compositional changes to our overall product mix, including initial sales of our recently launched Spectra cabinet, we expect to achieve modest sequential ASP improvement in the fourth quarter with global ASP on track to eclipse the 19,000 level for the fifth consecutive quarter. Turning to our international EGM segment. Total international EGM recurring revenue increased 16% year-over-year to $4.3 million, supported by the continuation of Mexico’s consistent macroeconomic recovery. To that end, international EGM recurring revenue has now increased sequentially for 9 consecutive quarters dating back to Q2 of 2020, a trend we expect to continue into the fourth quarter.

During the third quarter, we elected to formally remove the approximately 7% of our international recurring revenue units previously identified as inactive from our reported international EGM installed base as we felt there was a low probability that these units would be turned back on following COVID restriction-induced shutdowns. Although immaterial to our reported international recurring revenue in the quarter, this did result in an over 470-unit reduction in our reported international EGM installed base. Importantly, as we look ahead, we do not anticipate any additional contraction of scale within our international installed base and believe the reported Q3 level serves as a good base level to forecast the business. Looking beyond AGMs, our table products business, once again, delivered record performance with third quarter revenue and adjusted EBITDA, eclipsing $4 million and $2.5 million, respectively.

The addition of nearly 70 new progressive units and over 50 unit increase in our PAX S shuffler footprint paced our record performance in the quarter. During the third quarter, we conducted a comprehensive review of our table products installed base, which led to a reduction in our reported unit counts. Following this review, we believe our revised installed base reflects a more accurate count of the products on lease. Revenue and adjusted EBITDA were not affected at all by the adjustment to the installed base, and most importantly, this KPI revision normally alters the segment’s compelling multiyear revenue and EBITDA growth trajectory. Looking ahead to Q4, despite a less prolific new casino opening and expansion calendar, we expect to achieve modest quarterly sequential table products revenue growth, building on the 15% sequential growth achieved in the third quarter.

As we assess the intermediate-term outlook for our Table Products segment, we believe the accelerating shuffler rollout momentum, steady progressive product demand and additional site license adoption should sustain the trend of consistent quarterly sequential revenue growth within the business. Shifting to Interactive. Trends within the business remained stable throughout the quarter as quarterly revenue eclipse $2.5 million and adjusted EBITDA was positive for the 11th consecutive quarter. Our efforts to refocus our interactive resources on growth opportunities within the North American real money gaming market continues to bear fruit as revenues within this channel grew by over 35% versus the prior year, accounting for over 85% of Q3 RMG revenue compared to 70% in the prior year period.

Looking ahead, we believe the improved flow of AGS content into the online channel should begin to drive incremental interactive revenue growth, perhaps as early as Q4, while the activation of new B2C customer relationships, the introduction of new online-only game content and the expansion of our online content reach into additional North American jurisdictions should eventually steepen the rate of revenue growth we are able to achieve within the business. Now turning to margins. Third quarter adjusted EBITDA margin was 44%, in line with expectations articulated on our Q2 call. Our third quarter margin performance reflects a greater mix of EGM unit sales revenue, which carries a lower gross margin as compared to EGM gaming operations revenue.

Further, post-COVID normalization in our discretionary business operating expenses and market-level inflationary cost fluctuations. Looking ahead to the fourth quarter, while we should begin to realize a modest benefit from ongoing moderation in global supply chain and logistics disruption and the inclusion of our initial run of value-engineered Spectra cabinets which should be gross margin accretive, we expect our commitment to investing in R&D to support future revenue growth opportunities and a full complement of seasonal G2E-related expenses to produce a Q4 adjusted EBITDA margin that is in line with to slightly below the 44% achieved in the third quarter. Looking at the balance sheet. We ended the third quarter with just over $73 million of total available liquidity and net leverage stood at 4x.

Supported by our steadily improving financial performance through the first 9 months of the year, the product momentum building within multiple segments of our business and the consistency we continue to observe within the day-to-day operations, we are highly confident in our ability to deliver upon our previously issued year-end 2022 net leverage target of less than 4x. Before closing, I would like to address a few items related to our cash flow performance in the quarter and provide some perspective on our outlook for the remainder of the year. Third quarter capital expenditures totaled approximately $20 million, bringing our year-to-date capital spend to approximately $50 million, driven by unwavering customer demand for a high-performance premium EGM products and the market’s strong initial response to our new Spectra cabinet and high-denomination game content, we now expect full year capital expenditures to land near the top end of our previously issued $62 million to $67 million range.

Free cash flow in the third quarter was negative $2 million. Measures taken to ensure that we are positioned to fulfill future demand within standard lead times and the timing of Q3 equipment sales created a $7 million working capital drag in the quarter. Additionally, slightly higher debt service costs as a result of recent increases in market-level rates further affected our quarterly free cash flow performance. Looking ahead to the fourth quarter, we believe our sustained operational momentum, budgeted capital spending plans and anticipated working capital normalization should allow us to generate positive free cash flow even after taking the higher prevailing interest rate environment into account. Operator, this concludes our prepared remarks.

We would now like to open the lineup for questions.

Q&A Session

Operator: Our first question comes from Jeff Stantial from Stifel.

Jeff Stantial: Hey, good day, everyone. Thanks for taking our question. I wanted to start on the North America game ops business, if possible, it looks like yields, call it, 31 and change, just a tick lower than kind of the 32.50 reported in Q2. Can you just kind of frame the puts and takes going at the quarterly sequential growth on the one hand, got a solid expansion in premium content. The consumer feels mostly stable. But any other kind of levers to kind of contemplate when we’re thinking about that sequential growth rate?

David Lopez: So I’ll just comment on the quarter itself, and I think you’ve summed up. There’s a lot of puts and takes. So I think there’s a lot of movement. I think the good news is, on one hand, our premium business is doing fantastic. We’re very happy with the progress there, he can sort of extrapolate and get into the numbers there, what kind of progress we’ve made in the quarter. But from there, I think the key is beyond our premium business is that we just see stability. I think this movement isn’t a whole lot. There’s a little bit of seasonality that comes into play for us, we’re — I’ll go ahead and turn it over to Kimo, so he can talk you through that a little bit.

Kimo Akiona: I mean that’s the interesting part of it. I think you hear some commentary out there, Jeff, right, like people are starting to see, let’s call it, normal seasonality in their businesses, right? And I think that’s what we’re seeing. I think where Q3 ended up with RPDs where we expected it to be. So I don’t think there’s anything other than normal going on. I think, seasonality — normal seasonality seemed to be kind of the theme that we’re seeing.

Jeff Stantial: Okay. Great. That’s helpful. Switching to the cost side of things, margins kind of hanging around that 44% level. Kimo, can you just kind of frame out for us the puts and takes as we go into 2023 for getting back to that 45% to 47% range that you used to guide to, how much is supply chain normalizing versus replacement cycle fully getting back in 2019 versus sort of a lag return on some of the R&D investments you’ve made over the past couple of years versus anything else to contemplate? And let me know if that makes sense.

Kimo Akiona: Yes. So I think related to ’23, we’re still working through our budget process. I won’t — I don’t think I’ll comment too much on ’23, but I’ll say that what we’re seeing or what we just saw in the past quarter in Q3 was dramatically, pretty similar to Q2, right? Like I think what’s incremental to Q2 maybe was we see the for-sale business coming back. And as everyone knows, the for-sale business carries lower gross margins than the recur business. So a little bit of the margin degradation sequentially is mix driven. I think maybe one other thing is on the for-sale side, specifically is you do see a little bit of degradation there, right? And that is again ongoing, I think supply chain inflation that we’re seeing.

We have seen some letup in transportation costs. But on the component side, we still do see inflationary cost there. I think on the positive side, right, is we’ve fully accepted that it is what it is, and we’ve done the best that we can do with it. But we’re able to fulfill the demand we’re seeing. We made some strategic decisions to do buys on inventory and fill demand that we see in the market. So I think there’s a positive there. I think a little forward looking. We will continue to invest in R&D. So R&D will be at a similar level going forward, if not maybe a tick higher. But a lot of that depends on the macro as we move into ’23. And I’m not going to comment too specifically on ’23 yet. I think it’s premature, but we’ll say it’s top of mind, right, as you look into the future.

Everyone is talking about macroeconomic headwinds and maybe a little bit of a storm ahead. But it’s top of mind, but I won’t comment too much on that. It’s a bit premature, I think.

Operator: We now turn to Carlo Santarelli from Deutsche Bank.

Carlo Santarelli: Thank you. David, Kimo, Brad. Thanks for the color. David, maybe this one is for you. I know that I want to be courteous of you guys not getting too much into 2023. But if I ask the question a little bit differently as it pertains to your unit sale opportunities. If we were to envision a 2023 with flattish replacement, flattish expansion demand relative to 2022. With the Spectra cabinet, the incremental content that you guys have, the momentum that you have, how do you kind of think about the, give or take, 4,000 units you presumably will sell for the full year ’22 in terms of the growth trajectory into ’23?

David Lopez: Yes. So I’ll answer that the best I can without getting into that exact number, obviously. It’s majorly for us there. But I think the good news is, like you said, we got Spectra 43, our Curve is still moving. We’ve got a lot of content at this time. We’ve got all 7 studios producing games. That’s the first time we can say that all 7 studios have put a gain into action in the field. So that’s great news. So I think the momentum is there. I think the product is there. I think the investment in R&D is there for us to grow and do better than we did in the current year. I can’t get into specifics, obviously, as far as numbers go. But I think that you are — you’re warm, you’re very warm onto the topic of what the momentum looks like, what our performance is going to drive and how confident we are just in the businesses, in general, on the sales side, you can sort of see that in the numbers, and we can see that in our — in sort of the Eilers Report and things like that, things that are going to drive that momentum.

But G2E was a good bellwether for that. The customers were pretty hot on our product. And again, we’re really proud of the work the guys have done in R&D, 7 studios all performing right now. And many — much of that production coming out there is doing fantastic. I don’t know, Kimo, do you have anything to add? Is that coming up because you can’t say anymore?

Kimo Akiona: No, I think you covered all the key points.

Carlo Santarelli: Great. And then if I could, just one follow-up. SG&A has been a little choppy, but kind of in this $16 million to $18 million range. As you guys think about kind of the business today and rightsized where you are, is this kind of a good run rate, albeit presumably some inflation in there as you look ahead into ’23, ’24, et cetera? Are you kind of set with everything you need at this point from an SG&A perspective?

Kimo Akiona: Yes. I think — Carlo, I think, substantially, yes. I think we’re pretty set on the SG&A front. So I think it’s a good rate to use going forward, the range that you have.

Operator: Our next question comes from David Bain from B. Riley.

David Bain: Great. Thank you. And nice third quarter results. I guess the first one I would have been the opportunity for AGS in Texas. If your largest customer there expands, could you participate by like a development deal similar to WinStar, any kind of early read on structure, timing? It seems like a pretty big opportunity for you guys. So I’m just trying to get a big-picture perspective at this point if you have any kind of comments there.

David Lopez: Yes. Thanks, David. So obviously, the Texas opportunity is a fantastic one for us. It’s squarely in our wheelhouse. It’s Class II. It’s an area where we have, I’d say, tremendous relationships. We’ve been very committed to the tribes down there and really providing products in some of the most challenging of times for them. So we’re really happy with sort of how things have transpired. We think the opportunity is fantastic. And you’ve asked the question about development, I’ll actually get to your question now. And I think that’s all on the Board. Those are all some opportunities that are on the Board. Too early to tell exactly what — how that will transpire or what — how it will come to fruition for us. But I think that’s certainly one of the options that are out there, and you referred to it much like another — an Oklahoma casino. Could the development agreement happen? Yes, I think it’s a good, but it is a little bit early.

David Bain: Okay. Right on. And then I know it’s a smaller piece of portfolio, but something that continues to grow nicely on the table side is the PAX S shuffler rollout momentum. And I’m wondering if you could give us maybe just a little bit more depths around kind of the feedback. It seems like you’re just kind of scratching the surface with shufflers and maybe even take that to the next shuffler extension that can broaden the table universe for you guys. Is that something that we should view as transformative for this product to kind of complete the portfolio there?

David Lopez: So I mean feedback on the shuffler right now, I think, is fantastic. The reliability is there. We’re as fast as we need to be. We’re probably even a smidge faster than we need to be. We could probably slow the machine down a little bit more. But our reliability is there. I think our service is on point at G2E. This is the first time we’re really selling the shuffler when it was fully commercially available, obviously. So the rollout is going well. interest is high. We view the shuffler we’ll sort of — we’ll say that portfolio and that opportunity has been a good one going forward. Obviously, we’ve got 2 shufflers in there right now. The most recent one PAX S, we have very high expectations for. And we’d love to keep building that out.

I can’t sit here today and tell you exactly when the next shuffler would come out. But our view is to build out that portfolio and have it been a substantial part, not just on the table games division, but of our growth overall. So we’ve got some experience in the area. We’ve got some great employees. Our dev team has been doing great. Service has been awesome. And so we’ve been really, really proud, once again, of the work that the team has done and the feedback we’re getting from customers.

Operator: We now turn to Barry Jonas from Truist.

Barry Jonas: Hey, guys. It sounds like the overall operator outlook is pretty consistent for now despite that potential storm on the horizon. I’m just curious of certain types of operators or specific geographies sound better than others from AGS’ perspective at this point.

David Lopez: I think that right now, Barry, we don’t really see anything out there. There’s nothing in the numbers. There’s nothing in the feedback. There’s nothing at G2E where certain customers were coming to us and saying, “Hey, this is something that’s happening in our business that’s trailing off.” It’s been rather consistent. There’s been nothing that we’ve seen or heard of that indicate, hey, that thing around the corner is coming. We’re not there yet. I mean a lot of numbers continue to be incredibly strong. So that’s sort of where it stands right now. I don’t want to pick one versus the other and try to be a prognosticator when they haven’t indicated anything to us at this point, and we certainly don’t see it in the numbers.

Barry Jonas: Understood. Understood. Then just for a follow-up. You guys have been calling out HHR performance. Just wondering how big HHR is now for you? And how big you think it could become?

David Lopez: So we don’t break that out. So I’m going to turn it over to Brad to sort of characterize it the best we can, but we don’t really give out that number at this point.

Brad Boyer: Yes, Barry, I think the beauty of the HHR market is that your kind of seeing growth everywhere. You’re seeing growth in existing markets, both in existing facilities and with the addition of new facilities. You’re seeing new jurisdictions come online like in New Hampshire. And it does seem like for the first time that there’s maybe a little bit of legislative momentum in that area that could further expand the market over sort of a multiyear period. So I think, for us, the beauty is that we have a great relationship with our systems partner. Our games performed well, and we’re just continuing to tap into that market and look for areas to continue to grow it as we look down the road.

Operator: Our next question comes from David Katz from Jefferies.

David Katz: Hi, good afternoon, everyone. Thanks for including me. I wanted to talk about the installed base just a little bit because I know there’s a variety of pieces here on the premium piece as you grow that becomes increasingly accretive. But it does seem — and I think we’re trying to figure out what the arc of that installed base in total really looks like going out a little longer term beyond just the fourth quarter. And similarly, the RPD on it, there should be some meaningful accretion there, right, which at some point, sort of arcs that RPD upward at some point. And so if you could just help us unpack that a little bit, it would be helpful.

David Lopez: So I’ll kick it off a bit there. Thanks, David. I think that I’ll start with, obviously, performance and we’ve talked about premium, and I know you commented on it just now. When you look at our premium growth sequentially and then obviously, our premium growth year-over-year was quite substantial. I think that will — we will, over time, begin to see that really support that RPD and help grow it over time. Our success there has been nothing short of fantastic right now. And then you look at the actual installed base, you say, “Hey, we’re not growing the installed base at the same rate. You’re seeing that we are trading off some of the installed base for some newer and much better installs.” And that’s what we’re focused on right now.

We try not to do too much of what we say — we don’t even really use the pruning term anymore. I think that we’re just making sure that we manage the installed base correctly. We think we can continue to grow the base, but our focus being on premium because that will drive that number and sort of drive that arc that you’re referring to. Kimo, do you have anything to add as far as a little color on that?

Kimo Akiona: No. I mean, I think, David, you’ve seen us execute on our strategy, we always talked about, right? Like I think early on, as we just go back to when we entered the pandemic, right, I think our strategy was really increasing the health of the base by making some moves that we did and really focusing on how we invest in that base. And if you fast forward to today, right, a lot of our investment is going into premium, which is the best returns that we can get right within our business. So as we move forward, yes, I think you’ll see the total installed base continue to grow. But what really, we’re focused on is just returns, right, cash returns. So we want to be most mindful of that. So investing in a way that is just getting the best returns on our investment, which would mean trying to increase premium as much as we can.

David Katz: Got it. And if I could just double deeper into Texas because obviously, there’s a much larger opportunity out there for you in the future. But I think from some of the commentary and the release, there are some units that are sort of growing your footprint in Texas, broadly speaking now. Can you just sort of help us understand where you are in that market and what the opportunities are separate and apart from that one large tribal opportunity that’s out there?

David Lopez: I’m going to kick that over to Brad. He’s the Texas expert.

Brad Boyer: Yes, sure. Thanks, David. So we kind of commented on our last call that in advance of the ruling in June, we started moving back into one of the facilities that was partly to the favorable ruling that was issued by the Supreme Court. So we started moving back into that facility in Q2, and we added some more units there in Q3. I would say we kind of rightsized our position in that additional facility through in Q3. And we’ll look to continue to maybe deliver some incremental growth there, but nothing on a large scale. So we — in addition, our largest partner within the state outside of Houston, we did add some additional units in there on the back of the ruling as well. But on order of magnitude, I would say, Speaking Rock facility in El Paso was really the area where we took advantage of the ruling to sort of broaden our exposure within the state.

Operator: We now turn to Chad Beynon from Macquarie.

Chad Beynon: Hi, good afternoon. Thanks for taking my question. I wanted to start with capital allocation. You’ve talked about your goal of sub-4x. You reiterated that and said that you’ll achieve that by the end of the year. I think you’re actually achieving it now from a TTM basis. But now that your kind of in that range and should be in that range through the end of the year, how should we think about how the company is run, maybe new opportunities that you might take a look at on M&A share repurchases? Anything different in terms of how you’ll be running the capital from there.

Kimo Akiona: I’ll start off. I mean, Chad, I think it’s pretty consistent. I’d say it’s pretty consistent with what we’ve said over the course of the last couple of quarters. I don’t think there’s going to be any big changes as far as capital allocation strategy. And part of that in the calculus has always been there’s talk about the macroeconomic environment next year. I think we are not blind that we are living in a time of rising interest rates as well, right? So I think that has always been in the calculus as we move through this year and as we enter next year. So I think capital allocation is going to be the same. I think we’ll continue to invest in the lease business as we see appropriate. Again, we feel like those are some of our best organic returns that we have.

We’ll continue to invest in our R&D franchise as well, continue to support that. And we’ll be mindful of if there’s any small tuck-ins or different things out there that exists, i.e., like the small tuck-in that we did in table games in the first quarter of this year. So I wouldn’t say if any dramatic changes that you’ll see going forward related to capital allocation strategy.

Chad Beynon: Okay. And then we’re trying to kind of frame out Spectra how big this can be. Can you — first off, can you kind of remind us when we should expect kind of the beginning of the bulk of some of these placements or orders to be shipped. Clearly, the 3x house average opportunity could provide a big opportunity. So first, on the timing? And then secondly, is there a way to kind of frame out what the opportunity is? I know the question was asked earlier just in terms of could units be up from a year-over-year basis, but you’ll be selling other units in addition to the Spectra. Just trying to figure out if this truly is kind of an incremental place on the floor, and it could be additive to the areas you’re currently selling into.

Brad Boyer: Chad, this is Brad. So as we highlighted in the prepared remarks, the Spectra will soft launch here in the fourth quarter. It’s not going to really drive the lion’s share of the mix in 4Q. The full-scale commercial launch is scheduled for the first quarter of next year. As we said, we have 30 titles in the offer to support the year 1 launch. We feel really good about where we’re heading with Spectra. I think the beauty for us right now is that really for the first time in our company’s history, we have 2, what I would call, relatively new cabinets for sale in the market at the same time. Our high-denom content really helps to sort of differentiate our Curve product. So we get some unique mix opportunities that maybe we haven’t really had in the past to help drive some incremental volume there.

So I think we can — we’re starting to move down the path of really truly building a portfolio. I think having that cross-sell opportunity as we’ve seen over time really helps to drive some incremental business. So I think we feel really good about the cabinet lineup that we have in front of us as we look ahead to ’23.

Operator: We now turn to Edward Engel from ROTH Capital.

Edward Engel: Hi, thanks for taking my question. Within Interactive, nice to see EBITDA return to sequential growth here as RMG continues to kind of drive growth from here, can margins quickly return to that 33% we saw in 2020, 2021? Or are you still kind of ramping your investment there?

David Lopez: Well, I’ll kick off, and I’ll turn it over to Kimo here. So obviously, we’re — we think that interactive is going to be substantial going into the future. It goes without saying that as this rolls out throughout North America, it might be a slow rollout as far as states taking on real money gaming. But we think it’s going to be a big part of everyone’s business on the vendor side and operator side going forward. So we’re going to continue to make those investments. We made some very recent strategic hires. We think they’re going to be very good ones to help beef up our business and our content for the business. So we will see some of that going forward. We’ll be mindful of our trajectory in revenue and growth as we make those investments. But as far as the margin goes, I’ll kick that over to Kimo and see if he’s got anything to add there.

Kimo Akiona: Yes. I think, will it return? Yes. I wouldn’t use the word — I always caution using the word quick. It’s pretty subjective, right? But I would say, yes, it will return to that. And like David said, we’ve always been mindful of how we invest in that business and making sure that we run an interactive business that’s profitable, right? So I think we’re making the investments today in increasing kind of our game production and getting that smoothen out, but we will get back to kind of that 30% margin range that you cited.

Edward Engel: Great. Thanks for the color. And then I guess, just relative to some of your newer KPIs that you gave out in the table game segment, is that a mix shift to more shufflers still accretive to that reported average monthly lease price?

Brad Boyer: Yes, I’ll take that one, Ed. This is Brad. So we highlighted this a little bit in the earnings release, but in a normal sort of fully loaded scenario, we would expect shufflers to be accretive to the ALP. I think, given sort of where we are in the rollout phase, we do have a decent number of units that are out on trial. Generally, operators take the unit on a trial basis, and then it converts to a revenue-generating unit. So over time, you will start to see that mix benefit within ALP. And then the only other call I would have been if you look at it year-over-year, you are layering in the Lucky acquisition from earlier this year, which is a side bet so a side bet is a lower-yielding table product so that does influence the year-over-year comparison. But definitely over time as the shuffler continues to grow and get to a position of some critical mass, you will see it start to get reflected accretively in ALP.

Operator: This concludes our Q&A and today’s conference call. We’d like to thank you for your participation. You may now disconnect your lines.