PlayAGS, Inc. (NYSE:AGS) Q3 2023 Earnings Call Transcript

PlayAGS, Inc. (NYSE:AGS) Q3 2023 Earnings Call Transcript November 7, 2023

Operator: Hello, everyone. And welcome today call tilted PlayAGS Third Quarter 2023 Earnings Conference Call. My name is Allen, and I’ll be your call operator today. [Operator Instructions] I will now like to turn the call over to Brad Boyer, SVP of Investor Relations to begin. Brand, please go ahead whenever you are ready.

Brad Boyer: Thank you, operator, and good afternoon, everyone. Welcome to the PlayAGS Incorporated third quarter 2023 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, 2023, can be found on our Investor Relations website, investors.playags.com. On today’s call, we will provide an overview of our Q3 2023 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. We delivered another solid quarter of execution in Q3 with our product momentum and focused team producing performance that far exceeded the trends observed across the broader domestic gaming landscape and contributed to several new financial records along the way. That said I would like to highlight a few of the notable accomplishments from the quarter. First, Domestic EGM gaming operations revenue increased 6% year-over-year, once again outpacing the revenue trends observed across the broader domestic gaming landscape. Second, Global EGM unit sales increased by over 30% versus the prior year, far surpassing the 2% market level increase forecasted by Eilers. I would note our replacement unit sales and the number of customers sold to both reach new records in the quarter.

Third, we estimate Domestic RPD increased 9% year-over-year on a constant currency basis, as our ongoing optimization efforts and a stable macroeconomic backdrop continue to support our performance in the region. Fourth, Interactive revenues increased more than 20% year-over-year to record $3.1 million driven by returns on strategic investments initiated in the back half of 2022. And finally, Table products revenue surpassed $4 million for the third consecutive quarter with the continued strong rollout of PAX shuffler pushing table sales revenue above the $500,000 level for the second quarter in a row. Ultimately, the noteworthy top line trends I just described allowed us to deliver on three financial metrics that I believe matter most to those of you on the call.

Adjusted EBITDA surpassed the $40 million level for the first time establishing a new record for the third time in the past four quarters. Next is free cash flow which increased to a record of approximately $13 million reflecting strong operating performance and a continued focus on working capital efficiency and CapEx discipline. And last net leverage fell to 3.4x which is inside of our targeted year end range a quarter ahead of schedule. With another record quarter behind us our focus now turns to Q4 and 2024 which leads me to G3 where I can confidently say this was our company’s best show to date. Continuing a theme that began our pre-G2E customer meetings, the show itself served as the coming out party for our collective R&D team, showcasing the dramatic product transformation spurred by their commitment and focus over the past several years.

This transformation did not go unnoticed by our customers. From new cutting edge cabinets, to thoughtfully curated portfolio of diverse slot content, new table game concepts and a turbocharged interactive offering. Our booth truly had it all. Taking everything into account, I believe our current pipeline of new products puts us in the desirable position to continue our team of relative outperformance for the foreseeable future. Within thoughts, our product momentum is very real, with Spectra 43 continuing to deliver exceptional performance. While Spectra 49, the second cabinet in our Spectra family has jumped out to a strong start across all initial test sites. In addition to this success, I’m also excited about our entrance into the mechanical, real and jumbo market segments, with initial deployments scheduled for the back half of 2024.

With a complete portfolio of slot products capable of addressing the most in demand segments, on operators floors, and a well-diversified portfolio of game content, I’m confident we have the tools at our disposal to consistently grow our ship share in the quarters ahead. Momentum is equally evident in our premium games segment, where we just completed our 15th consecutive quarter of unit growth. Similar to spot sales, I believe we have the right hardware and game content momentum necessary to level up in this growing market segment building on our current premium unit mix of 17%. Turning the tables, our position as partner and innovator of choice continues to propel the business forward. On the topic of innovation, we recently introduced several new features and functionality for our Bonus Spin Xtreme progressive, which have the potential to broaden the products appeal and allow us to build upon our existing BSF inflation base of over 500 units.

Additionally, our PAX S shuffler continues to prove efficient and effective, with our footprint quickly approaching 300 units. Looking ahead, the continued momentum behind BSF and packs, along with the new jurisdictional and product approvals is allowing us to accelerate our sell-in to underpenetrated markets. Additionally, we have kicked off early stage development for a new multi-deck shuffler which will allow us to attack the largest segment of The Global shuffler market. Combined, we believe these opportunities put our table business on a compelling multiyear growth trajectory. Finally, our Interactive segment has entered launch mode, as evidenced by our record Q3 performance. During the quarter, we launched our first game in the popular three real category.

Mega Diamond, our most successful new game released today has outperformed our previous best release by nearly 40%. The strong performance propelled the title to the top of the charts in the October Eilers report with another AGS game theme capital gains taking second place. As I look to 2024 and beyond, I’m confident the strategic ambitions for our interactive team should allow for more consistent delivery of AGS content and the online channel. Further diversification of our online content offerings into additional genres and more strategic and impactful interactions with our B2C partners, all of which will position us to deliver outsized growth. While I’m encouraged by the recent success and consistent momentum building across all three of our operating segments, I’m even more enthused with how our improved operating performance has allowed us to deliver on two key strategic objectives, consistent free cash flow generation and delivery.

As I previously mentioned, free cash flow in the quarter set a new company record surpassing $10 million for the second consecutive quarter. Looking ahead, we remain focused on leveraging our organizational commitment to CapEx discipline and working capital efficiency to consistently generate quarterly free cash flow with a target is steadily improving our annual free cash flow conversion over time. Additionally, we intend to pair our improved free cash flow with continued adjusted EBITDA growth to further reduce our net leverage while we continue to target yearend net leverage in the range of 3.25x to 3.5x, we have our sights set on driving leverage into the mid-2s, at which point we believe we will be presented with opportunities to further unlock shareholder value.

In closing, I would like to thank our team members across the globe for their commitment, focus and dedication. Your effort does not only produce a run of record setting financial performance, but also contribute to the development of the most diverse and compelling product lineup in our company’s history. That said, I remain extremely excited about what lies ahead for the company and I look forward to sharing our progress with you on future calls. With that, I will turn the call over to Kimo.

Kimo Akiona: Thank you, David. And good afternoon to all of you on the call. As in prior quarters, I will review a couple of highlights from our reported results and provide a perspective on how we see each of our business segments trending as we look ahead to the current quarter. I will also share some thoughts on our free cash flow outlook for the remainder of the year and close by addressing a few items related to our balance sheet. Turning first to our Domestic EGM gaming operations business, third quarter revenue increased 6% year-over-year to approximately $49 million far outpacing the modest decline in market wide domestic gross gaming revenues or GDR. Domestic EGM RPD improved 5% year-over-year to $32.57 topping the $30 level for the 10th consecutive quarter for our Domestic EGM installed base grew by over 160 units versus the prior year and increased sequentially for the sixth quarter in a row.

The strategic initiatives driving the continued relative outperformance in our Q3 Domestic EGM recurring revenue were consistent with the past several quarters. First, we identified additional opportunities to thoughtfully expand our footprint of higher earnings premium recurring revenue units, achieving growth in our premium installed base for the 15th consecutive quarter. Second, we leverage the expanded scale and scope of our EGM product portfolio, including our high performing Spectra cabinet and increasingly diverse the game content library to further optimize our core EDM footprint. Finally, overall market level GDR trends remain relatively stable and consistent throughout the quarter. Looking ahead to Q4 at a high level, we believe our domestic EGM gaming operations business is once again positioned to outperform relative to broader domestic GDR trends.

From a KPI perspective, we expect our yearend Domestic EGM installed base to be up slightly versus Q3 as continued modest growth in our premium unit footprint is partially offset by an anticipated seasonal increase in fourth quarter convert to sale activity as operators deploy use it or lose it capital prior to yearend. As it relates to RPD, quarter-to-date GDR trends across our serve markets continue to prove relatively consistent but those witnessed over the past several quarters. That said, provided the Domestic GDR environment maintains its resiliency throughout the duration of the quarter. We believe our unique set of company specific yield optimization catalysts, including our growing premium unit footprint, high performing Spectra cabinet and diversified core content offering should allow us to deliver Q4 domestic RPD that is in line with slightly ahead of the $31.46 achieved in Q4 2022.

Shifting to EGM sales. We sold 1,345 units globally in the third quarter, up by over 30% versus the prior year. Sustained Spectra momentum supported by the continued strong performance of the cabinet launch titles, a more than 60% increase in the number of customers sold to further penetration of the growing historical Horse Racing machine market and the ability to leverage a deeper and more diverse product portfolio and stable market level demand trends once again contributed to our outside unit sales growth in the quarter. As we look ahead to Q4 continued sell-through of Spectra 43, the scheduled commercial launch of Spectra 49 further targeted broadening of our customer account penetration and a consistent market wide purchasing demand climate should allow us to deliver a Global EGM unit sale that exceed Q3 levels.

Moving on to EGM pricing. Third quarter global ASP was approximately $19,400, up slightly versus the prior year. A greater mix of premium price Spectra cabinet sales and continued implementation of our price integrity initiative paced or improved ASP performance versus the prior year. ASP declined modestly relative to the $20,700, achieved in Q2 2023. Consistent with the expectations laid out on our second quarter call. The quarterly sequential ASP cadence reflects a slight increase in international unit sales and the mix of domestic Orion family cabinet sales in the quarter. It is important to know that pricing on Spectra, which accounted for approximately 60% of our total third quarter unit sales mix remain comfortably above the 20,000 level.

Looking to Q4, supported by strong pricing we continue to command for Spectra 43, the anticipated sale of initial Spectra 49 units, which are priced at a premium to 43 and the mix of non-Spectra family units within our sales pipeline, we believe ASP should return to around the $20,000 level. Turning to our International EGM business, recurring revenue increased 25% year-over-year and improved sequentially for the 13th consecutive quarter. The continued strong performance of several established AGS franchise games throughout Mexico, further installed based optimization. Stable macroeconomic trends and favorable FX movements contributed to our improved recurring revenue performance in the quarter. International RPD increased by nearly 30% versus the prior year or approximately 9% on a constant currency basis, surpassing $9 for the first time.

As we look ahead to Q4, we believe that compounding effect or benefit of installed base optimization, coupled with the resilient market level revenue trends observed quarter-to-date should allow us to deliver another quarter of outside international game ops revenue growth. Looking beyond EGM, revenues within our table product segment top $4 million for the third consecutive quarter with equipment sales revenue surpassing $500,000 for the second quarter in a row. Our PAX S shuffler footprint increased approximately 8% sequentially to over 290 units. While our Bonus Spin Xtreme progressive installed base surpassed 500 units at quarter end. We also expanded the market penetration of our AGS Arsenal site license program in the quarter by executing our first site license with the casino operator in the Oregon market.

Supported by continued strong demand for PAX, a favorable customer response to the enhanced features and functionality recently added to our Bonus Spin Xtreme progressive, targeted jurisdictional expansion opportunities and an accommodative new casino opening calendar, we believe we should be able to modestly improve upon our Q3 table revenue performance in the fourth quarter. Shifting for Interactive, segment level revenues increased 20% year-over-year to a record of just over $3 million. Returns on the strategic investments into our real money gaming or RMG business initiated in the back half of 2022 continue to accelerate during the third quarter, with RMG revenue advancing more than 20% on a quarterly sequential basis to a record of $2.8 million.

The strong revenue growth also flows through to segment level EBITDA, which increased nearly 60% year-over-year to a little over $900,000 representing our 15th consecutive quarter of positive adjusted EBITDA performance within the segments. Looking ahead to Q4, although we expect interactive revenues to be nicely, higher versus the prior year. We believe that combination of a challenging Q3 comparison with the quarter benefiting from our most successful R&D launch, game launch to date, and the anticipated timing of new content introduction could temporarily moderate the level of sequential revenue growth we were able to achieve. That said as David indicated, we’re increasingly confident to added depth and diversity of our under-development online content offering along with our execution of more targeted and tactical business development initiatives put our interactive business on a multiyear path to consistent and sustainable outsized growth in 2024 and beyond.

Turning to margins, their quarter adjusted EBITDA margin was approximately 45%. Nicely ahead of the expectations articulated on our Q2 call and up 90 basis points versus the prior year. Operating leverage resulting from outside EGM segment revenue growth, the greater mix of higher margin Spectra family EGM unit sales and accelerating returns on our tactical interactive investments, all contributed to our improved margin performance in the quarter. Although seasonal G2E related expenses are likely to contribute to modest sequential compression in our Q4 adjusted EBITDA margin, we expect to remain above the 44% level in the quarter as we continue to target full year adjusted EBITDA margin in the range of 44% to 45%. Third quarter capital expenditures totaled approximately $17 million, bringing our year-to-date capital spend to just under $47 million.

We continue to expect full year capital expenditures, inclusive of anticipated capitalized R&D to land in the range of $65 million to $70 million. Cash interest in the quarter was $13.5 million increasing our year-to-date cash interest expense to approximately $39 million. We believe that $13.5 million level serves as a good proxy for the fourth quarter. Third quarter free cash flow defined as net operating cash flow plus proceeds from payments on customer notes receivable less CapEx increased on both a year-over-year and quarterly sequential basis to just under $13 million supported by our record operating performance, heightened focus on efficient and effective working capital management and continued CapEx deployment discipline. Looking ahead to Q4, we believe the strong demand we are currently seeing for our growing suite of EGM products could require us to source additional component inventory prior to yearend to ensure we are in a good position to fulfill Q1 demand in a timely fashion.

While this has the potential to modestly impact our Q4 free cash flow performance, our continued operating momentum and further execution of our CapEx efficiency initiatives will allow us to generate positive free cash flow for the third consecutive quarter. Finally, net leverage at quarter end fell to 3.4x compared to 3.8x at the start of the year, supported by the operating trends observed across the business through October, combined with our expectation to once again generate positive free cash flow in Q4. We remain confident in our ability to exit 2023 with net leverage in the range of 3.25x to 3.5x. I would note the assumptions underpinning the midpoint of our targeted yearend net leverage range continue to contemplate a modest pullback in prevailing market level conditions that we have not yet observed Q4 to date.

That said, should broader GGR trends remain relatively consistent with the levels we are currently experiencing for the duration of the quarter, we would expect to exit 2023 with net leverage in the bottom half of the range. Finally, I would like to reiterate our approach to deleveraging remains unchanged as we continue to target a combination of adjusted EBITDA growth and consistent free cash flow generation. Operator, this concludes our prepared remarks. We will now like to open the line up requested.

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Q&A Session

Operator: [Operator Instructions] Our first question today comes from Jordan Bender from JMP Securities.

Jordan Bender: Hey, thanks for taking my question. Jordan from JMP. Kimo, on the last point there, you’re talking about leverage, and you kind of made a reference to leverage fall into the mid-2s over time, if you look into next year leverage following free cash flow continuing to build. Is there kind of an updated view here on how the company views its strategic opportunities with a better balance sheet? And maybe a little bit more of a serving environment? Thank you.

Kimo Akiona: Yes, it’s good question. And I think the strategic view is the same. And I think the point of us emphasizing putting that number out there, as a Northstar is really just to keep emphasizing how focused we are on leveraging the business, right, and you look at, I think, the strides that we’ve made in the operating performance of the company, we have a bunch of initiatives around working capital management in different areas. And I think you’re starting to see the early days of us being able to consistently produce quarterly free cash flow. So I think we put that number out there more, not again, to change any kind of strategy or strategic view on the company, but more just to emphasize how focused we are on deleveraging the business.

Jordan Bender: Great, and then you talked about mechanical real, can you just maybe talk about the rollout for that, and then maybe what that means for the overall mix of the company.

David Lopez: So, as far as rollout goes, like we said, sort of back half of the year, we’ll probably be trying trialing some of this and some tests banks, perhaps a little bit before that, as far as what it looks like for the company, I think it’s really just maybe focus back on G3 a little bit. And, and pre G2E is actually where we weren’t actually demonstrating the product. But they, we gave them a sneak peek into that, and our jumbo cabinet. And we look at the lineup that we have right now with Spectra and really coming off of Ryan. And not really just hardware, but their belief in our content, I think they’re looking at the greater AGS portfolio, and really saying, hey, this is a big step up function up for this company moving forward.

And it just allows us to use all these tools in the toolbox for our guys to sell in a more comprehensive fashion. So having, in the past only been in as we use the term one swim lane. Now we’re in multiple we’re in four or five swim lanes. And this just gives our team a really a fantastic opportunity to go out there and compete with the best of the best. So we feel great about the mechanical, real, we feel, fantastic about Jumbo, and, of course, our entire lineup at G2E that was shown that was on the floor, but it does come down to content. And that’s where we have our most, that’s where we’re absolutely most confident, the contact, the game, the math itself.

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

David Katz: Good afternoon. This is a general question. But we’re finding a lot of debate around whether your customers as operators, how they behave in circumstances where revenue may slow down a little bit or profits may get compressed a little bit on [inaudible]. What is your experience, Dave and Kimo with respect to that. And, how do they behave broadly speaking?

David Lopez: Yes. I think that, this is a nice, like, a bit of a debate that we all have sort of examined, perhaps, and, I don’t want to say the end of COVID, because I just had COVID last week. But it’s something that we all sort of been talking about for a couple of years now. And I think it’s just as it depends on the region, regionals might do one thing, Vegas trip, type destination will be another thing, and then there’s always tribal and Canada. And, I think for us, we know that we can put them into segments, some of those will be much more conservative, David. And then I think that there’s others that sort of is in the middle, and then I’ll just be specific, tribal, and Canada tend to, carry the day, they continue, they usually tend to be very consistent, and at times even aggressive, because their businesses, they seem to really hum almost under, I don’t want to say any circumstances, but a mild pullback, they tend to do very well.

And they continue to be aggressive through those times. I don’t know if that’s helpful, but I think we, that’s how we break it down into three areas there, which are all told, probably amounts to a fair bit of stability, David.

David Katz: Right. And so just to make sure, I’m not paraphrasing incorrectly, when operators are making decisions about whether to renovate this or that, or extend this or that those should be treated, in most cases as a discrete decision set versus, how many slots we’re going to buy and why. Is that fair?

David Lopez: I mean, if you’re talking about, it’s interesting if you’re talking about CapEx spend on property, specifically, well, across the entire property, and not specifically spots, I’d say that if you put us up against those, a lot of operators post COVID, during COVID may have just looked at things a little differently and said, hey, if we’re going to spend money, let’s invest on the casino floor, where we want to be competitive against our operational competitors in the region or on this trip or any of the like, and I think that manufacturers, slot machines, table equipment, et cetera have gotten a bit of a nod over maybe some new carpet, or some other, I’ll call it not as an operator and not as an expert. They’re non-revenue generating CapEx investments. So I do think like specifically this question, this comment you just made about paraphrasing it, I think that we get the nod on a bunch of that stuff as CapEx can tighten.

Operator: Our next question this evening comes from Jeff Stantial from Stifel.

Jeff Stantial: Hey, good afternoon, guys. Thanks for taking our questions. Maybe starting out here on the EGM business, perfect domestic game often installs about flat quarter-on-quarter if I’m hearing you right, I think the narrative, it sounds like, some of your optimization efforts used to be called pruning kind of offset the gross add for curve premium and for Spectra 43. Is that a fair way to kind of characterize Q3 trends? And then if so, as we looked at 2024, should we expect overall similar albeit lumpy levels of kind of optimization? Is this more of a tapering trend? Just any thoughts there would help as we think about the outlook for net growth in the domestic installed base?

David Lopez: Thanks. Hey, thanks. So Q3 is probably a little bit different than what you mentioned there, maybe not so much on the optimization front, and the second half of the year here and in Q3, we saw, right towards the end of the quarter, I’d call it some opportunistic converting to sales by customers, that their budgets reset at the end of Q3. For us our Q3, the end of their account, or the end of their fiscal year is the end of their Q3 calendar year. So some of them, let’s say, had some extra CapEx that may fall under the term use it or lose it. And I would say, although I don’t love convert to sales, we’re honored that they’re selecting our product, because that means our product presents value, and buying at that point in time.

So I think what you’re seeing there is a bit of, outside of the normal cadence of convert to sales, mostly opportunistically, by that user lose it type capital that’s available. And you did ask, like, hey, I’d say, rather, we’ll be consistent in the way that we approach. I don’t like to use term pruning, but optimization we will continue to optimize, we have an installed base, that rivals, many operators, many regional operators, don’t even have as many slots as we have out there in game ops. So, obviously, it’s our responsibility to keep that up. And I think that will be rather consistent. And bearing in mind when we say being good custodians of CapEx, we have a little bit more latitude when we have games like we’ve had on Spectra 43. And now what we’re seeing on Spectra 49, and even some new games that I mentioned, on Orion Curve, which is, a little bit of an older cabinet, we have a little bit more latitude, because with the game performance being higher, it’s, I’d say, easier to be good custodians of the CapEx or the cash of our investors.

So I think overall, relatively consistent, but some are called better opportunities.

Jeff Stantial: Okay, great. That’s apple. Thank you, David. And then turning to the capital allocation looks like you ended the quarter with about $44 million cash on hand. Kimo, do you have a number in mind? For minimum cash, given your R&D initiatives and some of the macro uncertainty that we continue to deal with or I guess, approached differently? Should we have kind of a rough timeframe in mind for when to expect free cash flow to start to be allocated to pay down on your term loan? Thanks.

Kimo Akiona: I think as far as like a minimum cash level, we’re pretty comfortable where we are now, we’ve never given you like an exact number, right. But I think we’re pretty comfortable where we are now. I think, again, like just being focused on building the cash position as we move forward, which gives us like, more flexibility, right. So I think, yes, is there an exact number or we’ll make that decision? I think I wouldn’t give you that number now. And we’ll see where and as we put the decision making in the sausage maker, right. We’ll figure out when is the right time to start paying down debt. I think what’s more exciting right is that we build the cash position, we continue to execute and headed on this path of where we’re going, what’s more exciting, I think there’s going to be get to an event where we can perhaps reprice or refinance our debt structure, right?

And maybe, obviously, target lowering our cash interest expense. So that’s something that, we’re pretty focused on executing on something like that at this point.

Operator: Our next question comes from Barry Jonas from Truist.

Unidentified Analyst: Hey, guys, this is [inaudible] on for Barry. Thanks for taking our questions. There’s been some regulatory noise in Mexico around a potential ban of slot machines. Can you talk about what you’ve heard on this? And what you see as the likelihood of this happening?

David Lopez: Yes, we hear about stuff like this. We think we see this periodically in Mexico. And I think I’m, what am I coming up on 26 years in gaming. And this is not the first time it’s come around is something that has been talked about, I think sometimes it’s used as a little bit of political saber- rattling, prior to elections, nothing that we consider to be a serious conversation. We’re pretty dialed into it needless to say, and there’s a lot of interested operating parties down there that are very big companies that have not indicated that anything like this would be serious.

Unidentified Analyst: Got it. Thanks for that. And then just taking a step back, in the past, you’ve guided to an adjusted EBITDA margin range of around 45% to 47%. Do you see a path to returning to margins at that level at some point? And if so, what would that path look like?

Kimo Akiona: I mean, again, not ready to throw out a target in the future for you. But I’ll say that we are as a leadership team, right. And across the company, we are focused on incrementally improving EBITDA margin consolidated. So I think you’re starting to see that now. Obviously, there’s a lot of puts and takes, right, and there’s a lot of difference of variables that go into that. But again, not ready to put out a target. But, we’re intent on improving the margin as we move forward. And I think, we have the different tools in the toolbox to do that. Like some of the premium initiatives that David talked about, I think, some of the new products that we’re rolling out, I think you can see some of the initiatives we’ve already been working on, we’re already gaining some call it SG&A leverage, as we move through this year, expect to continue next year.

R&D is really the one that we’re intent on, continuing to call it spend at the similar rate that we do today. That’s the one that will be ongoing, but, again, intends on improving margin and as we go forward. So not ready to quite give you a target just yet.

Operator: Our next question comes from Chad Beynon from Macquarie.

Chad Beynon: Thank you, evening, thanks for taking my question. I wanted to ask about interactive 20% year-over-year growth, which was the strongest growth within the segments? Kimo, you talked about Q4, maybe slightly lower growth in that, but really just wanted to have you guys expand a little bit in terms of what’s working. Is it more titles, new markets? I know Pennsylvania, Michigan, and New Jersey, are the big markets. But at what point would you consider kind of moving into some of the bigger non-North American markets, given your pipeline of PAX?

David Lopez: I mean, I’m just going to be a little more specific when you speak of non-North American markets, what do you specifically like? What would you refer to that as before I go answering a question that I don’t understand. I am sorry for you question again.

Chad Beynon: Sure. Other big gaming markets, like the United Kingdom.

David Lopez: Okay. United Kingdom, I mean, we do business in Europe. At this time, I think that most of our opportunities still lies within North America. And I think, if you look at Eilers and you look at our success with game titles, and you look at sort of what we’ve done maybe over the last year or two, and how we’re just posting up on Eilers right now in the top five, for some of our game content, I think Chad for us, it’s making sure that we’re in every jurisdiction with every customer that we can be in, in North America, continue to do what we’re doing in Europe, because we are still doing it there, right. But cadence of rollout of new titles, and that’s where we’ve made some of our investments. And there’s a little bit of a nugget that we had in the prepared remarks there.

About, we’re going to offer new content through those investments that we’ve made. So we can put more content out with a better cadence, and then b, we’ll be in a situation where we can offer new game types, we’ll get into those game types, maybe on another call. But there’s some of the most popular ones even as simple as we released our first three real game, Mega Diamond. So three row games are very popular, as you know, we released our very first one, and it’s the best game that we’ve ever released by a huge margin. So that’s what we’re excited about. It’s all about content for us. We think that content cadence, and really just taking a team that we have a lot of confidence in from our R&D team, to mark our commercialization team and our leadership there.

We are just very comfortable and very confident what they’re capable of doing.

Chad Beynon: Okay, thanks. And then secondly, I wanted to ask about just EGM sales within your guide. On the fourth quarter, you talked about Q4 sales higher than Q3. So that would effectively put you over the 5,000 shipped share number 423, which is up over 25% year-over-year, and it’s I believe, the highest in your history. Is this kind of a new baseline foundation in terms of sales, given your market share gaming story, and how should we think about the seasonality if what we’re seeing in ‘23, should be kind of how we should think about seasonality going forward? Thanks.

David Lopez: Yes, I mean, I have to dive in specifically on the seasonality that we’re seeing. I think it always can move a little bit there, Chad. But I think that we’ve got a sort of lean a little bit back on the prepared remarks, that with what we showed it at G2E, with the things that we didn’t show physically, but we gave previews of pre-G2E, and the content that we’ve been rolling out that we have the kind of momentum that we know, we can look forward to sort of continued better days as far as not just our installed base game ops RPD, et cetera. But as far as game sales goes, and our ability to sell into, let’s say, those additional swim lanes, so we’re feeling good about where we’re at. And yes, some of your calculations are right there. And as we move into 2024, again, we’re very confident with the lineup that we showed at G2E and the stuff that we’re going to roll out in the back half of the year. Do you have anything to add to that?

Kimo Akiona: Yes, Chad. The only thing I would say to add is that, from a seasonality perspective, we’ve grown our EGM unit sales sequentially for 10 of the last 11 quarters, I think it really speaks to the momentum that we see behind the product. It’s truly resonating with customers. I think a telltale sign of that is if you look at G2E, each week since G2E, the amount of inbound interest and our demand for our product is picked up each successive week. I think it’s important to remember that we’re in the market today with the first of our Spectra family of cabinets, which implies there’s more to come, 49 is launching here in Q4. And we’ll gain momentum in Q1, where we’ll have two distinct products in the market at the same time, which really is a first for our company. And so I think we feel really good about the momentum that we have there with some of the additional new products and swim lane entrances to come in the back half of ‘24.

Chad Beynon: Thank you both. We’re getting a little greedy here looking for ‘24 commentary. Appreciate it.

Operator: There are no further questions on today’s call. So I’d like to close the call here and thank you all very much for your participation. You may now disconnect your lines.