PlayAGS, Inc. (NYSE:AGS) Q4 2023 Earnings Call Transcript

PlayAGS, Inc. (NYSE:AGS) Q4 2023 Earnings Call Transcript March 5, 2024

PlayAGS, Inc. beats earnings expectations. Reported EPS is $0.05574, expectations were $0.02. PlayAGS, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Hello, everyone. Thank you for attending today’s PlayAGS Fourth Quarter and Full Year 2023 Earnings Call. My name is Sierra, and I’ll be your moderator for today. All lines will be muted during the presentation portion of the call, with an opportunity for questions-and-answers at the end. [Operator Instructions] I would now like to pass the conference over to our host, Brad Boyer, Senior Vice President of Investor Relations.

Brad Boyer: Thank you, operator, and good afternoon, everyone. Welcome to the PlayAGS Incorporated fourth quarter and full year 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 fourth quarter and fiscal year ended December 31, 2023 can be found on our Investor Relations website, investors.playags.com. On today’s call, we will provide an overview of our Q4, and full year 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 obligations 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.

Reconciliation 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. The fourth quarter capped off an exceptional year for AGS, with revenues and adjusted EBITDA increasing 15% year-over-year. Q4, represented our 11th consecutive quarter of double-digit growth, and our fifth consecutive quarter of double-digit adjusted EBITDA growth. The strength in the quarter was broad-based, with all three operating segments, setting new quarterly records for revenue, and adjusted EBITDA. The quality and consistency, of our financial performance is a true reflection, of our incredibly talented and focused team, increasingly deep and diverse product offerings, across all three segments, and the improving efficiency and effectiveness of our execution. Before providing some perspective on the current year, I would like to highlight a few notable achievements for the fourth quarter.

First, global EGM sales increased 36% year-over-year, to a record 1,519 units, surpassing the 30% growth level for the third consecutive quarter. Just like Q3, our record performance was not driven, by a concentration of sales to any one customer, or within a jurisdiction, as we sold units to nearly 180 unique customers in the quarter, a new record for the company. Second, our Interactive revenue grew by over 30% versus the prior year to $3.4 million, with strong flow through increasing Interactive adjusted EBITDA by nearly 160% year-over-year to a record $1.3 million. Our refreshed and energized Interactive team, continues to further cement our position as a leading B2B content provider within the global real money gaming market. Third, Table Products sales and recurring revenue reached new records in the quarter, producing an approximately 20% increase in adjusted EBITDA, to a record $2.8 million and pushing full year adjusted EBITDA, to approximately $10 million.

I think it is important to remind everyone our table segment, was doing less than $1 million of annual EBITDA in 2018, with the 60% growth CAGR, over the past five years reflecting the incredible work, from our entire tables team. Fourth, free cash flow increased more than 45% year-over-year to $11 million, topping the $10 million for the third consecutive quarter. We are encouraged by the progress made improving the consistency, and magnitude of our free cash flow generation over the past several quarters, and I believe our organizational focus on this key metric, will continue to drive consistent growth, in our free cash flow conversion in 2024, and beyond. Kimo will provide some context around our free cash flow outlook for 2024, in his prepared remarks.

Finally, we ended the year with net leverage at 3.2 times, down from 3.8 times at the start of the year, and slightly below the low end of our targeted, 3.25 times to 3.5 times range. We have considerably improved our leverage profile, over the past several years, and we’ll continue to prioritize further deleveraging as our preferred use of excess capital, for the foreseeable future, with a path to below 3.0 times, well within our sight. With all that said, I would like to turn my attention to 2024 and the exciting path forward for our company. As you have heard me say on prior calls, I continue to believe we have the strongest, most diverse product offerings in our company’s history. Additionally, the quality of our team, across all three operating segments, and at the corporate level, has never been better.

Lastly, the consistency and quality of our execution, continues to steadily improve, as evidenced by our recent string of record operating performance. Collectively, I believe the three Ps of people, product and process position us, to not only improve upon our record 2023 results in the current year, but also set us up for compelling multi-year growth trajectory. Within our EGM segment, the expanded scale and scope, of our game content and cabinet portfolio, focused go-to-market strategy, and driven sales team, have us well positioned on both sides of the business. For the first time in the company’s history, we’ve had two high-performing cabinets, Spectra 43 and Spectra 49, with deep game libraries, targeting the most in-demand product segments.

Additionally, as we progress into the back half of 2024, we remain on schedule, to make our initial push, into the mechanical reel and jumbo segments with our mech reel cabinet recently receiving GLI approval. Collectively, these two segments account for over 15% of the total units sold into the North American market, dramatically expanding our addressable market. Ultimately, our growth algorithm and slot sales is simple. First, further leverage our focused and targeted sales strategy, and the recent strength of our product performance, to broaden our customer base. And second, utilize the added diversity and quality of our product offerings, to increase the average order size within our activated customers. And confident, successful execution of our strategy, will not only lead to ship share gains in 2024, but it will also set us on a path to becoming a top five supplier of choice, for many years to come.

On the recurring revenue side of our domestic slot business, the outlook is as equally as compelling. We have demonstrated over the past several quarters, our unique mixed-driven growth catalysts, including an increasingly powerful premium game offering, and more diverse array of core content, have armed us with the necessary tools to deliver consistent, modest growth in both domestic RPD, and within our domestic EGM install base. Looking to 2024, I believe the unprecedented depth and diversity, of our cabinet and content roadmaps, across both the core and premium market segments, should allow us to utilize a similar growth algorithm, to deliver relative outperformance and domestic gaming operations revenue, as compared to the rate of change observed in the market level GGR.

Moving on to tables, although we have come a long way over the past five years, I believe our recent momentum will continue throughout 2024, as we further solidify our position as a partner, and innovator of choice within the market. The enhanced features and functionality of our Bonus Spin Xtreme progressive continue to be well-received as evidenced by the 5% sequential growth in our BSX install base, achieved in the fourth quarter. Additionally, customer adoption of our efficient and effective PAX S shuffler continues to surge, with our footprint surpassing 330 units at year end, and a healthy pipeline building for Q1. Finally, we continue to drive greater adoption of our AGS Arsenal site license offerings, with several notable launches lined up for the first quarter.

All told, I believe the unwavering strength of our three growth pillars, BSX, PAX, and Arsenal, coupled with our strategic focus on broadening, our geographic and customer account reach, and our continued progress on the development of a new multi-deck shuffler, keep our table game business, on a compelling multi-year growth trajectory. Finally, I’m greatly encouraged, by the increasingly consistent and efficient execution, with our Interactive segment, where our run rate of annualized revenue and adjusted EBITDA, is now topping $13 million and $5 million, respectively. Although Interactive is in the early innings of an outsized multi-year growth cycle, I think it is important to highlight the February 2024, Eilers Industry Survey ranked us as the sixth largest provider of slot content to North America online market with a reported market share of approximately 5%.

Additionally, we produced the fourth best overall slot performance in the report, with a reported index of 1.6 times site average, with our capital gains theme performing, as the second best slot overall. Looking ahead, I believe the quality of our Interactive team, and the great number of strategic growth objectives, in our line of sight positions AGS to emerge as a leading share gainer within the high growth RMG channel, in both 2024, and beyond. In closing, I would like to thank our team members around the globe for their commitment, focus and dedication throughout 2023. The record setting performance, we have been able to achieve, is a true reflection of the quality products you have developed, the successful strategies, you have orchestrated, and the efficient execution of your plans.

With the most exciting lineup, of new products and the highest quality team in my tenure as CEO, I remain extremely excited, about what lies ahead for AGS, 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 perspective, on how we see each of our business segments trending, as we look ahead to the current year. I will also share some thoughts, on our free cash flow outlook for 2024, and close by addressing a few items, related to our balance sheet. Turning first to EGM equipment sales, fourth quarter global unit shipments, increased 36% year-over-year, to a record 1,519 units, representing our third consecutive quarter of growth, in excess of 30%. Sustained Spectra 43 momentum, supported by the continued strong performance of the cabinet’s, expanded suite of game content, initial sales of our successfully launched Spectra 49 cabinet, a more than 70% increase in our total customer count to nearly 180 unique customers, and stable market level demand trends, once again contributed, to our outsized unit sales growth in the quarter.

Fourth quarter global ASP was approximately 20,700, up 7%, versus the prior year. A greater mix of higher price Spectra family cabinet sales, which accounted for over 80% of total unit sales in the quarter, and further implementation, of our price integrity initiatives contributed, to our improved ASP performance in the quarter. Looking ahead to 2024, current consensus estimates project we should be able to grow Global EGM unit sales by approximately 3% over our just reported full year 2023 total of 5,244 units. That said, we believe our ability to increase average order size through concurrently delivering a variety of high-performing titles on both Spectra 43 and Spectra 49, further activation of new customers, continued outsized share capture within the growing HHR market, our scheduled back-half launch into the mechanical reel and jumbo product verticals, a slightly more robust set of international sales opportunities and the relatively consistent market-level customer purchasing behavior observed 2024, to-date should allow us to surpass the level of growth currently reflected in consensus.

From a cadence perspective, we expect 2024, to follow a similar seasonal pattern to 2023, with Q1, serving as our lowest volume quarter of the year, and volumes building, as we progress throughout the year. With respect to ASP, the $20,000 level should serve as a good proxy for 2024. Supported by the premium pricing, we continue to command on our Spectra family cabinets and further execution of our price integrity strategies. Shifting to game ops, the positive underlying trends within our domestic EGM gaming operations business, continued in the fourth quarter, with RPD topping $30 for the 11th consecutive quarter, while our domestic EGM installed base, increased sequentially, for the seventh consecutive quarter. Continued growth in our high-yielding premium game footprint, further optimization of our core unit installed base, supported by deployment of our Spectra cabinet, and increasingly diverse game content library, and relatively stable market-level – GGR trends, pushed domestic RPD to a fourth quarter record of $31.68.

Looking out over 2024, current Wall Street estimates project, full year market level gross gaming revenue, to be flat to up 1% year-over-year, with Q1, GGR expected to be down, 1% to 2%, versus the prior year, as a result of the heavily discussed, weather disturbances in January. As we reflect on the outlook for our gaming, our domestic EGM gaming operations business in 2024, our high-level growth algorithm, remains relatively consistent with the prior years. Notably, we expect to leverage our growing suite of premium EGM products, with multiple new premium form factors, and titles scheduled to launch, throughout the year, to thoughtfully and consistently expand, the mix of higher-yielding premium games within our domestic installed base, building on our 16th consecutive quarter, of premium unit growth.

Additionally, we plan to utilize the enhanced scale and scope, of our core EGM cabinet and content portfolio, to execute upon the continuous installed base optimization strategies. Combined, we believe these mix-driven initiatives, should allow us to once again, deliver domestic RPD that outperforms, relative to the market-level GGR forecasts I provided, while also keeping our domestic EGM installed base, on a moderate long-term growth trajectory. Turning to our international EGM business, the continued strong performance of our established AGS franchise game themes, throughout the Mexico casino market, further execution of our global installed base optimization initiatives, a stable macroeconomic backdrop, and favorable foreign exchange fluctuations, contributed to a 16% year-over-year increase, in fourth quarter gaming operations revenue.

International RPD, increased over 15%, versus the prior year, or approximately 4% on a constant currency basis, to a fourth quarter record of 8.86. Looking ahead to 2024, we expect our international installed base, to remain relatively consistent with year-end 2023 levels, while our ongoing optimization efforts and stable market-level trends, should contribute to a modest growth in constant currency international EGM RPD, for the full year. Looking beyond EGMs, Table Products revenues, increased more than 20% year-over-year, to a record $4.8 million. Greater customer adoption of a reliable and efficient PAX S card shuffler, innovative Bonus Xtreme progressive technology, and an all-inclusive AGS Arsenal site license offering, pushed recurring revenue to a record of nearly $4 million.

Equipment sales revenue, also established a new highwater mark in the quarter, supported by the sale of more than 20 PAX S units in conjunction with a recent high-profile Las Vegas Strip casino opening. Turning to 2024, unwavering PAX interest and demand, a favorable customer response, to the enhanced features and functionality, recently added to our Bonus Spin Xtreme progressive, targeted jurisdictional expansion opportunities, and a compelling pipeline of Arsenal activations, should keep our Table Products lease revenue stream, on a trajectory of consistent and predictable growth, similar to the one demonstrated in 2023. That said, I would encourage everyone, to keep the timing and magnitude of sales revenue, related to 2023 new casino opening activity in mind, when putting together segment-level projections, for the current year.

Shifting to Interactive, revenues grew by over 30%, versus the prior year, and 8% sequentially, to a record $3.4 million. An accelerating cadence of new game launches, including the introduction of the company’s first online first game theme, Double Shamrock, improving efficacy of our more tactical, and targeted business development activities within our B2C operating partners, the continued strong performance of franchise brands, including Capital Gains, in the online channel, and the activation of more than 10 new B2C operator partners globally, paced our record-setting performance in the quarter. The outsized revenue growth once again flowed through, to segment-level EBITDA, which more than doubled year-over-year to a record $1.3 million.

Looking ahead to 2024, we believe the added depth, and diversity of our content roadmap, planned new customer and jurisdictional launches, and increasingly effective business development efforts, put our Interactive business on a path, to delivering the highest level of year-over-year revenue growth, amongst our three operating segments, with consistent sequential growth anticipated as we progress throughout the year. Additionally, as demonstrated over the past several quarters, we expect to flow through a significant portion of the incremental revenues, generated throughout the year, contributing to a considerable adjusted EBITDA margin expansion, and adjusted EBITDA growth within the segment. Turning to margins, fourth quarter adjusted EBITDA margin surpassed 45%, exceeding the expectations articulated on our Q3 call, and improving margin profile within our Interactive business, supported by the segment’s continued outsized revenue growth, superior gross margins, on the highly modular and efficiently designed Spectra family of EGM cabinets, and operating leverage resulting from the over 15% year-over-year increase in total revenues, all contributed to our solid margin performance, in the quarter.

As it pertains to 2024, we expect to achieve an adjusted EBITDA margin, in the range of 44.5% to 45.5%, representing a modest lift over 2023 at the midpoint. Our margin outlook incorporates, the revenue growth expectations articulated in my segment level remarks, which should allow us to realize operating leverage, on our corporate SG&A expenditures. With respect to R&D, we expect to reinvest behind growth, to ensure we are arming the business, with the products and resources necessary, to remain on an upward sloping multi-year growth trajectory. As a result, we anticipate 2024 expense R&D, remaining relatively consistent on a percentage of revenue basis, at approximately 12%. Finally, we expect to execute upon the sale of approximately $1 million of used Orion family cabinets, to a distributor in Q1.

These sales, which will not be reflected in our reported KPIs for the quarter, are likely to push first quarter margins in line with, to slightly below the low end of our targeted full year range. That said, we expect margins to steadily expand, as we progress throughout the year, pulling us comfortably into the targeted range, by year end. Fourth quarter capital expenditures totaled $15 million, bringing the full year capital spend to just under $62 million. Turning to 2024, we 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 approximately $14 million, increasing the full year cash interest expense, to just under $54 million.

On February 5, 2024, we successfully completed, a repricing of our term loan credit facility, which effectively reduced the interest rate spread, applied to our term loan borrowings, by 35 basis points. Additionally, in conjunction with the repricing transaction, we elected to voluntarily repay $15 million, of our total debt outstanding. Combined, the repricing and repayment, are expected to reduce our annualized cash interest expense, by approximately $3 million at current market level rates. Fourth quarter free cash flow, defined as net operating cash flow, plus proceeds from payments on customer notes receivable, less CapEx, reached $11 million, surpassing the $10 million level, for the third consecutive quarter, and pushing the full year 2023 free cash flow, to approximately $27 million.

Looking ahead to 2024, we believe our consistent operating momentum and execution, heightened focus, on efficient and effective working capital management, continued CapEx deployment discipline, and anticipated cash interest savings, from our recent debt repricing and repayment, should allow us to grow a full year free cash flow, by 25% or more, with material levels of positive free cash flow generation projected, in all four quarters. Finally, net leverage fell to 3.2 times at year end, compared to 3.8 times, at the start of the year, and below the low end of our targeted 3.25 times to 3.5 times range. Supported by the relative resiliency observed, across the broader North American gaming complex 2024, to-date, both with respect to gross gaming revenue trends, and customer purchasing demand, the growing appeal and strong performance, of AGS as deeper and more diverse suite of EGM cabinets and game content, the anticipated continued outsized growth and Interactive revenues, an unwavering commitment to cost containment, and operational efficiency, and steadily improving free cash flow conversion, we expect to exit 2024 with net leverage in the range of 2.7 times to three times.

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 would now like to open up the line for questions.

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Q&A Session

Operator: Absolutely. [Operator Instructions] The first question is from the line of Barry Jonas with Truist. Your line is now open.

Barry Jonas: Great, thank you. Guys, what do you see as the implications for AGS from the IGT Everi deal, I guess both in the short-term and the long-term? Thanks.

David Lopez: Hi, Barry, thanks. I think history has instructed us here a little bit on this, and if we look back to that sort of 2012 to 2014 period where there was a lot of consolidation, it was also a time where we had acquired Cadillac Jack, and neither one of us were very big in Class III. Following that consolidation period, the non-big four suppliers nearly tripled, or actually about tripled their ship share, from that period going up to about 2017, 2018. So, we think that this will create a little bit of a, air pocket here for some smooth sailing, and it’ll give us an opportunity to sort of step up, in this case, from a ship share perspective and get more eyeballs from the customers. So, we feel pretty good about that, but I think the key is, for us is to run our playbook, and do what we do best, which is invest in R&D, invest in our sales and product management teams.

And obviously great people across the organization, not just in those three areas, and sort of stick to the plan, which is putting out great content, leveraging it not just in the casinos and the online space, but also eventually we have a very big opportunity, to go abroad with it, and we haven’t really gone past Mexico, and a bit of Latin America to do so. So, we like it for us. I think it’s probably good for the industry. Consolidation is long-term, good for the industry, because it does sort of refresh, the lower base of the non-big four, where you’ll start to see some smaller companies pop up, and really come up with some good games, and some innovation. So that’s – how I feel about it.

Barry Jonas: That’s great. Really appreciate your thoughts there. And then just to follow-up, I think there’s probably some AGS specific talent, set for this year, but maybe David, maybe talk a little bit about how you see the health of the overall market right now?

David Lopez: So, I think the health of the market, Q1 is stable. And I think, Barry, everything we see looks pretty good there, and we don’t see a whole lot of change. I think others have commented the same on their earnings calls, but I think what we’re focused on, is our growth drivers, and a little bit of what we said in the prepared remarks, which is, this is sort of, the first time where we’ve had two cabinets that, are right in the hotspot of what’s going on with Spectra 43 and Spectra 49. We have some great opportunities there. So that just gets back to, if you look at us on the Eilers reports, you look at our performance on these cabinets, very early days with Spectra 49, but Spectra 43 has really been crushing it for lack of a better term.

The content’s been fantastic. I don’t think, or I’m sure, that we have never had a situation, where we’ve had this many core games. And on top of that, now we have another premium game that’s, come hot out of the gates, and the performance is, from a premium perspective, the best performance we’ve ever had in our organization. So yes, market’s stable, and AGS, I think, better than stable. We’re looking pretty good, with our product line and the pipeline.

Barry Jonas: Perfect, thanks so much.

David Lopez: Thanks, Barry.

Operator: Thank you. The next question is from David Katz with Jefferies. Your line is now open.

David Katz: Hi, afternoon, everyone. Thanks for including me. Look, I wanted to talk about, how you think about market share, right? Like we all probably, I mean, we spend a great deal of time thinking about gaining share, losing share, et cetera. Is it as important as we think it is, or are you just making games, selling games, driving profits, driving cash flow, and the share does what it does?

David Lopez: Yes, David that’s a great question. Probably, we haven’t really gotten this one before.

David Katz: Thank you.

David Lopez: But that’s a good question. I like it, because we sort of, should be running our playbook, right? And we should do what’s best for us. And at the end of the day, sort of creating value, generating free cash flow, improving margins, and all the things that you mentioned, right? We’ve been demonstrating EBITDA growth, revenue growth, free cash flow improvement, has been a huge focus of ours. I think that, we don’t obsess with ship share, right? Because if ship share wobbles one quarter versus another quarter, and it’s not like maybe, something that you guys would deem fantastic, we’re still looking at our financials, right? And we’re looking at the Eilers report, and we’re looking at what’s going on, because the proof is in our performance of our games.

And right now, we probably track performance of games a lot closer than, we do ship share. Long-term, yes, ship share – should just follow that nicely. It should sort of tuck in, and draft that very closely over time.

Brad Boyer: Yes, David, I would just add, this is Brad. Another thing about the ship share metric that I encourage everyone, to keep in perspective is that, there are big segments of the market in North America that, we currently do not sell into, that our competitors are selling a significant number of games into, including the route markets here in the United States and in Canada. Additionally, from a swim lane perspective, we’re not fully penetrated at this point. We’re making some strides here, in the back half of this year, getting into mech reel and jumbo, but there still are some other categories that, we’re not in. So, I think when you view our ship share, I definitely encourage folks to look at it on an adjusted basis relative to the markets that we actually play in.

David Katz: Right, and so naturally, I mean the ship share gives us a reason to call you guys. Naturally, the follow-up is, with respect to valuation, and I know management teams shouldn’t necessarily be, overly focused on it, but yours – could be better. And as some headroom, how do you think about the possibilities, of trying to get a bit more recognition to that end? And how do you and the Board, sort of focus on it and think about taking some action?

David Lopez: I’ll tell you, speaking of recognition, I think one of the things that, we took very seriously, was this latest $15 million payment, debt payment. I know it might, maybe on the surface, it doesn’t seem like a move where we’re trying to say, hi, we want to see some multiple expansion, but the feedback that we got from investors was fantastic. There’s always this question of share buyback, just keep your powder dry, or pay down some debt. And this one, is a move that got some serious applause from our investors, and if you sort of just line that up, maybe with our repricing, we did do a bit of a pre-release on Q4, and then that debt paydown, we saw some considerable movement in the stock. So, as far as doing it the old-fashioned way, I think sticking the plan here and continue to de-lever is a huge move, right?

And I think that as we cross that next leverage barrier of 3.0 times, we’ll get some of that recognition there, David, but there’s also, I think that from an IR strategy and some things, I won’t bore everybody on the call, but I think we obviously can get more active, in particular once we get to that 2.9, right? When we get to that 2.9, we know there’s a whole shareholder base that we can speak to again. So that’s what, I’m excited about, talking to more investors, and I’m excited to get out there, post this payment, and really flagging to our investor base, and potential investors that, we’re confident about our free cash flow generation going forward.

David Katz: I’ll agree with that. Thanks, appreciate it.

David Lopez: Thanks, David.

Operator: The next question is from the line of Jeff Stantial with Stifel. Your line is now open.

Jeff Stantial: Hi, great afternoon, everyone. Thanks for taking our questions. Maybe starting off here on the EGM business, David, back at G2E, I seem to recall, you noted that the testing data, the initial testing data for the 49C, was actually tracking better than the initial data, for the UR43. Now that you have some, immediately, preliminary units on the floor, is that still the case? And I guess just broadly speaking, how would you characterize performance for the new cabinet, maybe versus your expectations, heading into launch?

David Lopez: Yes, sorry. I apologize, we have a little bit of delay here and I jumped the gun on you. Yes, I think broadly, 49C’s doing fantastic. Upright Spectra 43’s been out a while now, and maybe a comparison there might be a tad unfair of a both, but the truth is both cabinets are really kicking butt and we’ve got. Again, I referred to core content, we’ve got some great core content out there, and we keep expanding upon our strongest brands like Rakin’ Bacon, and I think that’s been a huge help to us. Really goes back to our strategy and development, and how we carve up our time and what we work on. And we’re in a very nice position right now that we’ve established a couple of brands, we continue to play off those brands, and every brand extension of Rakin’ Bacon has been pretty much more successful than the previous version of it.

We’ve been able to knock, the cover off the ball with that. So, we’re seeing a lot of success with 49C, yes. And I think that we’ll continue to see that, but – don’t count out Spectra 43, it’s still trucking along.

Jeff Stantial: Great, thanks, David. And Kimo, in the prepared remarks, you cited some greater international opportunities in the EGM segment, for the for sale business, and I think, David, you kind of hit on this as well in your answer to Barry’s first question. Can you just expand on this a bit more? Are you entering new markets, selling more into existing markets? And if it’s the former, can you just shed some light on which markets you’re planning to expand into? Thanks.

Kimo Akiona: Yes, I mean, if you think about the way our business has been historically, and even up to current, right? I mean, international, like Brad just commented on, it’s predominantly been Mexico, right? We’ve done sales here and there in different parts of, call it Latin America or the Caribbean, but going into 2024, and with the launch of our newer cabinets, like the Spectra family, we really put a plan in place to kind of be able to address the broader Latin America market, Central and South, and address the Caribbean. So there’s a lot of white space there for us to go after these markets, in a lot more targeted way than we ever could before, which includes games that obviously are made for that market, or nuance to be able to work in those markets.

So we’re excited. I mean, it’s a big white space for us just in that area, without even talking longer term, about Australia, or let’s call it Australasia, or some of those markets. I don’t know, if David wants to add, but.

David Lopez: Yes, I think Kimo nailed it, and I was actually going to tack on that very bit at the end, which is, he’s just referring to our current markets and what we’ve got there. But something we’ve sort of made sure that we mentioned in almost every earnings call, for the past probably year plus, is that that figure of how many customers we sell to, in sort of the North American market. And that’s where we’ve done quite well. I think the number was 183, 183. If I’m off, I’m off by a few. But that’s a number that’s way up, from what we used to sell. We used to be sub 100, in our number of customers that we sold to. So, we’re going deeper with more product domestically. We’re going wider to more customers. And then we’re aiming a little bit more Latin America.

And then we know that our next step, hasn’t been talked about yet, but our next step into the international market just opens up that much more white space. I think there’s a lot of room to grow here in the future.

Jeff Stantial: Great, very helpful. Thanks, David. Thanks, Kimo. I’ll pass it on.

David Lopez: Thank you.

Operator: The next question is from the line of Chad Beynon with Macquarie. Your line is now open.

Aaron Lee: Hi guys, this is Aaron on for Chad. Thanks for taking our questions. So I wanted to touch on Interactive for a bit. Obviously great Interactive result this quarter. The business seems to be on a nice trajectory. With regard to the year ahead, how should we think about the major drivers of growth? And any color you can share, just on any reinvestments into the business necessary, to support your growth there? Thanks.

David Lopez: Yes, thanks. So obviously we’ll get, over time we’ll get into more customers. I think that there’s probably some pretty straightforward drivers of growth. One is more games and it’s just that simple. If we look back a couple years ago, we definitely had customers that said, your stuff is awesome. Can we just get more games? And we’ve talked about in the past, how we’ve made the investment there. In order to open up the pipeline, so we can move more of our brick and mortar content, online much quicker. And we’ve accomplished that. And then from there, growth will also come from unique online only content that we develop. And we’re developing that, with our very sharp team that we have in place now. We’ve really expanded that team.

But I think, forgetting about expansion of the team, the development team, it’s about quality. It’s just not about quantity of people, but it’s about quality. And those folks, not only can get our porting done quickly, but they also can – or they can develop games for online only. So, I think that’s a bit – and we’re exploring partnerships and omni-channel and sort of just, you got to look at online much like you look at, the brick and mortar business, to figure out where else you can go, whether it’s geographies of type or types of online gaming, we’re obviously in social, and we’re in real money gaming right now. But there’s a lot of opportunity out there to drive this. And we don’t just have to depend on new states opening up. I think that we have a lot of meat on the bone.

And in particular, if you look at our performance, again, we mentioned Eilers so many times, Chad ringing the bell here. But Eilers, once again, our performance from a multiple perspective, it’s in the prepared remarks is phenomenal. So, I think that we got – we’ve got ourselves in good position again, to run our playbook on Interactive, and to grow the business.

Aaron Lee: Great. Thanks for the color on that. And then just turning to margins, you talked about 2024 R&D being consistent at around 12% of revenues. Can you just talk about how you got there? What gives you the confidence that that’s the right level and just any color on what could cause you to move outside of that range? Thank you.

Kimo Akiona: Yes, I mean, if you look at, our message has been pretty consistent, right? Like we’ve always felt that, at the heart of our success, is our creative team and our R&D team. So, over the last couple of years, right, we’ve embarked on expanding our studios, kind of expanding the depth of our talent in these different areas. And as we analyze and look at the returns that we’ve been getting. We look at, the opportunities in the front of us next year, and we feel that the 12% level is right, based on our experience. I think that still allows, obviously, right? It allows for continued investment in that, being that revenue is obviously going to be growing as well. So, 12% level is right, and we feel comfortable about that, that there won’t be, let’s call it like a stair step, required, call it in the short-term, right?

Aaron Lee: Great. Thank you very much.

Kimo Akiona: Thanks, Aaron.

Operator: The next question is from the line of Jordan Bender with JMP Securities. Your line is now open.

Jordan Bender: Great, good afternoon, everyone. EBITDA margins for ’24, kind of implied about up 40 basis points. I assume there’s a positive impact still coming from Spectra, but can you maybe talk about how mechanical reel and jumbo, will impact that sequential margin growth, I guess, compared to more of the organic margin expansion?

David Lopez: Yes, so we haven’t really talked much about, what we’re projecting here, in particular for 2024, because this is a bit of back half activity. We know that mech reel opens us up, in a couple of markets where we’re very strong. We can have an opportunity, not just to place new units, but really improve our real estate when the situation is right for us. So, we know that we can optimize with this product down the road. We know that we’ll see growth with the product. Like I said, in jurisdictions where we’re very strong, obviously, we have expectations of getting in the market in Class III. And sort of the strong mech reel markets. But jumbo and mech reel, as far as 2024 goes, I’ll sort of turn it over to Brad if he has any additional commentary.

But we’re not really leading ourselves very far on this one just for this year. But we have, obviously, long-term, we got in this space for a reason. A, we’ve made the investments in people, and B, because of the people we have, we’re very well positioned for success in mech reel and, of course, jumbo. And Brad has nothing to add to that. So, I think we’re good to go.

Jordan Bender: All right. And then, Kimo, you’ve given several of the inputs just on free cash flow for the year. But in this post, if you want to call it an investment period for the company, 17% free cash flow conversion last year. How should we think about that rate kind of moving forward into 2024, and beyond? Thank you.

Kimo Akiona: Yes, I mean, so not ready to put out a target or anything, right? But I think what we can say is, that we’re obviously, we’re dead set on improving free cash flow conversion, right. I think in the prepared remarks, we talked, at least I said, we expect to get free cash flow growth of about 25%, right? And I think that would obviously imply that there is a sequential improvement year-over-year in free cash flow conversion. So, we’ve done a really good job, I think, managing how we invest in the business, right? And obviously, I think as our products have continued to perform, every time we place a product in the field, whether it’s on lease or sale, we’ve been able to increase the returns on that investment, right? So, going forward, we’re very confident that our free cash flow conversion rate will continue to improve year-on-year.

Jordan Bender: Great. Thank you very much.

Kimo Akiona: Thanks, Jordan.

Operator: Thank you. There are no additional questions in queue. [Operator Instructions] There are no further questions. With that, we will conclude today’s conference call. Thank you all for your participation. You may now disconnect your lines.