Q4 2020 PlayAGS Inc Earnings Call
Good day and welcome to the a G S 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 this event is being record.
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 chemo.
For 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 play Ags Dot com on today's call. We will provide an overview of our Q4 and full year 2020 financial performance and offer perspective on our core.
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 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.
Say 2020 was an unprecedented year might be the understatement of the century that said from 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 unique 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 begin to come back online.
Successful execution of the feeds I just described required the commitment of our passionate loyal and hard working 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 for the Covid storm for emerged 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 ground to a halt corporate offices turned dark for awhile and kitchen table has 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 <unk> segment, we continue to leverage our new high performing product offering the Orion star wall to strategically grow our presence within the industry's premier recurring revenue segment.
At quarter end, our star wall footprint eclipsed 300 games and operator demand remains healthy.
I'm equally as excited about prospects for our Orion curve premium package scheduled to formerly launch in the back half of 2021.
Her premium will be offered in a socially distance carousel format. We plan to lead with an extension of our player favorite Reagan Bacon gain 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.
And in effort to combat Covid, it's negative effect on new unit sales demand, we have looked for opportunities to strategically create our own demand by expanding our businesses into new product adjacencies, including historical horse racing or HHR is we call it.
During the fourth quarter, we executed our first sale of units into the Virginia, HHR market and believe our strong initial game 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 II front, we remain committed to nurturing our nearly 12000 unit class II installed 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 II format and plan to leverage our new technology platform to significantly increase the number of new class II titles released to the market in 2021.
In addition to new content. It is important to remember our premium game strategy extends to class II has well over 15% of our star wall games installed to date have been placed in class II markets and we see it we see considerable opportunity for our current premium and Orion rise cabinets within the class II space.
Turning to our table products business. Despite the COVID-19 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 installed base.
Supported by strong demand for our Super for 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 team to continue growing our share of casinos overall table products spend, particularly as new products, such as our bonus spin extreme progressive and packs as hand, forming shoppers 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.
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 20th century, having.
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 BDC 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 and I gaming 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 chemo 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 am 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 for 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, as 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-19 related capacity limitations and casino closures.
To that end fourth quarter EGF gaming operations revenue of $35 9 million reached 76% of prior year's level, whereas total AGM 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 2022.
Sequential improvement in table products revenue in E. G M gaming operations revenue of 13% and 12% respectively was more than offset by a 100 for unit quarter over quarter decrease in slot unit sales predominantly a function of a softer new casino opening and expansion calendar <unk>.
Additionally, we strategically prune and sold 476, lower yielding units from our installed base in the third quarter of 2020, which negatively impacted the quarterly sequential revenue comparison.
Adjusted to exclude the impact of these onetime 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-19 pandemic negative impact on our AGM 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-19 related shutdowns stimulated result, 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 declines in fourth quarter and full year net income reflect the degree to which COVID-19 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.
Did that in 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 per cent 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 a recurring revenue base recovering ahead of the post COVID-19 normalization in our operating cost base.
Additionally, higher margin revenue related to the strategic pruning of 476, lower yielding units further supported third quarter EBITDA and margins.
Adjusted to exclude the impact of the onetime sales adjusted EBITDA would have declined a more modest 4% on a quarterly sequential basis driven by for their normalization and 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 declines 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 AGM business.
Total <unk> revenue in the fourth quarter 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 $18000.
Sales of the Orion curve Covenant 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 of 2020, we sold 1343 units with a domestic asps.
Of approximately $18100 compared to 4879 units and 18300, respectively in 2019.
Our domestic installed base at the end of the for quarter comprised 16268 units, representing a quarterly sequential decrease of 557 units.
For 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.
Largely offset by the addition of new premium recurring revenue products, including Orion Star wall into the base.
As David mentioned, we are encouraged by star walls performance today with over 300 games installed at year end.
Fourth quarter domestic RPT was $23 26.
Compared to $24 and 97 in the prior year's quarter.
For the year over year domestic RPT decline predominantly reflects COVID-19 <unk> impact on our recurring revenue business, including the closure of casino housing some of our highest yielding units during the 2024th quarter.
Domestic RPT improved 12% on a quarterly sequential basis from the $20 81 reported in Q3.
We believe a full quarter contribution for casinos reopen during the third quarter, a greater mix of premium products within the installed base and generally it's stable revenue trends at properties unaffected by the implementation of stricter Covid protocols supported the quarterly sequential domestic RPT improvement.
We estimate approximately 90% of our domestic units were active in the fourth quarter, producing adjusted RPT of approximately $27 for our active units.
On an adjusted basis, our PD increased approximately 8% year over year aided by the addition of high performing premium games into the installed base and the strategic pruning of lower yielding units.
Our international installed base at the end of 2024th quarter included 7985 units of which we estimate approximately 36% were active.
Quarterly RPT was $2.56 below the $7 65 achieved in the prior year's quarter, but well ahead of the 2023rd quarter.
Ongoing temporary statewide closures of casinos and several key jurisdictions, a lack of meaningful fiscal stimulus and stringent COVID-19 related operational protocols, including H base visitation restrictions continue to compress our PD metrics throughout the Mexico market in the fourth quarter.
Our table products segment generated fourth quarter revenue of $2 6 million nearly all of which was recurring Teva.
Table products adjusted EBITDA was $1 3 million compared to 1 million in the prior year's quarter.
The total table products installed base at quarter end comprised 4254 units, representing an increase of 13% year over year and 242 units sequentially.
We estimate approximately 80% of our table products lease installed 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 remained consistent through the fourth quarter supported by a loyal user base with resilient rates of monetization.
Although slightly lower on a sequential basis our.
Our interactive segment contributed positive adjusted EBITDA for the fourth consecutive quarter.
The modest sequential adjusted EBITDA decline reflects an increase in costs related to new market entrants and higher platform maintenance costs.
Turning our focus to cash flow and 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 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 31, 2020, our available liquidity was $111 7 million compared to $113 2 million at September 32020.
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 six 2022.
Our total net debt leverage ratio, which is total net debt divided by adjusted EBITDA for the trailing 12 month period increased from three six times at December 31, 2019 to seven five times at December 31 2020.
As a reminder, in May we obtained covenant relief from the first lien leverage ratio test for 2020 and will begin using a modified tests 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 AGM business, we believe ongoing vaccination efforts additional fiscal stimulus and the potential for gradual easing of COVID-19 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 and product adjacencies, notably HHR to help offset any lingering sluggishness across our traditional sales channels.
As it relates to our domestic installed base, we continue to look for opportunities to prune lower yielding units from the base.
For that and we expect to strategically prune units in the first quarter of 2021, and similar size and scope to the 476 units pruned in the 2023rd 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 installed base as we move throughout 2021.
Turning to domestic RPT, we believe the combination of injecting new premium leased units into the installed base strategically planning lower yielding units and realizing some level of post COVID-19 recovery and industry wide gross gaming revenue trends could allow us to improve domestic RPT 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 our PD 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 and our industry, leading and growing progressive product portfolio and believe operators focused on driving improved margins could continue to stimulate demand for our site license offering.
Additionally, we're extremely excited about the prospects for the upcoming launch of our packs S hand, forming shuffler.
<unk>, which we believe has the potential to steepen the revenue growth trajectory within our table products 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 tenant of our strategic DNA.
That said, we continue to prioritize reinvesting in the business as future even in an environment in which Covid continues to impact revenue trend throughout the industry.
Accordingly, we believe 2021 adjusted EBITDA margin could bracket the low end of our historically targeted 45 to <unk> 47 per cent range that said for 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 <unk>.
<unk> 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 remained 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.
No we will not begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
If youre using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two once again that is star then one to ask a question at this time, we will pause momentarily to assemble the roster.
From your first question today will come from David Bain with Roth Capital markets. Please go ahead.
Great. Thanks, so much.
David you mentioned that.
A few have opined that potential return to slot buying normalcy could occur in the back half and I think we've all heard encouraging comments from <unk> calls.
Operators.
I know there may not be anything substantive yet, but is there anything that youre hearing sort of anecdotally on the on the ground from your sales guys and then looking at kind of the casino floor performance focus by operators versus non gaming amenities.
They close and maybe hesitancy to reopening them do you think that the return could prove even maybe more aggressive.
Given theres been such a significant pause in orders.
Yes, Thanks, David the first part of your question. There is the Genesis of that comment comes from the ground from the boots on the ground are salespeople do a great job, we obviously talked to a number of different operators and we just feel like we can see the momentum building up towards the <unk>.
It can have for 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.
Don't want to use the word post COVID-19, but post reopening after the Covid shutdowns.
Their margins have been high.
Mostly driven by gaming amenities AK gambling, and we certainly hope that that can be something to propel things and in the second half and beyond as far as their focus goes for capital expenditures and it's a good it's a good sort of comment and question and we hope that that is.
Recognized via the her financials over the past couple of quarters.
Right.
And then just my one follow up would be.
As we assume a normalized buying environment, let's call. It early 'twenty two early hopefully.
21, you have the Oklahoma now stabilized improving the premium segment and trends and everything else happening with your product lines I'm wondering will.
Will you be dusting off the road to $2 50.
EBITDA is that something that you can even today sit here and say, it's achievable by 'twenty five 'twenty six with small tuck ins or maybe even without.
Yeah, I'll, probably stay away from and this environment right now David from the road to 250, <unk> 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 star wall launch, but now we're going to see a full year of all the star wall.
Launch that'll be followed up by some other premium products, obviously are pruning, which youre somewhat referring to when you talked about Oklahoma, but our pruning has been rather effective and I think.
We're confident that that's adding additional stability and that should prove to help us with our PD long term.
As we move forward, our table electronics business you'd want us to have a progressive et cetera R.
Our 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 in all of our progress as we think they are the best in the industry and they are performing very well along with that as our schaeffler launch I know again mentioned that in the prepared remarks, but the packs as we're excited that's a very nice segment.
I'm familiar with it and so as 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 for a five things and then yeah, maybe a tuck in of course, we're excited about our growth prospects.
But I won't we won't we won't really dust off $2 50, just yet we want to get out of the woods here in 'twenty one.
Look forward to some good things happening in 'twenty two 'twenty three.
With these things and yes, some tuck ins obviously.
Growth is in the cards.
We're excited about the things, obviously that I mentioned and it's very all very positive.
Very good thank you.
Thanks, Dave.
And our next question will come from Barry Jonas with true Securities. Please go ahead.
Hey, guys.
Is it going.
Just a couple of non bearing.
So David I was just a high level one is 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 rather would you like to adapt ags to respond.
So it depends on sort of what.
You're referring to I mean, we could you know if you're referring to our cost structure and expenses.
That's sort of one answer if youre talking about Directionally, where are we aiming the boat right now right to different so I'll just answer them both Barry from.
And internal.
Spence and structural perspective, I think it will long term mirror. 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 semi 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 moved some of our.
Money in 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 opportunity is clear.
Clearly our in our slots and in our premium product obviously.
Obviously, we're going to continue to focus on our class II business.
As it's very good for us.
But along with premium.
See I think we see the world going in and a direction, there's a bit of online search 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 and a little bit you know.
Online is going to be a big part of the future I think the absence of an online presence for any one of the slot vendors is a mistake and thats why we are in it now and I think that.
To answer your question will probably be in a bigger way going forward.
That's great and then just.
Can you give us an update on the new scalar machines and as Youre, just cumulus commentary around 'twenty, one trends seen any movement there.
So net scalar is largely just on hold an open.
There is nothing definitive at the moment I think there is some.
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.
They've always 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 in a holding but a bit positive. So we'll weigh it sort of a wait and see mode.
Okay got it so sort of status quo with that 'twenty, one commentary on margins and everything.
Yes, right exactly.
Great. Thanks, so much guys.
Thanks Barry.
And our next question will come from Chad Beynon with backward. Please go ahead.
Hi, good afternoon. Thanks for taking my question and all the commentary.
David Kim I wanted to ask about the Orion Star Wall footprint I believe you said that's up to 300 units now impressive given the current situation, but how should we think about.
Our 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 as far as if we 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 this at the moment is sort of what we said on the call which is.
We've got that 300, plus installed right now we've got a pretty good Q working we're confident we're going to continue to grow it we're going to release other products such as curved premium going forward. We know that with term current premium were kicking it off with one of our best brands, which is Reagan Bacon.
Probably 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 star Wars done well, we've got two or three configurations of the star wall 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'll be very helpful from we'll call it a social distancing perspective.
And just what the trends are that we've seen in the casinos today.
So we're encouraged by the performance B the variations that we've put out there and also of course current premium about to launch as well. So 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 percentage of the business it'll be as far as recurring revenue.
Okay.
Okay. Thanks, Yes, happy that baseball is back.
And then with respect to 45% to 47% margin.
So you generated 46% in this recent quarter.
And the third in the quarter prior to that you were at 55, so obviously with the <unk>.
Lease to sell 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 the first quarter should probably be higher higher than that or at the higher end of the range. Thanks.
Yeah, Hey, Chad So I mean in our in the prepared remarks, it's pretty key word that I chose to use was we used the term bracketed weighted when we talk about margins historically, we've always talked about 45% to 47% for EBITDA margin, but some of the commentary we made earlier about choosing to.
Strategically invest for the long term like R&D like investing.
In product management, our sales for some of the commercial team as we move through 'twenty one.
What we're trying to say is margins will probably end up being closer to the 45% range give or take and it is because of the current revenue environment that we're in and like we said like look if in the second half we see the market come back stronger than anticipated right I think margins will improve.
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 margin because of this strategic decision to reinvest in the business in areas like R&D.
So I think as you think about margin you should probably think more in the closer to that 45% range.
Okay that makes sense chemo. Thanks, guys best of luck I appreciate it.
Thanks Jen.
And our next question will come from Jeff <unk> with Stifel. Please go ahead.
Hey, great. Thanks, Good afternoon, everyone. So I just wanted to follow up on day.
David's question earlier when your sales guys are talking to the various operators is there any difference in tone between tribal versus a commercial regional operator, whether in terms of the recovery cadence for capital budgets longer term structural changes to pick out a 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 and its texture of that answer and without going through it all I would say this you know.
Oklahoma is one of the stronger jurisdictions out there right now I.
I believe Oklahoma, California, Northwest, Florida will all be very strong.
And continued to be strong here 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.
Be the tail end of this recovery if you will.
But generally speaking we can feel the momentum across the board.
We mentioned on the prepared remarks HHR has been strong we see those business is doing very well and again tribes.
Jurisdictions that I mentioned, along with the regionals would sort of being there as well at the top end and yes Vegas is going to be a little slower to recover.
But we can we see these conversations improving across the board pretty much.
Okay, Great. That's helpful. Thanks, so much.
Gears over to the premium lease segment I'll try to ask a prior question a little bit differently. 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 given the competitive nature of that specific product segments.
Listen obviously were so low in that segment. This this play 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.
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 and star wall, where even if some things are being removed off the floor are theres, a little bit of pruning by the operators for additional <unk>.
<unk>, we believe that we've got an opportunity to get in there with the star wall 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.
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 product release, putting out the best unit, the best games and a little less focused on where we're going to go.
Three or four years from now, but we will have those internal targets and we believe that youll see the results in the financials over the coming years.
Okay, great. Thanks, that's really helpful. I 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.
It obviously is an extraordinarily hot topic.
And I'm wondering if my headset is perhaps a problem.
Got it.
It's closing a little bit, but we can bear here, let's go for it.
Right the handset is good.
I wanted to ask about the interactive business.
Which as you know.
What is involved.
With getting some of your top content.
Into the system and into the ecosystem as there are capital investment involved what would it take for you to decide that you want to just make it a big business for a big or a business and grow it.
Right. It's good good question David for.
For the most part it's a function of how large your your development or your team that translate these games from the brick and mortar business.
The online World, obviously, it's not a straight port there's work to be done there. So we moved 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.
Not to just go out there and we'll say.
Develop our program our port over 12, or 15 titles overnight and then hope for the best I think that we've 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% outperformers in brick and mortar. So this is this is why.
We have to be smart, we have to be efficient and not rush to judgment 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 like.
You can just picking a jurisdiction like a michigan or something and the like.
Now I think we're live with one of the operators, but will eventually be live with all of them were pretty much signed up with everybody. Its just a process of time to get approved to get integrated 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.
He said our best games in the casino have not been our best games online and it's actually one of our bottom tier performers net.
Crushing it online.
Understood.
And frankly, I think Thats all I had appreciate it thanks very much and good luck alright.
Thanks, Dave and everyone.
And our next question will come from John Decree 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 customers casino customers have typically had an affinity at least public casino customers to buy games over lease given they were so focused on margin net.
Now that they've found a lot of margin presumably in during the Lockdowns and theyre keeping a tight grip on their wallets from capital constraints have you seen any.
Any preference or operators moving more towards leasing versus buying and if that's an opportunity for 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 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 a few weeks.
We can see on one end and.
It's very sort of tight group when he talked to these folks and one and Theyre looking for Hey, Where's the the biggest chunk is 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 as a net as it worth it to have it on the floor right.
On the other side early in the year here in the first half.
Not seeing a lot of capital expenditures, alright, and you've covered that sort of cover both of those restating, what you said, but in the middle there's this sort of.
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 will 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 and we don't have unreasonable minimums on our participations are flat fees. When we are in a jurisdiction, where there's flat fee is very reasonable as well. So I think that your question is interesting I think its.
Small slice of the market, but interesting what is happening to an extent it's not.
This is not a wildfire this is not running rapid.
But very interesting question and we do see a little bit of it yes.
Okay. Thanks, it seems like it might be an opportunity a window of opportunity given the dynamics, but I appreciate your color.
If I could ask maybe a quick tack on to that.
Asps in the quarter was quite strong as it was in <unk> as well and there was a little bit of 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.
For the quarter and your thoughts on maintaining that ASP for 'twenty, one would be helpful.
Right. So I think what you're getting at is that we didn't compromise asps.
In order to sell more units over the past couple of quarters.
And we're going to we're going to do our best as we always have to avoid that because yeah. We believe we have to play the long game here John and.
You can't you can't go the Tin Cup approach and try to go over the water. All the time, we 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 for.
However, 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 disk discount type product. Therefore, we are doing our best to maintain those asps now that said with low quantity sales youre 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 our ASP that you see that <unk> 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 yes, we're going to maintain our pricing integrity, we believe in our products and we think that we have a fantastic product offered the casino. So we're sort of sticking to that.
Thanks, David that's really helpful. I appreciate that color.
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 todays call and at this time you may now disconnect your lines.
Yes.
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Sure.