PlayAGS, Inc.

Good day and welcome to the AGS fourth quarter earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one. Please note that this event is being recorded. I would now like to turn the conference over to Brad Boyer, Vice President of Investor Relations and Corporate Strategy. Please go ahead, sir.

Thank you, Operator, and good afternoon, everyone. Welcome to AGS's fourth quarter and full year 2020 earnings conference call. With me today are David Lopez, CEO, and Kimo Akiyama, CFO. A slide presentation reviewing our key operational and financial highlights for the fourth quarter and full year 2020 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 2020 financial performance and offer perspective on our current financial outlook. This conference call includes 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 actual results to differ materially from forward-looking statements, please refer to the earnings release that 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 that the use of these non-GAAP financial measures provides an additional tool for investors to use in evaluating ongoing operating results and trends. 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.

Thank you, Brad, and good afternoon, everyone. To say 2020 was an unprecedented year might be the understatement of the century. That said, I'm a big believer in a famous quote, out of adversity comes opportunity. As you can imagine, we as an organization faced our fair share of adversity throughout 2020. In addition to quickly realigning our business to meet the challenges presented, by an extended shutdown of casinos across the globe, we successfully shored up our balance sheet and implemented measures to ensure we were positioned to support casino operators as their businesses began to come back online. Successful execution of the feats I just described required the commitment of a passionate, loyal, and hardworking team. To that end, I'm extremely honored by and thankful for the tireless efforts put forth by all of our AGS team members to ensure we not only manage through the COVID storm, but emerge as a stronger, more resilient company. Looking beyond the many challenges introduced by COVID, one of the bright spots, to the extent there was one, is that the pandemic slowed the pace of life. Business travel grounded to a halt, corporate offices turned dark for a while, and kitchen tables got to work out. As a company, we use this time to refocus our efforts on solidifying our foundation with a keen focus on three key areas, people, products, and processes. As a result, I believe we are better positioned today to achieve success across all three of our business segments than at any other point in our company's history. Within our electronic gaming machines or EGM segment, we continue to leverage our new high-performing product offering, the Orion StarWall, to strategically grow our presence within the industry's premier recurring revenue segment. At quarter end, our StarWall footprint eclipsed 300 games and operator demand remained healthy. I'm equally as excited about prospects for our Orion Curve Premium Package, scheduled to formally launch in the back half of 2021. Curve Premium will be offered in a socially distanced carousel format. We plan to lead with an extension of our player favorite, Rake and Vacant game theme, both of which should help stimulate demand for this new form factor. Within the for-sale business, we continue to refine our hardware offerings and deepen our content catalog to ensure we are well-positioned in advance of the anticipated improvements in operator slot capital spending, which many industry experts believe could occur in the back half of 2021. We currently have our high-performing Ultimate Choice jackpot family of games available on the Orion Curve cabinet and remain committed to improving our content creation execution both with respect to the quality and quantity of new games. In an effort to combat COVID's negative effect on new unit sales demand, we have looked for our opportunities to strategically create our own demand by expanding our businesses into new product adjacencies, including historical horse racing, or HHR as we call it. During the fourth quarter, we executed our first sale of units into the Virginia HHR market and believe our strong initial gain performance could stimulate future demand for our products throughout the state. Additionally, the recent favorable legislative ruling in Kentucky broadens the addressable market for our HHR content and has the potential to accelerate sales demand in the coming quarters. On the Class 2 front, We remain committed to nurturing our nearly 12,000-unit Class 2 install base, both inside and outside of Oklahoma. To that end, we recently made our Imperial 88 family of games available for play in the Class 2 format and plan to leverage our new technology platform to significantly increase the number of new Class 2 titles released to the market in 2021. In addition to new content, it is important to remember our premium game strategy extends to Class 2 as well. Over 15% of our StarWall games installed to date have been placed in Class 2 markets, and we see considerable opportunity for our Curve Premium and Orion Rise cabinets within the Class 2 space. Turning to our table products business, despite the COVID-related challenges facing our casino partners' table game operations, demand for our industry-leading progressive products continue to grow. In the fourth quarter alone, we achieved a 127-unit sequential increase in our progressive install base, supported by strong demand for our Super 4 stacks and Royal Mine progressive products. Additionally, as operators continue to look for ways to identify incremental margin enhancement opportunities on their floor, demand for our site license offerings continues to build. With six site licenses live at year end. Looking ahead, I believe we have the right products and teams to continue growing our share of Casino's overall table product spend, particularly as new products such as our Bonus Spin Extreme Progressive and Tax S hand forming shufflers are introduced to the market later in the year. Finally, I've become increasingly encouraged by the more consistent performance achieved within our interactive segment. For the fourth consecutive quarter, Interactive delivered strong year-over-year revenue growth and positive adjusted EBITDA. As most of you on the call can attest, the expansion of regulated gaming from the brick and mortar to mobile and online channels could potentially represent the industry's greatest growth opportunity of the 21st century. Having said that... we remain deeply committed to ensuring we have the right people and technology in place to emerge as a more affordable content provider within this growing market. Looking ahead, I believe we are well positioned to execute on all four areas of our real money gaming growth strategy, which includes broadening our partnerships to include additional B2C providers, expanding the amount of AGS content available for play online, participating in new regulated markets as they are approved, and deepening partnerships with existing third-party content providers. With respect to new markets, we continue to see growing legislative interest in iGaming and believe new jurisdictional launches in both the U.S. and Canada could strengthen our future interactive segment growth metrics. I will close by once again thanking all of our AGS team members for their tireless commitment during what was truly a challenging year. I believe we have used the last year as an opportunity to refine our strategy and improve our operational efficiencies. And it is now time for us to lean on the sturdier foundation we created to achieve greater levels of success and continue moving the organization forward. With that, I will turn the call over to Kimo to provide additional perspective on our financial results, liquidity position, and current outlook for the business.

Thank you, David, and good afternoon, everyone. Overall, I'm deeply encouraged and proud of the way our team came together throughout 2020 to overcome the unprecedented operational and financial hurdles introduced by the spread of COVID-19. Not only were we able to nimbly streamline our business to preserve liquidity at the onset of COVID, but we opportunistically shored up our balance sheet in May and successfully ramped operations as our casino operator partners gradually brought their businesses back online throughout the second and third quarters. Turning to our fourth quarter of 2020 financial performance, we generated consolidated revenue of $46.6 million, representing a decrease of 40% versus the prior year's quarter. We attribute the majority of the year-over-year revenue decline to COVID-19's ongoing impact on operator demand for new slot equipment purchases and, to a lesser extent, the continued disruption to our recurring revenue business as a result of COVID-related capacity limitations and casino closures. To that end, fourth quarter EGM gaming operations revenue of $35.9 million reached 76% of prior year's level, whereas total EGM sales of 283 units amounted to 22% of the level achieved in the fourth quarter of 2019. In aggregate, we derived 86% of our fourth quarter revenue from recurring sources compared to 66% in the prior year's quarter. On a quarterly sequential basis, consolidated revenue decreased 5% as compared to the $49.3 million achieved in the third quarter of 2020. Sequential improvement in table product revenue and EGM gaming operations revenue of 13% and 12% respectively was more than offset by a 104-unit quarter-over-quarter decrease in slot unit sales, predominantly a function of a softer new casino opening and expansion calendar. Additionally, we strategically pruned and sold 476 lower-yielding units from our install base in the third quarter of 2020, which negatively impacted the quarterly sequential revenue comparison. Adjusted to exclude the impact of these one-time sales, consolidated revenue would have increased by approximately 5% sequentially. For the full year of 2020, we generated consolidated revenue of $167 million compared to $304.7 million in 2019. The COVID pandemic's negative impact on our EGM and table products business, both of which directly cater to our brick-and-mortar casino operator customers, paced our year-over-year revenue decline. On a more positive note, we believe COVID-related shutdowns stimulated results within our social and RMG businesses as evidenced by the nearly 50% year-over-year increase in our full-year interactive segment revenues to $7.2 million. Fourth quarter 2020 net loss of $17.2 million compared to net income of $1.4 million in the prior year's quarter. For the full year, net loss was $85.4 million compared to $11.8 million in the prior year. The year-over-year decline in fourth quarter and full-year net income reflect the degree to which COVID-related casino closures and capacity restrictions negatively impacted casino operators' propensity to purchase new slot equipment and, to a lesser extent, revenues within our gaming operations business. Additionally, we incurred higher interest expense in the fourth quarter and full year related to the $95 million incremental term loan we closed upon in May to enhance our liquidity position. Fourth quarter 2020 consolidated adjusted EBITDA totaled $21.3 million compared to $37.3 million in the prior year's quarter. Adjusted EBITDA margin was 45.7%, slightly below the 47.9% achieved in the fourth quarter of 2019. We attribute the year-over-year decrease in our adjusted EBITDA and adjusted EBITDA margin to the COVID-driven decline in our consolidated revenue performance, combined with the effect of normalizing our operating costs in advance of an anticipated recovery in our revenues in 2021 and beyond. To that end, fourth quarter adjusted SG&A and adjusted R&D expense reached 76% and 88% of the levels incurred in the fourth quarter of 2019, respectively, whereas consolidated revenue totaled 60% of the level achieved in the prior year's quarter. On a quarterly sequential basis, adjusted EBITDA declined 21%, while adjusted EBITDA margin compressed 910 basis points as compared to the 54.8% margin delivered in the third quarter of 2020. It is important to remember third quarter margins benefited from our recurring revenue base recovering ahead of the post-COVID normalization in our operating cost base. Additionally, high margin revenue related to the strategic pruning of 476 lower yielding units further supported third quarter IPTA and margins. Adjusted to exclude the impact of the one-time sales, adjusted IPTA would have declined a more modest 4% on a quarterly sequential basis, driven by further normalization in our operating costs to support an anticipated revenue recovery. Looking at the full year, we delivered 71.7 million of adjusted EBITDA compared to 146.1 million in the prior year period. Our full year 2020 adjusted EBITDA margin was 42.9%, representing a year-over-year decline of 500 basis points. The year-over-year decline in adjusted EBITDA and EBITDA margin primarily reflect the degree to which COVID-19 adversely impacted our business. I will now provide an update on each of our business segments, beginning with our electronic gaming machine or EGM business. Total EGM revenue in the fourth quarter of 2020 was 42.4 million, of which 85% came from recurring sources, compared to 47.6 million and 65% respectively in the prior year's quarter. We sold a total of 283 units in the quarter, all of which were replacement units, and the domestic average selling price or ASP was approximately $18,000. Sales of the Orion Curve Cabinet accounted for 105 of our total units in the quarter, bringing the total curve sales to date to over 200 units. Virginia, Nevada, and California emerged as our top three sales markets in the quarter. For the full year 2020, we sold 1,343 units with a domestic ASP of approximately $18,100 compared to 4,879 units and 18,300 respectively in 2019. Our domestic install base at the end of the fourth quarter comprised 16,268 units, representing a quarterly sequential decrease of 557 units. The quarter-over-quarter decline reflects the anticipated end-of-lease term sale of 512 lower-yielding Illinois VLT units and further strategic pruning of approximately 45 underperforming units, partially offset by the addition of new premium recurring revenue products, including Orion Starwall, into the base. As David mentioned, we are encouraged by Starwall's performance to date with over 300 gains installed at year-end. Fourth quarter domestic RPD was $23.26 compared to $24.97 in the prior year's quarter. The year-over-year domestic RPD decline predominantly reflects COVID's impact on our recurring revenue business, including the closure of Casino, housing some of our highest-yielding units during the 2020 fourth quarter. Domestic RPD improved 12% on a quarterly sequential basis from the $20.81 reported in Q3. We believe a full quarter contribution for casinos reopened during the third quarter, a greater mix of premium products within the himself base, and generally stable revenue trends at properties unaffected by the implementation of stricter COVID protocols supported the quarterly sequential domestic RPD improvement. We estimate approximately 90% of our domestic units were active in the fourth quarter, producing adjusted RPD of approximately $27 for our active units. On an adjusted basis, RPD increased approximately 8% year-over-year, aided by the addition of high-performing premium gains into the established and the strategic pruning of lower-yielding units. Our international install base at the end of 2020 fourth quarter included 7,985 units, of which we estimate approximately 36% were active. Quarterly RPD was $2.56 below the $7.65 achieved in the prior year's quarter, but well ahead of the 2020 third quarter. Ongoing temporary statewide closures of casinos in several key jurisdictions included a lack of meaningful fiscal stimulus, and stringent COVID-related operational protocols, including age-based visitation restrictions, continue to compress RPD metrics throughout the Mexico market in the fourth quarter. Our table product segment generated fourth quarter revenue of $2.6 million, nearly all of which was recurring. Table products adjusted EBITDA was $1.3 million compared to $1 million in the prior year's quarter. The total table product install base at quarter end comprised 4,254 units, representing an increase of 13% year-over-year and 242 units sequentially. We estimate approximately 80% of our table products lease install base was active at quarter end. Finally, our interactive segment delivered fourth quarter 2020 revenues of $1.7 million. representing an increase of 27% year-over-year. Our real money gaming business continues to benefit from improving execution of our four-pronged growth strategy while operating trends within our social business remain consistent through the fourth quarter, supported by a loyal user base with resilient rates of monetization. Although slightly lower on a sequential basis, Our interactive segment contributed positive adjusted EBITDA for the fourth consecutive quarter. The modest sequential adjusted EBITDA decline reflects an increase in cost related to new market entrance and higher platform maintenance costs. Turning our focus to cash flow in the balance sheet, fourth quarter CapEx totaled $14.1 million, with growth CapEx accounting for over half of the total capital expended. Full-year CapEx for 2020 totaled $35.7 million, down significantly compared to the $71.1 million incurred for the full year of 2019. We generated $2.4 million of free cash flow in the quarter, in line with the directional commentary provided on our third quarter call. As of December 31st, 2020, our available liquidity was $111.7 million compared to $113.2 million as of September 30th, 2020. As noted on our third quarter call, in October, we fully repaid the $30 million previously outstanding on our revolving credit facility. Total net debt, which is the principal amount of total debt less cash and cash equivalents, was approximately $540.8 million at December 31, 2020, compared to $520.6 million at December 31, 2019. As a reminder, our first lien term loan and our $95 million incremental loan both mature on February 15, 2024, and our revolving credit facility will mature on June 6, 2022. Our total net debt leverage ratio, which is total net debt divided by adjusted EBITDA for the trailing 12-month period, increased from 3.6 times at December 31, 2019 to 7.5 times at December 31, 2020. As a reminder, in May, we obtained covenant relief from the first lean leverage ratio test for 2020, and we'll begin using a modified test for this covenant at the end of the first quarter of 2021. Looking ahead, we're confident in the prospects for our business to recover throughout 2021. However, given the uncertain macroeconomic environment in which we find ourselves today, we will not be providing formal 2021 financial guidance. That said, we thought it would be helpful to provide some high-level perspective on our outlook to help frame the year. First, with respect to our EGM business, we believe ongoing vaccination efforts additional fiscal stimulus, and the potential for gradual easing of COVID-related operating restrictions could enhance the vibrancy of casino operators' businesses and, in turn, support the recovery within our product sales and recurring revenue segments. Along those lines, we expect demand for new unit purchases to improve as we progress throughout 2021, with total unit sales weighted to the back half of the year. Additionally, we intend to harvest incremental demand in product adjacencies, notably HHR, to help offset any lingering sluggishness across our traditional sales channels. As it relates to our domestic install base, we continue to look for opportunities to prune lower-yielding units from the base. To that end, we expect to strategically prune units in the first quarter of 2021 in similar size and scope to the 476 units pruned in the 2020 third quarter. Normalized for these planned reductions, we believe our growing suite of premium lease products should allow us to stabilize and potentially grow our domestic install base as we move throughout 2021. Turning to domestic RPD, we believe the combination of injecting new premium lease units into the installed base, strategically pruning lower-yielding units, and realizing some level of post-COVID recovery in industry-wide gross gaming revenue trends could allow us to improve domestic RPD on a quarterly sequential basis. Shifting to Mexico, we expect more of our installed units to gradually come online over the coming quarters and believe RPD could gradually improve as additional casinos reopen and operational restrictions are relaxed. As it relates to our table products business, we continue to see strong operator interest in our industry-leading and growing progressive product portfolio and believe operator focus on driving improved margins could continue to stimulate demand for our site license offering. Additionally, we're extremely excited about the prospect for the upcoming launch of our Pax S hand-forming shuffler, a product which we believe has the potential to steepen the revenue growth trajectory within our table product segment. Lastly, on the interactive front, we believe we have started to find a relatively consistent revenue cadence within the business, with successful execution of our four-pronged growth strategy likely serving as the key to transforming the segment's growth trajectory over time. Before turning the call over to Q&A, I would like to address our thoughts around EBITDA margins and free cash flow for the upcoming year. As it relates to margins, most of you on the line know an unwavering commitment to investing in R&D serves as a key tenet of our strategic DNA. That said, we continue to prioritize reinvesting in the business's future, even in an environment in which COVID continues to impact revenue trends throughout the industry. Accordingly, we believe 2021 adjusted EBITDA margin could bracket the low end of our historically targeted 45% to 47% range. That said, to the extent the broader revenue environment normalizes and we maintain or grow our share of the market, we believe our rate of revenue growth should exceed the rate of growth within our operating cost base, in turn allowing our margins to expand. Finally, on the topic of CapEx and free cash flow, although demand for our growing suite of premium recurring products remains steady, we intend to pursue new placement opportunities presenting the highest ROI potential. As a result, we believe we should be able to prudently deploy our new recurring revenue concepts while also maintaining or potentially improving upon our strong liquidity position. Operator, this concludes our prepared remarks. We would now like to open up the line to questions.

And we will now begin the question and answer session. To ask a question, you may press star then 1 on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. Once again, that is star then 1 to ask a question. And at this time, we'll pause momentarily to assemble the roster. And our first question today will come from David Bain with Roth Capital Markets. Please go ahead.

Great. Thanks so much. You know, David, you mentioned that a few have opined that, you know, a potential return to slot buying normalcy could occur in the back half. I think we've all heard encouraging comments from 4Q calls with operators. I know there may not be anything substantive yet, but is there anything that you're hearing sort of anecdotally on the ground from your sales guys? And then looking at kind of the casino floor performance focused by operators versus non-gaming amenities, you know, that have been mostly closed and maybe a hesitancy to reopening them, do you think that the return could prove even maybe more aggressive just given there's been such a significant pause in orders?

Yeah, so thanks, David. The first part of your question there is, yeah, the genesis of the comment comes from the ground, you know, from the boots on the ground. Our salespeople do a great job. We obviously talk to a number of different operators, and we just feel like we can see the momentum building up towards the second half of the year, and that's what gives us confidence to say that. And on the second half of your question, we certainly hope that's the case. I think that when you look at the operators and how things have been for them post-reopening, I don't want to use the word post-COVID, but post-reopening after the COVID shutdowns, their margins have been high. It's mostly driven by gaming amenities, a.k.a. gambling. And we certainly hope that that can be something to propel things forward. in the second half and beyond as far as their focus goes for capital expenditures. It's a good, you know, sort of comment and question, and we hope that that is recognized via her financials over the past, you know, couple quarters.

Right. And then just my one follow-up would be, you know, as we assume a normalized buying environment, let's call it, you know, early 2020, hopefully, you know, 2021, You have Oklahoma now stabilized, improving the premium segment entrance and everything else happening with your product lines. I'm wondering, will you be dusting off the road to 250 EBITDA? Is that something that you can even today say is achievable by 25, 26 with small tuck-ins or maybe even without?

Yeah, I'll probably stay away from, in this environment right now, David, from the road to 250 answer. I think that what you're talking about with 2022 and beyond, obviously, I think the things for us to focus on, without speaking about tuck-ins or M&A, is that we have a very promising situation with our premium slots, obviously, starting with the StarWall launch. But now we're going to see a full year of a StarWall launch. That will be followed up by some other premium products, obviously. Our pruning, which you're somewhat referring to when you talk about Oklahoma, but our pruning has been rather effective, and I think, you know, we're confident that that's adding additional stability, and that should prove to help us with RPD long-term, you know, as we move forward. Our table electronics business, if you want to say our progressives, et cetera, are very promising as well. We just launched Bonus Spin Extreme. I know that was in the prepared remarks, but that looks very good for us. And all of our progressives, we think they're the best in the industry, and they're performing very well. Along with that is our shuffler launch. I know, again, mentioned that in the prepared remarks, but the Pax-S, We're excited. That's a very nice segment. You know, I'm familiar with it, and so is our head of the division. And last but not least is the interactive division really performing, stabilizing, and showing promise for the future. So when we think about those four or five things, and then, yeah, media tuck-in, of course, we're excited about our growth prospects here. But we won't really dust off 250 just yet. We want to get out of the woods here in 21, you know, look forward to some good things happening in 22 and 23. And with these things and, yes, some tuck-ins, obviously, growth is in the cards. But we're excited about the things, obviously, that I mentioned. It's all very positive.

Very good. Thank you.

Thanks, Dave. And our next question will come from Barry Jones with Truist Securities. Please go ahead.

Hey, guys. How's it going? Just a couple of questions. Great. So, David, just a high-level one. As the world hopefully gets back to normal soon, do you see any permanent structural changes in the business as a result of COVID? And if the answer is yes, how have you, or rather would you like to adopt AGS to respond?

So it depends on sort of what, you know, you're referring to. I mean, if you're referring to our cost structure and expenses, that's sort of one answer. If you're talking about directionally, where are we aiming, you know, the boat right now, right, it's a difference. So I'll just answer them both, Barry. From an internal, you know, expense and structural perspective perspective, I think it will long-term mirror, you know, the second part of the question. But we were pretty lean to begin with. I think that there are some companies out there that have done some judicious or aggressive cutting. And although we've done some very judicious cutting, we were pretty lean to begin with. What we saw was a shift. maybe from one department to another where we move some of our, you know, money and our spend around. So that's really what we've done there. I think longer term it will start to reflect where the opportunities are. So our opportunities clearly are in our slots and in our premium product. Obviously we're going to continue to focus on our Class 2 business as it's very good for us. But along with premium, you know, we'll see – I think we see the world going in a direction. There's a bit of online surge now. We're already in that business. Maybe more content. Maybe we see a little bit more investment there over time. And I think that's just following the money a little bit, you know. You know, online is going to be a big part of the future. I think, you know, the absence of an online presence for any one of the slot vendors is a mistake. That's why we're in it now. And I think that, you know, to answer your question, will probably be a bigger way going forward.

That's great. And then just an update on the Nafila machines. And this year, just keep those commentary around 21 trends, assume any movement there.

So, Neskilla is largely just on hold and open. There's nothing definitive at the moment. I think there's some somewhat positive signs, and we're just in a bit of a holding pattern. Right now, they're a great customer. We like the relationship with them. You know, we've always had a great working relationship. you know, with the folks down there. So at this point, we're in a bit of a holding pattern. But generally speaking, you know, holding, but a bit positive. So it's sort of a wait-and-see mode.

Okay, got it. So sort of status quo with that 21 commentary on margins and everything.

Yeah, right, exactly. Yep.

Great. Thank you so much, guys.

Thanks, Barry. And our next question will come from Chad Bannon with Vapority. Please go ahead.

Hi, good afternoon. Thanks for taking my question and all the commentary. David Hema, I wanted to ask about the Orion Starwall footprint. I believe you said that's up to 300 units now. Impressive given the current situation. But how should we think about a goal or a ceiling on this product? And then more importantly, as the pruning continues, and you kind of ramp this premium segment, how should we think about what your premium portfolio could look like as a percentage of your units in the medium to long term?

Thanks. So, Chad, good questions. I think it's so early in the game. You know, as far as if you want to use the old innings analogy, we're probably in the first inning of our premium strategy. I think the thing to focus on, you know, and this at the moment is sort of what we said on the call, which is, you know, we've got that 300-plus installed right now. We've got a pretty good queue working. We're confident we're going to continue to grow it. We're going to release other products such as Curve Premium going forward. We know that with Curve Premium, we're kicking it off with one of our best brands, which is Rake and Bacon. Probably not quite to the point now where we can talk about what percentage of the business it's going to represent because we really truly are in the first inning. But we're excited and encouraged because the Starwall has done well. We've got two or three configurations of the Starwall that are in the field. And we have, I think, a newer configuration that's coming out in the next 90 days or so that will be very helpful from what we'll call a social distancing perspective and just what the trends are that we see in the casinos today. So we're encouraged by, A, the performance, B, you know, the variations that we put out there, and also, of course, Curb Premium about to launch as well. So, you know, we'll probably get back to you on that answer, but that's probably something. Let's wait for the third or fourth inning before we can predict what percent of the business it will be as far as recurring revenue goes.

okay thanks yes happy that uh baseball's back um and then with respect to 45 to 47 margin so you generated 46 in this recent quarter um in the third in the quarter prior to that you were at 55 so obviously with the lease to sale units it sounds like the first quarter of 2021 will be an elevated margin quarter So as we get past that, this range of 45 to 47, is the reason why it is what it is, is that mainly just because of a mix issue as product sales start to account for a bigger percentage, or should we think about this potentially as being conservative given, you know, the first quarter should probably be higher than that or at the higher end of the range? Thanks.

Yeah, hey, Chad. So, I mean, in the prepared remarks, you know, it's pretty key words that I chose to use was, you know, we use the term bracketed. When we talk about margins historically, you know, we've always talked about 45 to 47% for ETF margins, but Some of the commentary we made earlier about choosing to, you know, strategically invest for the long term, like R&D, like investing in product management, our sales force, some of the commercial team. You know, as we move through 21, you know, what we're trying to say is margins will probably end up being closer to, you know, the 45% range, give or take. You know, and it is because of the current revenue, you know, environment that we're in. And like we said, like, look, it's in the second half. We see the market come back stronger than anticipated, right? I think margins will improve. We don't expect expenses to outpace that revenue growth, but I think we want to make sure we highlight for the year where our expectations are for consolidated margins because of this strategic decision to reinvest in the business in areas like R&D. So I think if you think about margins, you should probably think more and that's closer to that 45% range.

Okay. That makes sense, Timo. Thanks, guys. Best of luck. Appreciate it.

I'm Jan.

Thanks, Jan. Our next question will come from Jeff Stansio with Stifel. Please go ahead.

Hey, great. Thanks. Afternoon, everyone. So I just wanted to follow up on David's question earlier. You know, when your sales guys are talking to the various operators, is there any difference in tone between, you know, a tribal versus a commercial regional operator, you know, whether in terms of the recovery cadence for capital budgets, longer-term structural changes to kind of slot reinvestment levels, anything like that?

So I think it sort of comes down to what tribe and what jurisdiction and what state. It really is all very regional in its texture of that answer. And without going through it all, I would say this. Oklahoma is one of the stronger jurisdictions out there right now. I believe Oklahoma, California, the Northwest – Florida will all be very strong and continue to be strong here, you know, throughout 2021. So they're – I'd say they're out in front of the pack. The regionals also are very strong. We know that Vegas will very likely be the ones to sort of be the, you know, tail end of this recovery, if you will. But generally speaking, we can feel the momentum across the board. You know, we mentioned – On the prepared remarks, HHR has been strong. We see those businesses doing very well. And, again, tribes in the jurisdictions that I mentioned, along with the regionals, would sort of be in there as well at the top end. And, yeah, Vegas is going to be a little slower to recover. But we see these conversations improving across the board pretty much.

Okay, great. That's helpful. Thanks. Thanks. So to gear over to the premium lease segment, I'll try to ask a prior question a little bit differently. You know, if you think about the 1% historical share you've had in that product segment, what do you think is a reasonable target for where that could go longer term in your view, just, you know, given the competitive nature of that specific product segment?

Listen, obviously we're so low in that segment, this cuts both ways, right? As operators are examining their floor very closely to look at premium product and determine on premium recurring product what stays on the floor, right, we're not really in the crosshairs of that conversation. So we have a very low risk profile when it comes to premium content on the floor. On the flip side, we have something unique. One of our things is very unique in StarWall where – even if some things are being removed off the floor or there's a little bit of pruning by the operators for additional efficiencies, we believe that we've got an opportunity to get in there with the StarWall and maybe some of our premium curve units. So it's all upside for us. I mean, we're probably under 1% of the market right now, and we haven't really, you know, talked publicly about a target specifically about where it can go. But we know with our products that we can do pretty well. Our goals are really related to, you know, product release, putting out the best unit, the best games, and a little less focused on, you know, where we're going to go three or four years from now. But we'll have those internal targets, and we believe that you'll see the results in the financials over the coming years.

Okay, great. Thanks. That's really helpful. Appreciate all the color.

And our next question will come from David Katz with Jefferies. Please go ahead. Hi, everyone.

Afternoon. I wanted to go back to the interactive business, if I may. You know, it obviously is an extraordinarily hot topic, and I'm wondering if my headset is perhaps a problem.

It's buzzing a little bit, but we can bear it here. Let's go for it.

All right. The handset is good. I wanted to ask about the interactive business, which is, you know, what is involved with, you know, getting some of your top content, you know, into the system and into the ecosystem? Is there, you know, a capital investment involved? You know, what would it take for you to decide that you want to just make it a big business or a bigger business and grow it?

Right. Good question, David. For the most part, it's a function of how large your development or your team that translates these games from the brick and mortar business into the online world. Obviously, it's not a straight port. There's work to be done there. So we move pretty quickly on this. But what we're doing is we're just trying to optimize and just make sure we're efficient with the use of our capital. not to just go out there and, we'll say, develop or program or port over 12 or 15 titles overnight and then hope for the best. I think that we've done a nice job so far being efficient, picking the best titles. Some of the things that work online, David, it's very interesting. Our top game online, is probably in the bottom 10% of performers in brick and mortar. So this is why we have to be smart, we have to be efficient, and not rush to judgments on what our plan is. But in order to really turbocharge the business, the short answer is maybe another studio or development team for online to get more content into the system. At this point, you know, like you can just pick a jurisdiction like a Michigan or something of the like. You know, right now I think we're live with one of the operators, but we'll eventually be live with all of them. We're pretty much signed up with everybody. It's just a process of time to get approved, to get integrated, and to get online. But outside of that, it really does come down to content studios. And even though our content already exists, again, don't want to rush into it because I said – Our best games in the casino have not been our best games online. It's actually one of our bottom tier performers that's sort of crushing it online.

Understood. And, you know, frankly, I think that's all I had. Appreciate it. Thanks very much and good luck.

All right. Thanks, David. Have a good one. And our next question will come from John Degree with Union Gaming. Please go ahead.

Hi, everyone.

Thanks for taking my questions.

David, I wanted to ask you about your customer demand. In recent history, casino customers have typically had an affinity, at least public casino customers, to buy games over lease, given they were so focused on margin. Now that they've found a lot of margin, presumably during the lockdowns, and they're keeping a tight grip on their wallets from capital constraints, have you seen any preference or operators moving more towards leasing versus buying, and if that's an opportunity for you and for the industry to get a lot more of those premium units out this year with that environment.

So I think they're looking for efficiencies across the board, John. It's actually an interesting question. With some meetings that we've had over the past probably even just few weeks, You know, we can see on one end, you know, and it's very sort of tight group, you know, when you talk to these folks. On one end, they're looking for, hey, where's the biggest, chunkiest expense on the floor from a recurring premium point of view? And then they're looking at performance and saying, hey, how are they performing and what are we paying? Is it worth it to have it on the floor, right? Right. On the other side, early in the year here, in the first half, we're not seeing a lot of capital expenditures. All right? And you've covered that. So you sort of covered both of those, restating what you said. But in the middle, there's this sort of, you know, narrow group that we can talk to that might be looking to, because they don't have a lot of capital at the moment, at the moment, they might be willing to look into some, we'll say like efficient leases and trying new things and talking to AGS and saying, hey, we don't have a lot of your premium or lease product at this point. And I think they're looking for something in the tier of premium that we exist in. We don't have unreasonable minimums on our participations. Our flat fees, when we are in a jurisdiction where there's a flat fee, is very reasonable as well. So I think that your question is interesting. I think it's a small slice of the market, but interestingly enough, it is happening to an extent. It's not... You know, this is not a wildfire. This is not running rampant. But very interesting question, and we do see a little bit of it. Yes.

Thanks. It seems like it might be, you know, an opportunity or window of opportunity given the dynamics, but I appreciate your color. If I could ask maybe a quick tack on to that, your ASP in the quarter was quite strong, as it was in 3Q as well. And, you know, there was a little bit of, I think, mix you've mentioned too on HHR, but probably pretty small. I guess the broad question is your success in keeping pricing power in spite of kind of limited replacing demand for the quarter and your thoughts on maintaining that ASP for 21 would be helpful.

Right. So I think what you're getting at is that we didn't compromise ASP in order to sell more units over the past couple quarters. And we're going to do our best, as we always have, to avoid that because we believe you have to play the long game here, John. And, you know, you can't go the tin cup approach and try to go over the water all the time. We've got to lay up here, right? And so that means you take it a little easy. Why go out there and compromise price for more units, right, when you know that, COVID is not going to last forever. The operators are not going to be in the same position forever. We have a great belief in the quality of our product that we're selling, and we don't think that it should be a discount-type product. Therefore, we are doing our best to, you know, maintain those ASPs. Now, that said, with low quantity sales, you're going to see a little bit of turbulent ASP from time to time. It might pop up a little higher. And I think that our ASP that you've seen of late is going to be sort of still our average. But from time to time, it might pop up just because we're not selling high volume at the moment. But yeah, we're going to maintain our pricing integrity. We believe in our products. And we think that we have a fantastic product offered at the casino. So we're sort of sticking to that.

Thanks, David. That's really helpful. I appreciate that caller. Thanks.

Thanks, Sean.

And this will conclude our question and answer session, also concluding today's call. We'd like to thank you for participating on today's call. And at this time, you may now disconnect your lines.