Kevin M. Sheehan - President and CEO Michael Quartieri - EVP and CFO Bill Pfund - VP, IR.

Mike Malouf - Craig-Hallum Chad Beynon - Macquarie James Kayler - Bank of America Merrill Lynch Dan Politzer - JPMorgan Barry Jonas - Bank of America Merrill Lynch Susan Berliner - JPMorgan.

Good day, ladies and gentlemen, and welcome to the Scientific Games Corporation Q3 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. [Operator Instructions]. As a reminder, this call is being recorded.

I would now like to introduce your host for today's conference, Bill Pfund, Investor Relations. Sir, you may begin..

Thank you, Heather. Good morning, everyone. During today's call, we will discuss our 2016 third quarter results and operating performance, followed by a question-and-answer period. With me this morning are Kevin Sheehan, CEO and President; and Mike Quartieri, Executive Vice President and CFO.

Our call today will contain statements that constitute forward-looking statements under the Private Securities Litigation Reform Act of 1995. These statements involve risks and uncertainties that could cause actual results to differ materially from those being discussed.

For certain information regarding these risks and uncertainties, please refer to our earnings press release issued earlier today, the materials relating to this call posted on our Web site and our filings with the SEC, including our most recent Annual Report on Form 10-K filed on February 29, 2016, and our subsequent reports filed with the SEC.

We will discuss certain non-GAAP financial measures. A description of each non-GAAP financial measure and a reconciliation of each non-GAAP financial measure to the most comparable GAAP financial measure can be found in our earnings press release as well as on our Web site.

As a reminder, this conference call is being recorded and a replay of this webcast and the accompanying materials will be archived in the Investors section at scientificgames.com. Now let me turn the call over to Kevin..

Thanks, Bill. Good morning, and welcome everyone. On behalf of the entire Scientific Games team, we are pleased to report that our third quarter results marked year-over-year increases in revenue, attributable EBITDA and free cash flow. Revenue grew 7%, attributable EBITDA increased to 272 million and free cash flow rose to 61 million.

This performance enabled us to continue to delever during the quarter by paying down 42 million of debt even as cash increased by $20 million. In addition, during the quarter, we announced the accretive acquisition of DEQ, a great addition to our table games business with the closing expected around year-end.

Our third quarter results are a good start, but I believe we have a meaningful opportunity to do better.

These last few months have provided me with further evidence of the opportunities to enhance our margins and grow free cash flow, and I believe those prospects are every bit as great as I had anticipated, creating increased opportunity to strengthen our operating results so that we can accelerate our deleveraging.

Across Scientific Games, we have a solid foundation and significant strengths upon which to build; a strong gaming business with the most comprehensive product offering, the number one position in the instant lottery games, and an interactive business growing faster than the market. But it’s time to transform the way we operate.

We need to create a simpler and more efficient organization, streamlining the way we get things done and of course eliminating redundancies.

We are embarking on a journey to create a culture of discipline that aligns and uses our resources more effectively, and at the same time cultivates open minds willing to capitalize on additional opportunistic situations where we might be able to accelerate our deleveraging efforts.

As noted in the press release, following a detailed review of our organization, we are proactively addressing our cost structure by eliminating $75 million in annualized costs commencing today. We expect to have these actions largely behind us by the end of the year.

Some of you know my track record at Norwegian Cruise Line; through fiscal prudence we expanded our margins generating year-over-year increases in EBITDA and operating margin for 26 consecutive quarters.

It’s not only about process improvement but innovative ideas and a strong operational focus built upon our strengths, boosting the customer experience, and very importantly increasing our revenue growth rate.

Since joining Scientific Games, I’ve met with many of our team members and I’ve seen the strength, the depth and passion and focus on innovation in our talented workforce.

We have premier brand recognition among our customers with Scientific Games, Bally, Shuffle Master and WMS and no other company can approach the breadth and depth of our extensive portfolio of products, services and technologies.

At the G2E gaming show in Las Vegas, we showcased an innovative offering of new products and one week later we had a similar exceptional experience at our national lottery tradeshow in Atlanta. These shows also provided me with the opportunity to meet with many of our largest customers.

I listened as they shared their view of our strengths and how we can do better. Setting the right operational and strategic priorities to support our customers, aligning our resources to achieve our targets and tracking our performance is my near-term focus.

As we work on our business plan and budgets for 2017, we’re being smart and we’re being disciplined setting clear priorities and targets, moving forward with a much greater sense of urgency throughout the organization. We are building on our business strengths, our products and services, and empowering our talented people.

But importantly, as we complete our plans and move to 2017, we would direct increased attention to expanding our planning horizon to 2018 and beyond to generate greater consistency and ensure our long-term success. Now let me turn the call over to Mike to provide his review of the third quarter results..

Thanks, Kevin, and good morning, everyone. On an overall basis, revenue grew 7% year-over-year despite 11 million of unfavorable foreign exchange translation which represents 9% growth on a constant currency basis and our AEBITDA increased 3% to 272 million.

Gaming segment revenue grew 19 million in spite of an $8 million headwind from unfavorable foreign currency translation and segment AEBITDA increased to 210 million with an AEBITDA margin of 46.8%. The margin change was primarily due to a less profitable revenue mix.

An increase in gaming machine revenue year-over-year was offset by lower revenue of the higher margin gaming operations.

In gaming operations, while we still experienced a decline in the installed base down 246 units on a quarter sequential basis, we believe we are close to seeing a stabilization of the installed base of WAP, premium and daily fee participation units.

Importantly, during the quarter, we received our first jurisdictional approvals for our innovative GameScape cabinet and placed units in New Jersey and Nevada.

While the number of units installed during the third quarter was limited due to the timing of the jurisdictional approvals, we are encouraged by the exceptional player engagement and strong performance generated in the initial installation.

And we remain optimistic that our footprint of these player engaging games will expand with incremental placements as we receive additional jurisdictional approvals. Average daily revenue across the WAP, premium and daily fee participation units declined 2% on a sequential basis and was down 8% or approximately $5 per unit year-over-year.

This largely reflecting a lower proportion of WAP units in the installed base compared to the year ago period. Gaming systems revenue was 58 million, was essentially flat on a quarter sequential basis. Maintenance revenue continued to provide steady growth with a 5% increase year-over-year.

In aggregate, our system business continues to be well-positioned to help customers due to our continued investment and the development of new software tools and enhanced hardware, such as the iVIEW 4 demonstrated at G2E.

During the quarter, we announced several system deals including Hard Rock Hotel & Casino Punta Cana, Sun International's new South Africa casino and Penn National's Hollywood Casino Jamul-San Diego and Tropicana Las Vegas.

These contracts are a testament to the long-term strategy of our system business and the power that robust system solutions have to drive player engagement and operational efficiencies for casinos.

Table products revenue rose with a 15% increase on a quarterly sequential basis and a 9% over year-over-year, due to the increase sales with shufflers and other utility products, partially reflecting the opening of two new casinos in Asia during the quarter. Revenue from leased product maintained steady growth with a 5% increase year-over-year.

The total installed base of proprietary table games, progressives and shufflers continue to expand both year-over-year and on a quarterly sequential basis. As Kevin noted, the acquisition of DEQ remains on track with an anticipated closing around year-end. We are excited by the addition of their great products into our sales and distribution network.

Turning to gaming machine shipments, during the third quarter, we shipped 7,960 new gaming machines globally, a slight increase on a core sequential basis in spite of the lower seasonal shipments of replacement units.

Year-over-year, shipments increased 27% reflecting the year-over-year strength in international shipments and domestic demand for new casino openings. Of the total, 4,022 units were shipped to customers in the U.S. and Canada of which replacement units for casinos totaled 3,033 units.

Unit shipments of both the TwinStar and Dualos cabinets increased on a quarterly sequential basis, while the pro-series wave cabinet continued to garner strong demand.

Overall, we remain pleased with the exceptional balance demonstrated across the breadth of our portfolio during the quarter and the favorable feedback we received at G2E with our new cabinet. At G2E, we demonstrated three new additions to the TwinStar family.

The J43 curved monitor cabinet, a mechanical wheel platform and a flat top gaming cabinet, all powered by the next generation ArgOS engine. In particular, the J43 cabinet generated strong favorable feedback from a broad section of our customer base at G2E.

Additionally, we shipped 245 Illinois video gaming terminals and another 744 units for new casino openings. Internationally, we shipped 3,938 new units, a 52% increase over a year ago; most of which were replacements. Australia, Asia and South America were meaningfully up year-over-year.

Our average sales price was $16,824 and as a result of our solid ASP and strong unit ship share, we believe Scientific Games leads the market on a dollar basis for gaming machine sales in the U.S. and Canada. Lottery revenue decreased by 5 million while operating income rose 2 million.

Lottery segment AEBITDA was essentially flat year-over-year with a slight increase in the AEBITDA margin.

The decrease in revenue was primarily due to the impact of the previously disclosed expiration of the China validation contract at the beginning of the year, which represents a headwind for only one more quarter and unfavorable currency translation on international revenue, while a more profitable revenue mix and a $5 million increase in EBITDA from our equity investments benefited AEBITDA.

Looking at bit closer, while in aggregate instant game revenue was essentially flat, revenue of the U.S. instant games increased 5% year-over-year despite lower sales of licensed games compared to the record level of premium game activity in the year-ago quarter that included our Monopoly Millionaires' Club instant game.

On the other hand, international revenue declined 9% primarily due to a $2 million of unfavorable currency translation impact and a dip in revenue from price per unit contract customers that largely reflects the timing in the launch of new games.

During the quarter, we were pleased that the Massachusetts Lottery extended its current instant game contract and the South Dakota Lottery selected us as their primary instant game provider, awarding us a new three-year contract with an optional three-year contract extension.

We recently won a new contract with the Kansas Lottery who awarded us a six-year contract with four one-year extensions for instant products.

Year-over-year services revenue was down about 7 million reflecting both the $5.6 million impact from the expiration of the China validation contract and a 2.3 million impact following the expiration of the Indiana terminal services transitioning unit.

During the quarter, we completed the conversion of the Arizona Lottery gaming system from a competitor to Scientific Games. Our interactive segment had another great quarter of revenue growth and in addition, we designated our social gaming business subsidiaries as unrestricted to enable us to position to consider new growth opportunities.

It was a quarter where once again we believe our growth exceeded the industry norm, based on third-party estimates. Total interactive revenue was up 66% year-over-year with our social gaming revenue up 81%.

As a result of the strong year-over-year revenue growth, operating income increased 3 million and AEBITDA increased 1 million compared to the prior-year period. As we discussed last quarter, it's important to realize that our interactive business is still at a very early stage of development and growth.

Even as our core B2C social game apps continue to grow at above market rates, we have expanded our offering for two successful initial apps with the addition of three more fast-growing apps launched within the last 12 months.

Of which, four of these apps now reside in the top grossing social casino category, while the fifth game is launching right now. We anticipate launching additional apps targeted at new social casino segments during the next several quarters.

We are supporting our existing and new product launches with profitable performance, base marketing spend constituting about 75% of the increase in interactive SG&A expense on a year-over-year basis.

In our B2B interactive business, SG Universe which features the Mobile Concierge Platform and the play-for-fun network social casino, our revenue has more than doubled over the last year period.

This rapid growth reflects significant increase among casinos who have chosen our robust solution to strengthen the relationship between the casino and the player. Now turning to cash flow. During the third quarter, we continue to demonstrate our focus on reducing debt by paying down 42 million.

We made voluntary payments that reduced our revolving credit facility borrowings by 30 million, leaving a balance of just 50 million at September 30, 2016. And we also made 11 million of scheduled term loan amortization with the remainder reflecting capital leased payments. During the third quarter, free cash flow rose 57% or 22 million to 61 million.

For the nine months, we’ve generated 118 million of free cash flow which is a $91 million improvement over the first nine months of last year. Including the previously disclosed repurchase of debt at a discount in the second quarter, we’ve reduced the total principal face value of our debt by 151 million since the beginning of 2016.

In the fourth quarter last year, I would remind everyone, we have some items that impact comparability primarily related to the timing of shipment and game launches. Additionally, we anticipate we will incur approximately 20 million in charges, primarily cash, to implement our business improvement initiative.

The majority of the cost savings will occur through prioritizing our business strategies and streamlining and consolidating our processes, which will reduce headcount and lower other operating costs.

We expect to have the majority of those actions implemented by the end of the year with most of the cost to implement them incurred in 2016 fourth quarter. We expect that these actions will generate 75 million in annualized savings. Recently, we received good news regarding our VLTs for Greece.

We understand that OPAP and the government have reached consensus on the regulatory rules and OPAP is again making preparations for the rollout of VLTs throughout Greece. As a reminder, we have an agreement to supply 5,000 VLTs to OPAP on a participation revenue basis.

While we have VLTs already in Greece, we will be able to respond quickly, the rollout plans have not yet been finalized, we would expect that the first units to go live in early 2017. And now, I’d like to turn the call back over to Kevin..

Thanks, Mike. Before we take your questions, I’d like to just remind everyone that during the last several years, a lot of focus was devoted to merging and integrating our businesses. As a result, today we are a large global player in the gaming and lottery industries and one of the world's fastest-growing interactive gaming companies.

We’re a strong and growing company focused on building momentum. And as we move forward and prepare our plans and budgets for 2017 and beyond, there’s far more potential that we will work on to unlock.

This also includes being open to capitalize on opportunities, to accelerate deleveraging and improve our capital structure through the financial markets. We will build upon our strengths and create a culture of innovation and continuous improvement to drive revenue growth.

Not just talk about it but it will be ingrained in every fabric of Scientific Games with everyone throughout the company, everywhere across the globe.

We see real opportunity to build a stronger organization focused on the principles of lean management in which we’re constantly looking at how we can do better for our customers and how we can improve our financial performance. There are clear opportunities to improve our operational capabilities and our service to our customers.

We want to build on our strength as an innovative thought leader in the industry with products and services that help our customers grow and strengthen their business. I see significant potential to strengthen our financial performance.

Going forward, our priorities remain focused on generating top line growth and capitalizing on the diverse revenue streams to deliver margin improvements that would drive faster EBITDA growth and increase cash flow to accelerate our deleveraging efforts. And with that, we’d like to turn the call open for questions.

Operator?.

Thank you. [Operator Instructions]. Our first question comes from Mike Malouf from Craig-Hallum. Your line is open..

Great. Thanks for taking my questions. Could we just start off a little bit on this cost savings initiative? It’s obviously pretty significant and I’m just wondering, is this 75%, is it like a stretched goal, or how confident do you feel in your ability to reach that? You’ve had so much savings already through some of the past integration.

I’m just wondering if you could give a little bit of color on why you think you can make this..

This is Kevin. Good question. Actually, I think one of the benefits of having someone come into an organization with a clean slate of paper enabled me to step back and look at what has happened over the last couple of years. So there has been quite a bit of cost initiatives through the organization but you would expect that, right.

We combine gaming companies and we are a much larger organization.

But when you take a landscape of the business today and you say, what was done well and what may have been done a little less than perfect, you can see that the matrixing [ph] of the organization, if you look across all of the businesses and there’s quite a bit of overlap in being able to provide different skill sets across the organization that we’re doing in duplicative prices.

And we had a lot of very senior people across each of the businesses. So this was just a – and if you think about the way cost cuts would have been done in the past, we did a transaction. We say, take our costs. And the business leader will go through their headcount list and come up with a hedge to cut.

This time around, we looked across the entire spectrum of the organization. So it was a different view and I think it makes us a leaner, smarter, more able to respond quickly. It takes out some of the inefficiencies with different layers that were in the organization.

And it’s not that we expect to deliver 75 million, we are delivering 75 and that is happening today, this morning. This is a journey, so we’re going to continue to build this business as a profitable business. What was done in the past; to me, doesn’t matter.

It’s important to know, but for me it’s what are we going to do from this point forward to grow this business smartly and make sure we have the best assets working here to drive value..

Okay, great. Thanks. And then just a follow-up question with regards to the interactive business. Obviously, that continues to do very well in the top line.

I’m wondering if you’ve had a chance since the last call to consider some other growth options that you have, and if you could just maybe talk a little bit about that if you’ve explored that a little bit?.

I think we have a very attractive business, our social business, as everyone knows. We’ve been growing it quite successfully on the top line. The EBITDA growth, just for one point of perspective; third quarter to second quarter, it’s a bit of a seasonal low as people are on vacations and stuff like that.

And we are launching – we launched a fifth game in the quarter, so the marketing is a bit disproportionate in the overall results. Having said that, when you look at this business it’s positioned to do extremely well. And the reason – that is the main reason we separated it from the rest of the assets.

It was visible to everyone and are team is continuing to look at opportunities to smartly expand on our footprint and maybe our knowledge base. So I don’t think there’s anything more than just being able to watch what’s going on in the market, be thoughtful about being in the right place if something comes along.

We’re also looking at the business as absent anything else, as something that ultimately could become a public company and the team is very excited about building that proposition out right now..

Great. Thanks for the help..

Thank you. Our next question comes from Chad Beynon from Macquarie. Your line is open..

Great. Thanks for taking my questions. Just one, say on a high level standpoint for a minute, Kevin, you talked about some new ideas and additional opportunities that you’re holding your team to.

Just to completely understand this, are you talking about at the lab level asking your personnel to come up with some creative ideas within the three verticals that you currently operate in, or you thinking bigger picture maybe something outside of gaming lottery and interactive in terms of some new ideas that could generate cash flow? Thanks..

That’s a great question. A significant portion of our headcount by the way works on innovation. It’s probably about 40% of our people. So we’re always looking at being smarter than the average bear.

What can we do better? What new things can we do in the existing playing field? But the subtlety that you brought up, which is critically important is where are we going with each of these businesses and where do we want to be in three, four, five years.

And we need to really be thoughtful and be teeing up our opportunities today to make sure we’re in the game when these things develop. There’s a lot of developing technologies and we need to be mindful of it and looking at what’s developing, so that we’re there. We need to be on the cutting edge of all of this stuff not on the bleeding edge.

So I think that’s an important distinction. We don’t want to be doing a thousand different things. We want to look at the opportunities that are coming down the path and make sure we’re focused on the four or five that we think can make a difference..

Okay. Thanks. And then on the fundamentals which were positive in the quarter, just want to focus on the machine game sales. So ASPs continued to look pretty impressive increasing and Mike you talked about the benefit from the wave helping out that mix.

You also talked about the introduction of a great cabinet, the J43, that we all got to see last month, which I believe will be priced a little bit higher.

Can you just give us a sense of maybe some feedback from customers if they’re still willing to pay a little bit more for a game if it looks sleeker and sexier? And is there still that opportunity to increase ASPs in the future? Thanks..

I would say, yes and yes. What drives the price that you can get from the cabinet is the results that it gets on the casino floor. And so what we’ve seen just with the wave itself, if it’s going to garner two times what the house average is on the floor, then casino operators are going to be willing to pay more for that type of value.

And we see the J43 right in line with that..

Okay. Thank you..

You’re welcome..

Thank you. Our next question comes from the line of James Kayler with Bank of America Merrill Lynch. Your line is open..

Hi, guys.

How are you doing?.

Hi. Good..

Good. I guess just first on gaming ops, you mentioned some commentary on GameScape. I know it has just started to rollout in New Jersey and Nevada.

Can you maybe just give us a sense for the timeline of how you expect that rollout to go? And I don’t know if you’re willing to give any metrics around the performance? I’ve heard that the initial performance has been pretty exceptional..

Yes, I think from a timeline of jurisdictional approvals, I think it will be I’d say a somewhat lengthy process as it normally has been. So I think that will move forward probably over the next three to six months. We’ll probably get one or two here and there as we trend forward.

One of the other things that we do have approval for is GameScape in the tribal casino. So those units are getting out in the field right now as well. But initial feedback has been phenomenal. We’ve heard back from certain customers that it is somewhere – anywhere from the four to six times house average as far as a coin-in on the machine.

So we’re trying to get as many machines out as we can. Unfortunately, they’re somewhat limited based on the jurisdictional approval but we’re hoping to get out as many as possible between now and the end of the year..

Great. And then just changing gears a little bit.

Can you give us an update on the Canadian systems rollout from a timing perspective? And maybe just a reminder of sort of what the scope of that agreement is?.

Yes, I think the primary one of everyone’s focus should be on the Alberta contract. That is looking like it will be at the very tail end of Q3 but most likely in early Q4 as when the go-live would actually take place where we would be able to start recognizing the revenue on that.

And then that will start a revenue recognition process that will extend well in 2018 and probably even early into 2019 as well..

Okay. So revenue recognition starting in late --.

I would say early Q4 is probably the best estimate that we have at this time..

Okay, very good. Thank you..

Thanks..

Thank you. Our next question comes from the line of Dan Politzer from JPMorgan. Your line is open..

Hi, guys. Thanks for taking my question. So just another one on the cost reductions. How much of this is – it sounds like most of it is headcount.

Is there any R&D or COGS in there? And is this mostly in one division or is it across all three businesses, if you could just give us a few details there?.

Yes, on the headcount portion it’s across the entire globe. It’s kind of balanced across each of the businesses and each of the locations. There’s nothing that’s ever going to put an incumbence on our revenue.

That was the first priority when we set out to look at all of this stuff as we need to do things that are neutral to revenue, and we have a whole set of other initiatives working on how do we drive revenue. So this is just purely cost.

And we continue to work on other lean management efficiencies and that will be stuff that you guys will hear in coming quarters..

Okay. And then I guess just switching to the gaming. Have you noticed any change in the tone of your regional customers or the tribal guys? It seems like regional gaming revenues are just slowing or decelerating a little bit.

So have you picked up on any change there?.

No, not at this point..

Okay..

We see a little bit of a slower period in Q3 following the Q2 bump and then we see a little bit of an increase in Q4 based on the seasonality of everyone getting through their capital budgets for the end of the year and spending the last amount of capital before they lose it into the next fiscal period..

Got it. Okay..

Thank you. Our next question comes from Barry Jonas with Bank of America. Your line is open..

Hi, guys. Just a couple of quick questions. So the timing for the strategic review for the interactive division or rather your goal of potentially monetizing it.

Are there other areas of the business that you think could be monetized as well or maybe perceived as non-core?.

We have to be careful in what we talk about here. But I would say that coming in as the new guy, I’m looking at each of the businesses and saying, hey, can we win in this; does this provide the right cash flow analytics that makes sense for us for long term; can we see with our competencies; can we drive value here.

So I would say that we’ll continue to look at things that way but there’s nothing else right now that’s on the launching pad..

Got it. And then, Mike, in the quarter for free cash flow there was an $88 million boost for working capital.

Can you just give some color there? And then thinking about Q4, if we exclude the $20 million cost for the cost savings initiatives, do you think we could see positive free cash flow?.

Let me give you the historical look back for Q3 first and then we’ll go forward from there. The primary drivers in the 88 million plus of cash flow coming from working capital, there are really two kind of components. So one, we had good collections on receivables during the quarter primarily through our joint venture arrangements.

Secondly, you’ve got the higher interest expense that comes through or I should say the cash payment that comes through in Q4. So Q3 to year-end, you’ve got an increase in accrued interest because you got the large senior note payment on December 1. And then the last item is just the timing of our taxes payable in our foreign jurisdiction.

So the sum of those three basically gets you right about at that 88 million that’s in there. And then as far as Q4 goes, some of the things that we’re looking forward in Q4 is we’ve also got the DEQ acquisition which is about 21 million of cash.

So we’ve got to look at the timing of that plus the timing of the 20 million in cash that we’re going to incur on implementing the 75 million of business initiative savings that we’re looking for.

So we’re looking to continue to generate positive free cash flow in every period but we’re just going to be mindful of those couple of transactions that we have..

Great. And the last one for me, another quarter where lottery EBITDA from equity investments was very strong.

Just any more color you can provide there, so it will help us understand the run rate?.

Yes, nothing I can think of. I think the one thing that we’re – we’re mindful of the Italy as one of the primary drivers. But I think at this point it’s pretty broad across all of our joint ventures as to how they’re doing between New Jersey, Illinois, Italy. So I think at this point, it’s kind of hard to be able to project through that.

But I think it should be relatively consistent throughout the period..

Okay, so no tax items or anything like we saw last quarter?.

No. I wouldn’t expect to see any value add tax refunds that we got through the Italy joint venture like we did throughout this period, because we got that at the end of Q4 last year and then we also got a benefit of that in Q2 as well. So I wouldn’t expect anything like that to repeat itself..

Understood. Thank you very much, guys..

You’re welcome..

Thank you. Our next question comes from the line of Susan Berliner from JPMorgan. Your line is open..

Hi. Good morning. So I want to start with the interactive. I know that revenues have been really strong but the EBITDA margin was down a lot.

And I was wondering if you could talk about what happened and kind of give us a roadmap what we should expect going forward?.

Yes, I kind of touched on this. The revenue continues to grow significantly as we launch new games. On the expense side, what you would expect is the third quarter is seasonally slower than the second. And on top of that, we launched a fifth game in the beginning of the third quarter. So you’ll see that the marketing expenses were much higher.

But the marketing dollars we spent are all based on getting connections with players. So it’s all smart marketing and you start to see that benefit as we roll through the next number of quarters. And then we’re going to continue to have new games that will be launched in 2017.

So the goal is to obviously get to the best place where we have the highest revenue and ultimately get to the best sweet spot on EBITDA. So we’re in a growing mode..

Great. And Mike, if I can just touch on I guess your debt reduction strategies. You have 50 million on your revolver, you have the 8.125 [ph] that could be taken out.

I guess how are you thinking about debt reduction going forward? And if you can give us any roadmap on what you’re thinking with regards to redoing your revolver or anything on your term loans?.

Well, the 2018s we can’t take out until after we get past March of '17, so that’s kind of a target point that we have to start looking at executing on opportunities at that point.

As we’ve commented in the past, you got the '18 and the revolver that would need to be refinanced, which will take care of that I’d say probably Q2, Q3 of 2017 looking at other opportunities on how do we even tack [ph] on to the senior secured notes and take out the '18 that way as well as we continue to grow free cash flow.

And look for opportunities where we can either re-price some of the term loans to get a reduction in the interest rate there. And as we continue to grow and generate more and more free cash flow and delever the company, we can then take strategic looks at how we recapitalize the company at a future date..

Great. Thank you..

Thank you. At this time, we will be taking one more question from the line of Jenna Giannelli [ph]. Your line is open..

Hi. Thanks for taking the question. Just a couple of follow-ons to Sue’s.

As you guys think about deleveraging, what’s [indiscernible] and able to get this point to potentially bad debt bonds further in the open market and pursue that as a strategy toward incremental debt repayment?.

We had a little bit of a hard time hearing some of that question, but it sounded like are we going to be opportunistic on acquiring bonds in the open market. I guess you can look at it as good news or bad news. The bonds have all traded up quite a bit in the last three months. So that benefit is a little bit more diminished.

At the end of the day, we’re going to keep our head down here at Scientific Games and we’re going to produce quarter-after-quarter, and we’re going to generate a higher cash flow.

And then we will be opportunistic, because at the end of the day if you take a business model and roll it out two, three, four years and believe that we will grow the EBITDA, the net debt to EBITDA will start to become a much different situation.

And you want to make sure you’re at the right sweet spot to take advantage of the refinancing of the market. And at some point, it will be a very big momentum swing where the banks will be coming to us and looking for us to do deals. And the opportunity as you know with our weighted average is about 7.5%.

That could be a significantly different situation if we can produce the next four or six quarters of whatever and show the cash flows generating the debt pay down as we intend..

Thank you. And just one more, if I may [Technical Difficulty].

Jenna, you broke up a lot during that question.

Would you mind repeating it please?.

Hello.

Can you hear me now?.

You’re clicking in and out unfortunately..

Okay, I can follow up afterwards..

Thank you. At this time, I would like to turn the call back over to Mr. Sheehan for closing remarks..

Yes, sorry about that. Please call us right after the conference call ends and we can certainly answer that question. But I want to thank everybody for joining us this morning. Building a deeply ingrained common culture across this entire organization has begun.

It will be a journey for all of us, and one that will lead to truly exciting and a successful future. I can assure you that the months and quarters ahead are going to be fast-paced and exciting. Thank you for your time this morning..

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you all may disconnect. Everyone, have a wonderful day..