Good afternoon and welcome to the AGS First Quarter 2019 Earnings Conference Call. All participants will be in listen-only mode. [Operators Instructions] I would now like to turn the conference over to Julia Boguslawski, Executive Vice President of Investor Relations, and CMO. Please go ahead..

Thank you. And good afternoon everyone. Welcome to AGS' First Quarter 2019 Earnings Conference Call. With me today are David Lopez, CEO and Kimo Akiona, CFO. We posted a slide presentation reviewing our key operational and financial highlights for the first quarter 2019, which can be found on our Investor Relations website investors.playags.com.

Today's call is to provide you with information regarding our Q1 2019 performance, in addition to our 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'd like to turn the call over to our CEO, David Lopez..

Thank you, Julia. And thank you everyone for joining AGS' Q1 earnings call. For those using the slide deck, please turn to Slide 2. I'll start by providing a brief overview of our first quarter operational highlights, along with some color on how we're executing against our strategic initiatives that I shared on the last call.

After a financial overview from Kimo, I'll close the call with a few words on our outlook for the year. I am pleased to announce that we reported another solid quarter and with total revenue of $73 million, up 13% year-over-year, driven by double-digit revenue growth in EGMs and tables.

Recurring revenue of $52.9 million grew 7% year-over-year and net loss improved 100% year-over-year from a net loss of $9.5 million in the prior year period. Finally, adjusted EBITDA grew to approximately $36.3 million, up 5% over last year.

Q1, which did benefit from the February acquisition of the Integrity units, was highlighted by the continued penetration of the North American slot market with a year-over-year increase of 22% units sold, and an impressive 25% growth in our Table Products installed base.

Although the first quarter was strong from a year-over-year perspective, revenues were tempered by extreme weather conditions, affecting several of our key recurring revenue markets, which Kimo will touch on in more detail.

Despite weather challenges, our EGM business performed well with our high performing content creating demand for both new placements and reorders. With that, I'll now provide an update on segment performance for the quarter.

Beginning with our EGM segment on Slide 4, revenue growth was fueled by the sale of 1,024 EGMs in the quarter, resulting in placements at more than 80 casinos across roughly 23 states and Canadian provinces.

We achieved 5% ship share in the first quarter based on the estimation of total sold units in the latest EILERS FANTINI Quarterly Slot Survey, which is in line with our normal ship share range. Corporate customers accounted for nearly 60% of sold EGMs in Q1, led by strong sales volume from several cruise line operators.

Florida, California and Nevada were three of the most significant markets for its sales in the quarter, in addition to our first shipments into Pennsylvania since we received our license in Q4 of 2018. Orion Slant accounted for 21% of sales, driven by strong performance from the Fa Cai Shu family of games.

Most notably, Eastern Dragons and Emerald Princess, which were developed by our Australian game studio. Our Slant footprint, which includes both leased and sold machines, reached 1,933 units in Q1.

We are less than one year since its initial launch, we are pleased with the momentum of Slant in the marketplace and believe that the current titles available, plus roughly 25 new titles we have scheduled for the balance of the year, will continue to create meaningful long-term growth opportunities.

More than 660 of our sold units were the Orion Portrait cabinet with rebuys accounting for approximately 70% of orders in Q1. We are now just 100 units shy of 6,000 Orion Portraits placed as of the first quarter with 35% of those on lease.

The sole performance of both Portrait and Slant led to a strong mix of Orion In the quarter, which helped to drive an ASP of $18,738, which was up 6% over the prior year period.

With our continued strong performance, and our ever expanding games library, we continue to believe we are underrepresented with Orion Portrait placements, even on floors where we have an existing footprint.

We reported a total leased EGM base of 27,308 units, up 14% over last year, driven by the inclusion of 2,500 units from the Integrity acquisition.

Normalized for Integrity units, our leased installed base declined 1.5%, due to the end of lease buyout of 130 VLTs in Q1, as we mentioned on the last call, in addition to the 500 units in Texas that we've voluntarily removed in Q3 of 2018, as well as the end of lease buyout of 420 VLTs in the fourth quarter.

While approximately 150 VLTs in Illinois will convert out of lease base in Q2, we are still on track to grow our lease basis here, driven by several expansions and new openings occurring in the back half of 2019.

Just last month, we announced that we have renewed our contract with Chickasaw Nation, securing our installed base of approximately 3,200 recurring revenue games across their 22 casinos in Oklahoma.

The deal represents a significantly larger installed base of Class II games than what -- than what our previous contract covered, as we have added around 700 units within that time frame. Because of our strong relationship with the tribe, we are pleased to have signed this agreement ahead of the contract expiration date.

In fact, we are hosting our fourth annual GameON Customer Summit at their world-class Windstar property in Oklahoma, which boasts the largest slot floor in the world. In the quarter, we added approximately 160 new recurring placements in Mexico, driven by the recent introduction of the ICON cabinet to this market, which helped us gain floor share.

And just under a year, we've achieved placing close to 700 ICONs in Mexico, providing a strong secondary market for this cabinet. Additionally, we introduced Orion Portrait in the Mexican market in late Q4 with more units added in Q1.

Similar to what we see in the U.S., the Orion Portrait outperforms the floor in Mexico, serving as a solid premium offering for strategic accounts.

We also grew our recurring revenue 19% year-over-year in Mexico due to the addition of more than 1,000 incremental units, the introduction of a newer, high yielding products I just mentioned, as well as higher RPD, which Kimo will touch on later on.

Mexico also has a well established video bingo market of over 20,000 machines, which we believe represents an additional opportunity for the Alora cabinet. In April, we put initial placements of Alora into Mexico and will monitor its performance to assess the opportunity moving forward.

On the last call, I mentioned that we had placed our very first Alora units into the Philippines as of early March. I am pleased to report that approximately 45 additional units will touch shore by early next week, with several more containers planned in the coming months.

Initial performance has been as we expected and in line with the market, albeit on a very small base of units. Initial feedback on the units is positive and we are now starting to add more volume to the marketplace, which will give us better indicators of performance over time.

The results of the Q1 EILERS FANTINI Slot Survey shown on Slide 5 highlight AGS' casino owned game performance, primarily Orion and ICON, maintained its industry leading position, leading all suppliers for the eleventh quarter in a row.

What's important to note with these performance stat that it's not just one title driving these, we have numerous titles in the market performing at 1.5 times house average or better.

Our premium leased game performance, which represents our Big Red cabinet, of 1.4 times house average, remain competitive as we see this category indexing up in the latest reporting period. Moving on to the Table segment on Slide 6.

In the first quarter, we achieved record revenue of $2.2 million, up 29% year-over-year, roughly 100% of which is recurring. Adjusted EBITDA grew significantly year-over-year, pinning a record in Q1, which marks the sixth consecutive quarter of positive adjusted EBITDA in the segment.

Our table products footprint grew 25% year-over-year with an installed base of 3,285 units. The success of Progressives, such as Super 4 and Bonus Spin drove much of the year-over-year growth, with additional growth coming from side bet premium games and other table equipment.

We installed approximately 100 Progressives in the quarter, and just as notably, converted 200 Progressives from a competitor's platform to our platform. Although these conversions do not show up as an incremental unit, they do generate meaningful incremental EBITDA.

As of Q1, we converted more than 300 total games to our Stacks Progressive platform, allowing customers to take advantage of our innovative features and updated graphics. We are pleased so far with the rollout of the Dex shuffler. As of today, we have installed 45 units across nine casinos in the United States.

We received widespread GLI approval in April, which opens the gate for ramping installs, and we're in the process of submitting to Dex to additional labs throughout the country, such as Washington and Pennsylvania.

We're very pleased with customer feedback on the current version and believe we are in position to grow installs more significantly throughout 2019.

In our Interactive segment on Slide 7, revenues were down roughly $700,000 year-over-year, in line with our continued strategy of decreasing market spend in B2C social and pivoting to other, more profitable, long-term, interactive revenue models, such as real money gaming and B2B social.

This decrease was slightly offset by $300,000 in real money gaming revenues, reflecting the initial launch phase of this growing business line. We achieved an important milestone in the quarter with the launch of our AGS content for real money game in Europe and the U.K. We launched Golden Wins in March, and Jade Wins in April.

And early performance places these AGS games at the top of the list for all games offered on the access games marketplace. We are planning for the launch of four more AGS games within the next 60 days, and a steady release of game titles thereafter.

We expect to be live in roughly six more market within the next couple of quarters, including New Jersey, Spain, Mexico, and Sweden, and 9 to 12 additional new markets in 2019. We're now distributing real money gaming content from 13 suppliers on our Access platform, with more than 500 games available.

On the social B2B side of the business, we recently signed deals with the Plaza in Las Vegas and Jamul Casino in Southern California. We are also currently negotiating agreements with several other customers who recognize the value of our social white label casino offering.

Our strategy remains the same for B2C social, we will continue to focus on maintaining recurring revenues without incurring material user acquisition and marketing expenses. Having operated in the real money gaming space for about nine months now, we made a couple of observations. We are pleased that our initial thesis was right.

Our content performs well in the online real money gaming space, mirroring similar trends to what we see with our land-based EGMs. There is an opportunity in the vast RMG space for good game content, and we believe it's important to leverage our high performing content in this channel.

We are similarly pleased that during the three quarters since acquiring this new business, we have seen consistent double-digit increases and quarter-over-quarter coin in and gross gaming yield. We have also learned that markets take longer to enter and deals take longer to go live and build revenues than we initially anticipated.

The good news is that we have a strong pipeline of deal signings and more in the works, both to offer our content and to sign more supplier partners. However, the revenue ramp is a bit slower than we expected. We remain confident that we will achieve positive EBITDA in the segment, but believe that we'll turn the corner in the back half of this year.

With that Kimo will now go through a discussion of our financial results..

Thanks, David. And good afternoon, everyone. The first quarter of 2019 marked another quarter of executing on our strategic goals, and Slide 12 in the appendix provides a comprehensive operational summary.

For the first quarter, total revenues were up 13% to $73 million, of which $69.7 million was from EGM, $2.2 million from Table Products and $1.2 million from interactive.

The increase in revenues in the first quarter were driven by EGM equipment sales, notably in early entry markets such as Michigan, Saskatchewan, Pennsylvania and Massachusetts, as well as ramping markets like Florida and California.

We also experienced increased performance in our gaming operations business year-over-year with record recurring revenue of $52.9 million. Growth in gaming operations was driven by several factors, including, one, the contribution of EGM purchased from Integrity in February 2019.

Two, an increase in Orion Portrait and Orion Slant cabinets on lease year-over-year. We ended the quarter with over 2,100 Orion Portrait cabinets on lease, up 50% year-over-year, and over 1,040 Orion Slant cabinets on lease, highlighting the successful rollout of this new cabinet.

Three, an increase of $1 million in recurring revenue from Mexico, driven by a substantial increase in our EGM installed base. And finally, we saw a net increase in installed base of Table Product units on lease, up 654 units year-over-year, driven by the continued success of our progresses in side bets.

As David mentioned, we achieved this growth in recurring revenue, despite the difficult weather conditions that we experienced in certain markets. We estimate that these difficult weather conditions negatively impacted our Q1 results by approximately $1 million to $2 million in EGM recurring revenue, or a 2% to 4% impact on domestic EGM RPD.

For the first quarter, net loss attributable to PlayAGS, Inc. improved to $0.1 million year-over-year from a net loss of $9.5 million in the prior year period.

Total adjusted EBITDA was up $1.8 million in the first quarter, driven primarily by our EGM segment, which grew revenues by $8.4 million gross profit by $5.5 million, and was partially offset by increased adjusted operating expenses of $3.4 million, primarily due to increased headcount related costs in SG&A and R&D.

In the first quarter operating expenses also included approximately $1 million from cost from iGaming. Total adjusted EBITDA margin decreased to 50% in the first quarter, compared to 53% in the prior year period, due to several factors. One, increased headcount related costs in both SG&A and R&D, as previously mentioned.

Two, operating costs associated with iGaming of $1 million. Three, increased proportion of equipment sales to total revenues. And four, estate and local tax benefit of $0.9 million recorded in the prior year period.

Turning to our EGM segment, first quarter EGM sales increased 33% year-over-year to $20.2 million, due to the sale of 1,024 units as compared to 838 in the prior year period. The current quarter included approximately 100 sold units to new and expansionary properties.

Our ICON and Orion family of cabinets continued to drive our ongoing success in penetrating the Class III market.

In our domestic EGM gaming operations business, our installed base grew by over 2,245 units year-over-year, and over 2,500 units sequentially, driven primarily by the purchase of approximately 2,500 EGMs from Integrity, which closed in February of this year.

We recorded approximately $2 million in recurring revenue from the Integrity EGMs in the first quarter. We also increased placements of Orion Portrait, Orion Slant, and ICON cabinets on lease.

Year-over-year increases in the domestic installed base also included the voluntary removal of 500 machines from a single customer in Texas in the prior year, as well as an end of lease buyout by a customer who purchased 420 VLT machines in 2018, and another 130 VLT machines in the first quarter of this year.

Domestic EGM RPD for the first quarter was slightly down to $26.42. Driving this increase was the inclusion of the EGMs purchase from Integrity, as well as the negative impact of adverse weather conditions. As a reminder, the EGMs that we acquired from Integrity had an RPD of approximately $15.

Excluding the impact of the units acquired from Integrity, as well as an estimate for the adverse weather conditions, we estimate that domestic RPD for the first quarter was $28.18, representing a 5.5% increase.

Along with the international EGM installed base increase mentioned earlier by David, our international RPD for the first quarter increased by $0.41 or 5% compared to the first quarter of 2018, driven by the optimization of our installed base. On a constant currency basis, RPD in Mexico increased by nearly 7% year-over-year.

Now turning to Table Products, first quarter revenues increased by $0.5 million, or 29% year-over-year, primarily due to 25% increase in our installed base, which grew to nearly 3,285 units compared to 2,631 units in the prior year period.

As David previously mentioned, this was the sixth consecutive quarter of positive adjusted EBITDA for our Table Products segment. Adjusted EBITDA margin was 22% in the first quarter, compared to 11% in the prior year period. We expect adjusted EBITDA margin to ramp as we move through the year.

Interactive revenues were $1.2 million in the first quarter compared to $1.9 million in the prior year period. The decline was due to a $1 million decrease in social gaming revenue, due to the continued optimization of our user acquisition spend. Offsetting this decrease was an increase in revenues from real money gaming of $0.3 million.

Turning to operating expenses, SG&A expenses decreased in the first quarter by $1.9 million or 11% to $14.9 million. The decrease in SG&A was primarily due to a decrease of $5.7 million of non-cash, stock-based compensation expense.

The prior year included an initial charge of $6.2 million recorded in connection with our IPO, offset by an increase in headcount-related costs of $1.6 million, due to higher headcount, $1.7 million in professional fees related to acquisition and integration-related costs, as well as secondary offerings.

The prior year period also included a favorable state and local tax benefit of $0.9 million. Adjusted SG&A expense for the first quarter 2019 was $12 million compared to $9.4 million in the prior year period.

Current quarter adjustments to SG&A relate to non-cash, stock-based compensation, acquisition and integration-related costs, as well as costs associated with secondary offering. R&D expenses decreased slightly to $8.1 million in the first quarter of 2019, compared to the prior year period.

The decrease in the first quarter of 2019 was due to a decrease of $1.3 million of non-cash stock-based compensation expense.

The prior year included an initial charge of $1.6 million recorded in connection with our IPO, a decrease of $0.5 million related to the timing of software testing and product approval costs, offset by an increase in headcount-related costs of $0.8 million.

Adjusted R&D expense for the first quarter of 2019 was $7.6 million, compared to $6.3 million in the prior year period. Current quarter adjustments to R&D relate primarily non-cash stock-based compensation expense. Adjusted R&D expense as a percentage of revenue remained relatively constant at 10% in both the first quarter and prior year period.

Moving onto our capital update -- capital structure update on Slide 8. Total net debt, which is the principal amount of total debt, less cash and cash equivalents was $527.2 million as of March 31, 2019, compared to $468.1 million at December 31, 2018.

In the first quarter, net debt increased by $59.1 million, primarily driven by the acquisition of Integrity, as well as increased capital expenditures. Our total net debt leverage ratio, which is total net debt divided by adjusted EBITDA for the trailing 12-month period, increased from 3.4 times at December 31, 2018, to 3.8 times at March 31, 2019.

Normalized to include the trailing 12 months adjusted EBITDA from Integrity, adjusted total net debt leverage ratio increased from 3.4 times at December 31, 2018 to 3.6 times at March 31, 2019.

As we mentioned on our Q4 2018 earnings call, we still believe that we will be in a position to be under or at, or equal to 3 times by our Q4 2019 earnings call, pending any potential M&A.

Capital expenditures were approximately $19 million for the first quarter of 2019, which comprised of $12.9 million for growth machine CapEx, $3.9 million for intangible CapEx, $1.1 million of corporate CapEx and $1.1 million of maintenance CapEx.

Of note, growth machine CapEx was slightly higher due to our decision to optimize EGMs earlier in the year, as well as the installation of 290 additional EGMs related to various property expansions. With that I will now turn the call back over to David for closing remarks..

Thank you, Kimo. Slide 9 shows that we continue to grow our footprint in North America with three key EGM products and as of Q1, we were at 2.9% market share, up from 2.3% in Q1 of last year. That is a considerable gain for AGS, resulting in approximately 6,000 new units in the domestic marketplace.

There is a significant opportunity this year to increase penetration in Canada, Pennsylvania, Nevada and Ohio, to name a few, keeping us on a very achievable path to 5% market share. Slide 10 reiterates our current adjusted EBITDA guidance range of $160 million to $164 million, which we announced on the Q4 year-end call.

With regard to the cadence of the year, we believe that the back half will ramp based on EGM sales momentum, the rollout of Orion Upright in Q3 and greater contribution from Tables and Interactive in Q3 and Q4.

Additionally, as I mentioned earlier, we voluntarily removed 500 units from Texas in Q3 2018 and had 420 VLT conversions out of the lease base in Q4. As we move into the second half of 2019, the year-over-year revenue comps get stronger because we lapped the timing of those removals.

We also maintain what we communicated on the last call with regard to our CapEx range, reiterating $65 million to $69 million for the year.

For our first three months results and our commentary today, we believe that fiscal ' 19 is off to a good start, and then we have the appropriate strategies, products and people to ensure long-term meaningful growth.

In addition to the opportunities in 2019, we've made the right investments in our business to truly benefit from scale as we exit the year and head into 2020. We made a number of recent strategic hires in the sales organization that will help unlock further opportunities in markets like the Northeastern Canada as well as with our corporate accounts.

We are opening a new R&D office in Reno in July and believe that this new studio will help bolster further cabinet and content innovation, helping make AGS a more comprehensive and robust EGM supplier.

Last thing before we move to Q&A, I want to thank all shareholders and customers for their continued support and confidence in AGS, as well as the entire AGS team, now more than 700 strong around the world, working hard every day to deliver shareholder value. With that, we'll move to the Q&A portion of the call..

[Operator Instructions] Our first question comes from Barry Jonas with SunTrust Robinson Humphrey. Please go ahead..

Hey guys. David, about six months ago you gave some color on how you think you'll get -- you can get to $250 million EBITDA over the next three to five years. Just curious if anything has changed in your mind since then, whether it's the composition of growth between the segments or just general timing. Thanks..

Now, hey, thanks Barry. So I don't think anything has changed as far as -- when we look at that bridge to $250 million, we know the swap business is going to be a big contributor. We know that international will contribute. And you can see we're doing well in Mexico, we're continuing rollouts in places like the Philippines.

Our online business, a little bit of a timing difference there, just in this year, but we still are very firm believers that real money gaming is going to be a very good contributor long term, and as you can see, the table game business along with -- I know shufflers isn't really showing just yet, but we've got the units out there.

The table game business is really starting to show its strength this year..

Got it. Great. And then, I just want to make sure I got it. The release talks about strategic investment levers in R&D.

Is that specific to the R&D center in Reno that you're talking about opening or was that referencing anything else on top of that?.

I'd say it's R&D in general. I wouldn't say it's just the Reno office. We've made a very good contribution, an investment in Australia. I just visited the studio down there, and it just blows me away that we've been able to not just spin up a studio but spin up a very high quality studio with a bunch of rockstars [ph] that are working for us.

So that's really across the board R&D investment, from hardware, to Australia, to Reno game development teams and just investing, quite honestly, not just in R&D, but in the right people in R&D..

Got it. And then just last one on the Chickasaw contract renewal. Any additional color you can give, just in terms of the mix between additional penetration versus just participating in their expansions. And just any thoughts on the -- sort of the placement fees that we should be thinking about for our models..

So, I'll sort of answer questions. The lab contract sort of we were moving through in toward -- getting toward the end, we had some, I will say organic growth. Some of that is small expansions at Chickasaw, some of it is more, I'll call more organic. And then as far as the rest of the year, the Chickasaws are going through.

Yes, they are going through some expansions. This year you can see Border expanded, and there's a couple other times, we'll see a slug of units come in throughout 2019.

But it's been a healthy mix over the years, and I think this year of additional units organically, and then of course as they expand we -- fair to say, we get our fair share of that pretty consistently. As far as the placement fees, very consistent with the past. I don't think there's anything terribly new there in the way that we should look at it.

And as you guys know, we sort of -- we sort of pay our time with that just as we have in the past..

The placement fees will be about $1.5 million a quarter, Barry, related to the new agreement. There'll be a bunch of data..

Okay, great. That's all I got. And looking forward to see you guys at Windstar. Thank you..

The next question comes from David Katz with Jefferies. Please go ahead..

What I wanted to just go back over is, the lease domestic game performance. And I apologize if you've commented on this already, but I wanted to just circle back and make sure I have it.

When I sort of look at how the relative performance of premium leased games -- well, okay, I suppose the way you disclosed it last quarter was premium lease domestic game performance, which was on a relative basis a bit higher than what you have today and specifically I'm referring to Slide 5..

Yes..

Right, where you have 1.4 times. And last quarter was premium leased games and those were better.

Can you just help me reconcile what's in those two -- what's in that comparison?.

All right. So we'll break that down a little bit, and we tried to sort of tee that up a little bit in our prepared remarks, because on the leased domestic game performance side, that really truly is Big Red, right.

And so Big Red is now in there against a group of competitors that -- we're starting to see a lot of premium products come in there and I think that that performance level is affected by A, that group is getting a little bit stronger, our games are probably performing right in the same sort of range.

But on the other hand, I think the thing to notice, and I've said this many times leading up to the IPO, post IPO is that with the EILERS FANTINI report, which is where we get this information, it's sort of a barometer. It's not a phenomenon. It's not precision.

In the past, I think the methodology for picking up those numbers on both sides of Page 5 there, where they were pulling about 40% or 50% of those that get the report and it was a poll. And now they're trying to pull more precise numbers, but it's a very small sample, I want to say under 15%.

So those numbers are going to move around and we'll see them sort of steady up and then from there we will be tracking more closely. But the methodology changed, so we saw the numbers just shift for a moment. And I think that now we will them more closely, but I don't think anything's really changed with Big Red.

That's Big Red in the category that you're referring to. If you look at casino owned domestic game performance, now you're talking about the high products that we have right. So those are the casino owned games like Orion Portrait, Orion Slant and even the ICON, all of which performed very well because of our game content and obviously cabinet design.

I know it's been a little bit -- it might be a little bit confusing, but I think the methodology changed there and going forward, you'll see it be a little bit more consistent..

Perfect. And I wanted to ask a question about what you have on Slide 9, because there's obviously a lot of progress and a lot of opportunity even with the early entry states.

But I notice in the prospective other states that you have -- that you've listed in the footnote, I mean there are some pretty meaningful states down there where you're not there yet, like a Missouri or West Virginia, Rhode Island, etcetera.

What thoughts or plans do you have around entering those at some point as well?.

I think that some of those will open up as sort of ownership changes, as our primary owners sort of begin to -- or continues to scale down that will open up and give us some quicker opportunities to get some license, like I would say I think Colorado, there is also a Minnesota license, just to name a couple. So some of those do affect us.

As far as the other markets go, I think we specifically called out Florida, California, Ohio, and Pennsylvania as key markets. I think you're going down into the footnote you're saying. I say, you're talking about West Virginia, there's plenty of opportunity out there and we'll get to it.

I think there's plenty of meat on the bone right now, on the matrix that you look at here and we're just starting again in the PA, we're just starting to get into Canada, these are going to be all very good jurisdictions for us, and I think our first units, as we said ,just went in, in Q1..

No question, lots of white space. Thanks very much..

David Lopez:.

The next question comes from Brad Boyer with Stifel. Please go ahead..

Hey guys, thanks for fitting me in. First question is just around the win per day here in the U.S. in the quarter.

I guess what gives you guys confidence that -- that weather had the impact that you guys quantified in the release, and that the performance wasn't indicative of anything else? And then secondarily, should we kind of think about using the win per day ex weather that you quantified in the release as sort of a good proxy for modeling it forward? Thanks..

Alright, so we'll start with the first one. Good question. So, when this all sort of unfolded in Q1, we were paying very close attention to the polar vortex, and whatever other names they were referring to these weather patterns toward the end of the winter there, and we thought it was affecting us.

But the way to confirm it was, is that we went out there, we channel checked with our operators, obviously, and then we could look at it by jurisdiction. Some operators actually confirmed, in a jurisdiction or two, that they just had to shut down for a day or two.

They had to close -- they had to close down I think a couple of casinos and Washington confirmed that. So that certainly is a weather impact when you have to close the doors to a casino. Furthermore, if you move to our warmer weather states, by and large, largely, we can see that we were steady or actually up in some of those warmer weather states.

So this sort of confirms that weather did impact us.

As far as -- I think your second part of the question is, do we just ex out weather going forward or do you sort of carry this trend forward? Obviously the weather impact is not going to continue forever, but obviously we'll monitor and watch it closely, but we are confident in our RPD, that it should gradually sort of recover from that Q1 number.

It's interesting, if you remove Integrity, right, from the number, which we just acquired, we actually would have been positive from an RPD perspective for the quarter for many different reasons. Some of the low earning units that we removed last year that we discussed in the second half of the year. That helps RPD obviously.

And so we were actually up if you were to take Integrity out of the equation. Units in the domestic market were actually down, I think we said about 1.5%, but if you look at actual recurring revenue in the same market, we would be up and I'm referring to all ex Integrity numbers.

So I think we're doing okay there, we are still doing the right things with optimization and such, but you can sort of see that in the units being down a little bit because of the removals that we stated in the prepared remarks, but recurring revenue actually being up..

Okay. That's helpful. And then just as we sort of think through the forthcoming rollout and launch of Orion Upright, just how are you guys thinking about initial margins as Upright comes out? I know with some other manufacturers when you get through the first couple of iterations of a new product launch, you are at sub-optimal margins.

And so as we think through modeling sort of product sales margins in the back half of the year, should we expect there to be any noise as you bring Upright out or do you think that you'll be able to manage through that?.

I don't you think you should -- Brad this is Kimo -- so you shouldn't expect a lot of noise there. I think as you can see, like Orion Portrait is still a big part of the story. I think, which is grea,t because initially people had any kind of concerns of how much legs or how long are the legs for Orion Portrait and we see that continuing.

So even as we launch Upright in the back half of the year, this year is still going to be a pretty strong Orion Portrait year in the sales mix. So, one, you won't see any margin noise there. And then two, I guess one other thing that -- one other data point we have when we launched Orion Portrait was that fairly quickly we had BOM costs under control.

So there shouldn't be any substantial noise, even as Upright gains traction moving into next year. So I think you'll still see margins hold strong on the sales side..

Okay. And then lastly, just around international, I mean Mexico was -- it has been a very solid story for you guys the last several quarters. I think as some of the currency headwinds have abated, we're starting to see it more in the reported yields.

But I guess what are you seeing down there and kind of how should we think about growth in that market from here? And that's all from me. Thanks..

Thanks, Brad. So as you can see, year-over-year units were up considerably, I think we're up around a 1,000 recurring units year-over-year. That's just a phenomenal number, it's really -- that meant [ph] to our team down in Mexico, primarily in Mexico City and their leadership down there.

This sort of speaks a little bit to that voluntary removal from Texas where we moved many of those units into Mexico. And we're starting to see those yield results, because as we put those newer units into the market, we've gotten nice RPD lift out of it. And we believe Mexico is going to continue to have strong figures.

There's nothing that says Mexico is going to slow down. We can't control FX, of course, but even FX impacted RPD for Mexico, we were still up 5%, if you look at constant dollar, I think as Kimo might have said, we're up 7%.

So we are confident in the market, we're confident in our team, and we're confident in the product that we're moving down there, whether it's even a new Orion cabinet or a secondary market for things like ICON..

Okay, thanks a lot guys. Appreciate it..

Thanks..

The next question comes from Chad Beynon with Macquarie. Please go ahead..

Hi. Afternoon. Thanks for taking my question.

Regarding the new Reno studio in R&D, is the goal to have more titles, should we expect more titles at G2E, in the upcoming G2Es, more diversification of thought, can we just get a little bit more color on what we should expect to come out of the new studio? And then I have a related question as a follow up..

Yes. That's the latter of the two really, we're not really looking -- we're not really looking to do more content. We're looking to do more quality content if you will. I'd say obviously opening up another studio we'll get a little bit more expansion and bandwidth there. There's no doubt. But it's not our goal to just push out more content at G2E.

I think it's more about that diversity of thought, and actually the team that we're putting out there, without mentioning names, I think that it is a departure a little bit from the rest of the team, and that's good, very creative guy that's going to be leading the team up there in Reno.

And then from there, I think that -- this is just part of how we're building our team, and our development guys to match the road map that's going to be coming out over the next 18 months or so. Sort of looking back to David Katz's question earlier, when he was talking about Page 5, where you are looking at premium leased games.

That's going to be a space that we're going to be much more competitive, and one of the ways that we do that, one of the ways, not all of them, is this team up in Reno, which will be part of a couple teams, that will be creating content for things like that..

Okay, thanks.

And is it safe to assume 10% as a kind of a proxy of R&D as a percentage of sales, is kind of what you're targeting in the near term? I think you mentioned that's where it came in for the quarter?.

Yes. We've guided closer to around 11%, Chad, and that'll probably -- it can move quarter-to-quarter, but on an annual basis, I think 11% is a good way to look at it..

Okay, good. And then my follow-up Kimo, the cash balance at the end of the quarter looked a little low, just in terms of running a company of your size. How should we think about what you need to have on the books during the quarter? And then should any additional cash flow just go to debt reduction through the rest of the year? Thanks..

Yes, I think one thing we talked quite a bit about last year and then on our last earnings call was this year really is like a cash flow inflection year, right. So I think we still are very confident with the liquidity that we have. We have a $30 million revolver that we have not -- we have never used.

I think from this point forward we will be in a free cash flow generation period. So although Q1, we were still negative on a free cash flow basis, I'd remind everyone that it's better than last year. And I still think that one of our goals for this year is to probably double what we did last year on a free cash flow basis.

So going forward, we'll just continue to generate free cash flow. And then your second question, I guess, as far as -- that's just going back to the question we've answered, we get constantly is what are you going to use your cash for.

And we always go through that same analysis and thought process, and what's the highest and best use of our cash, and so far it's been to invest in the lease base, invest in reinvigorating it and growing the footprint. You saw that we did Integrity and we did Rocket in the prior year. So I think tuck-ins has always been part of the story.

Once we exhaust, I guess those type of higher ROI type uses of cash, then I think we get to debt reduction for sure..

Okay. Thank you very much. Appreciate it..

Yes, thank you..

[Operator Instructions] The next question comes from Shaun Kelley with Bank of America Merrill Lynch. Please go ahead..

Hi, good afternoon, everyone. Most of my questions have been probably addressed, but just one kind of higher level strategic one. As we go back to the -- some of the early entry markets where you guys are rolling out some of your products in, can you just give us a little bit more maybe market color, pointing it maybe Pennsylvania.

I think you called out Pennsylvania, Michigan, Canada as being three that stood out this quarter. But just sort of early market feedback from customers in those markets and what you're kind of hearing in terms of how you're penetrating those markets, just a little bit more granularity on that would be helpful..

Thanks. So I mean I think it's consistent with what we've seen pretty much in every market and I've unfortunately have to say I've been doing this 21 years, and in 21 years things have changed a little bit. You go back 15 years, you go to Canada, you sort of needed a little bit of a different product.

If you're maybe in the Midwest versus Vegas Strip, you might need a little bit different product.

Products have become a little bit more ubiquitous and as we roll out our successful products from the various jurisdictions that we've done great in, and we move into Canada, and we move into Pennsylvania, and we move into Ohio, we're really getting much of the same, and that's great results.

Canada, I think, the only exception would be that sometimes they're telling us the results are phenomenal or they are fantastic or something in the like. So the early feedback is great, but it's still early feedback.

In Pennsylvania, we just got our first units in, I don't think we've got a lot of feedback just yet, but that is a very good market for us.

Michigan, we actually just added a sales person for the Michigan market, and some of the surrounding areas, and she's fantastic and we really believe that we're going to be all capitalized nicely on the Michigan market with the great products that we've had and the numbers that we see..

Thanks.

And then maybe just as a follow-up, do you typically launch with the full product suite, or do you go in with one product and what's working in those markets? Is it Portrait, is it Slant, is it a combination of both, or how do you guys typically enter when you go in?.

I mean the good news is when you're going into these early entry markets, where you've got experience under your belt with product right, now we can grow hay makers.

Right? We don't have to go in and project [ph], we can go in with our best product, and we can come out of the blocks really hard with everything that we consider to be our strongest product, and of course our full product suite after that as things get approved, we'll be out there with our new Australian content coming out of our Australian studio, and everything like that.

But I think the bottom line is when you move into an early entry market, but we've got the experience of being in California, Nevada, Mississippi, etcetera, all across the country, we know exactly what's been working best and there's nothing experimental, we can just go out hard and fast with our best stuff..

Thank you very much..

This concludes our question-and-answer session. I would like to turn the conference back over to David Lopez for any closing remarks..

Thanks for joining us here for our Q1 call. We look forward to talking to you at the end of the -- at quarter two. Thanks a lot..

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect..