Good day and welcome to the AGS Second Quarter Earnings Conference call. All participants will be in listen only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions.

[Operator Instructions] I would now like to turn the conference over to Julia Boguslawski, Chief Marketing Officer and Executive Vice President of Investor Relations. Please go ahead..

Thank you and good afternoon everyone. Welcome to the AGS's second 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 second quarter 2019, which can be found in our Investor Relations website, investors.playags.com. Today's call is to provide you with information regarding our Q2 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-cash 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's Q2 earnings call. For those using the slide deck, please turn to Slide 2. I'll start by providing a brief overview of our second quarter operational highlights, along with some color on how we're executing against our strategic initiatives in each business segment.

After our financial review from Kimo, I'll close the call with a few words on our revised outlook for the year. In the second quarter, revenue of $74.5 million was up 2% year-over-year, driven by growth in domestic and international EGM game ops, table products and EGM sales. Despite these bright points in the quarter, our results were mixed.

Net loss of $7.6 million, increased year-over-year from $5.3 million in the prior-year period, driven by one-time impairments related to our real money gaming or iGaming business, which Kimo will cover later. Adjusted EBITDA decreased 2 % year-over-year to $35.7 million, due to higher operating expenses related to SG&A and R&D.

Q2 benefited from the Integrity acquisition, which generated $3.5 million of revenue during the period, contributing to the 2 % year-over-year growth of total recurring revenue of $53.6 million. Additionally, EGM recurring revenue was negatively impacted by various factors related to our Oklahoma footprint, which Kimo will touch on in greater detail.

I'll now walk you through segment performance for the quarter. Beginning with our EGM segment on Slide 4, we sold 1,181 EGMs in the quarter, up 12 % year-over-year, resulting in placements at nearly 100 casinos across 25 states plus Canada and Mexico.

We achieved approximately 6% ship share in the second quarter, based on the estimation of total sold units, and the latest EILERS-FANTINI quarterly slot survey, which is in-line with our normal ship share range.

Florida, Alabama, California, Nevada and Mexico were among the most significant markets for sales in the quarter, in addition to solid placements in Canada, Michigan and Pennsylvania. Nearly 650 of our sold units were the Orion Portrait cabinet with revised accounting for 66% of orders in Q2.

We now have more than 6,700 Orion Portraits placed as of the second quarter with 33 % of those on lease. Orion Portrait continues to be one of the strongest performing products in the market, and many opportunities remain to grow our footprint. Orion Slant accounted for 21 % of sales, driven by various titles developed by our Australian game studio.

Our Slant footprint, which includes both leased and sold machines, reached 2,230 units in Q2. We reported a total EGM installed base of 27,017 units, up 10 % year-over-year, driven by the inclusion of 2,500 units from the Integrity acquisition.

Year-over-year, we added approximately 720 new recurring units in Mexico, driven by the recent introduction of both the ICON and Orion cabinet, which helped us gain floor share.

Mexico revenue was up 15 % year-over-year and is a testament to our expanding product suite as well as our deepening relationships with our existing customers and success in gaining new customers. Next, I'll provided a quick update on our Philippines market entry.

We currently have 111 Alora video bingo units in the field with more shipments scheduled throughout the remainder of 2019. It's early in the game, but initial feedback indicates that the games are performing as have had expected.

We're pleased to have received reorders from the current locations that we're in and continue to view this as an opportunity to grow our global recurring installed base.

The result of the Q2 EILERS FANTINI slot survey, as shown on Slide 5, highlights AGS's casino-only game performance maintained its industry leading position, leading all suppliers for three years in a row now.

Some highlights from the survey include Rakin' Bacon!, our new game for Orion Portrait ranked 11th in the survey's most recent top indexing core games at two times house average. Rakin' Bacon! has been a notable success with nearly 800 installs as of today.

Fu Nan Fu Nu and River Dragons also ranked in the Top 25 with 1.68 times house average and 1.56 times house average respectively. And finally, our core ICON cabinet still remains a strong performer at 1.21 times house average.

What's important to note is that it's not about the specific performance of a single game title in any given quarter, it's about AGS and our ability to consistently perform and be recognized in every slot survey over the past three years. The key takeaway is that our R&D team consistently produced its top performing games.

We have the right approach, the right investment and the right people to ensure a level of consistency and longevity that our customers can count on. Some other news in the EGM segment that will positively impact the second half of 2019. BCLC units are performing at approximately three times house average during the initial trial period.

We have recently received sizable orders in the Washington Class II market, following a favorable regulatory rule change.

Initial installs of Orion Portrait in Pennsylvania are performing at a very high multiple of house average, which has driven installs to nearly 150 units, since March 2019, and we recently were awarded approximately 8% of EGM installs at a new property in Northern California. Moving on to our Table segment on Slide 6.

In the second quarter, we achieved record revenue of $2.4 million, up 35% year-over-year. Adjusted EBITDA grew significantly year-over-year, hitting a record in Q2 of more than $800,000. Our table products footprint grew 23% year-over-year with an installed base of 3380 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 bets, premium games and other cable equipment.

We had our largest West Coast installation of progressives at one property in the quarter, expanding our footprint to 50 Super 4s at Graton Casino in Northern California. We also installed nearly 650 table products year-over-year and converted roughly 100 progressives from our competitors platform to our platform in the quarter.

As of Q2, we have converted more than 400 total games to our STAX progressive platform. We continue to build momentum for Dex S Card Shuffler. As of today, we have installed approximately 100 units across 20 casinos in the U.S.

In the quarter, we made notable new installs in Canada, Oklahoma, Michigan and Connecticut, and we received both Nevada and PA approval in July and continue to pursue additional approvals from various independent test labs across the United States.

We are pleased with the customer feedback as its reliability and performance are in a position to grow installs more significantly through 2019 and beyond. In our Interactive segment on Slide 7.

Revenues of $1.1 million were down $600,000 year-over-year, due to a decrease of $770,000 in social gaming revenue, in line with our continued strategy of decreasing market spend in B2C social and pivoting to other interactive revenue models such as iGaming. This decrease is slightly also by more than $220,000 in iGaming revenues.

We continued our systematic release of AGS hit game titles into real money gaming channels by launching four games in the quarter.

Jade Wins, Fu Nan Fu Nu, Longhorn Jackpots and Rakin' Bacon!. We expanded global distribution of our games by going live via the SG Digital OGS platform and are finalizing a platform agreement with Playtech.

We now have more than 25 suppliers live across the platform, with 13 new suppliers launched since Q1 and more than 500 titles in our games marketplace. However, despite the progress, the business has experienced extended regulatory timelines, which consequently have caused a delay in generating revenues.

During the second half of the year, we expect revenue to build as we enter into key new markets like New Jersey and Pennsylvania, and also expand our library of high-performing games, including additional hit titles from AGS such as Olympus Strike.

On the Social White-Label side of the business, we continue to make progress with signings and installs. Although not a meaningful EBITDA contributor. It is important to understand that this small sub-segment of Interactive business creates value for us in many ways.

First, it expands and deepens the relationships we have with our customers by offering them products that enable them to connect with their patrons, while they are not on property. Second, it extends the range of our slot in table game product lines by making them available to patrons online.

And lastly, it lays the foundation for a potential expansion of our online offering at some point to real money casino and sports. Before I turn the call over to Kimo, I will give an update on the fourth annual GameON Customer Summit at the world-class WinStar Casino Resort in Oklahoma, held in early June.

We're pleased to have partnered with Chickasaw Nation, our largest customer to host another top notch event with a record 133 attendees. The week was once again a success as we believe that on a dollar-for-dollar basis, this event is the most valuable marketing spend we conduct annually. With that, Kimo will now discuss our financial results..

Thank you, David, and good afternoon, everyone. Before I begin, I'd like to point you to Slide 12, which provides a comprehensive operational summary. As David touched on earlier, net loss attributable to PlayAGS, Inc.

increased by $2.2 million year-over-year, which includes an impairment of goodwill and intangible assets related to our iGaming business. In the second quarter of 2019, we reduced our forecasted expectations for iGaming in the current quarter, based on the delays that David previously mentioned.

This reduction triggered an accounting valuation requirement of the goodwill and related intangible assets in which we determine the fair value of our iGaming reporting unit was less than its carrying value. As a result, we recognize an impairment of the iGaming goodwill of $3.5 million and an impairment of intangible assets of $1.3 million.

Normalized for these impairments, net loss would have been $2.8 million or up 47% year-over-year.

Total adjusted EBITDA and adjusted EBITDA margin in Q2 were $35.7 million and 48% respectively, and were both down approximately 200 basis points year-over-year, due to increased costs of gaming operations of approximately $1 million, primarily related to increased service costs associated with a larger installed base.

Operating expenses also increased approximately $1.4 million, driven largely by our investments in headcount in both SG&A and R&D to support our long-term growth plan. As a reminder, the current period also includes approximately $400,000 of higher operating costs related to the inclusion of iGaming.

Turning to our EGM segment, second quarter EGM equipment sales increased 3% year-over-year to $20.8 million due to the sale of 1,181 units as compared to 1,058 in the prior-year period. 46% of domestic sold units in the second quarter went to corporate customers and 11% were sold internationally.

Domestic EGM average sales price stayed strong at $18,178, but decreased 3% year-over-year due to sales to a large customer in the quarter.

In our domestic EGM gaming operations business, our installed base grew by over 1,774 units year-over-year, driven by the purchase of approximately 2,500 EGMs from the Integrity acquisition in February of this year.

Normalized for the Integrity units, our domestic lease installed base declined more than 700 units or 4%, due to the end-of-lease buyouts of 700 VLTs over the last three quarters, in addition to 500 units removed from Texas in Q3 2018, which were mostly redeployed to Mexico and removed from our domestic installed base.

Sequentially, we are down due to the end-of-lease buyouts of 150 VLTs in Illinois as well as standard quarterly pruning of underperforming units.

Despite those outflows, we grew organic EGM placements by nearly 500 units year-over-year, driven by new installs of a Orion Portrait, Orion Slant and ICON, and we are still on track to grow our EGM installed base this year, which will primarily be driven by several new openings occurring in the back half of 2019.

Domestic EGM revenue per day or RPD decreased to $26.16, compared to $27.79 in the prior-year period. When we normalize for the impact of EGM's purchase from Integrity, which we estimate that domestic RPD was $27.45 or down approximately 1%.

This decrease is due to a number of factors in Oklahoma, including, one, product underperformance at three Oklahoma properties, which largely accounts for the decrease in RPD; two, the placement of approximately 800 incremental units into Oklahoma over the past year, which has a market yield a lower RPD than our domestic average.

And finally, flooding, which resulted in the closure of several casinos. Outside of the Oklahoma market and excluding the VLTs and the units removed from Texas previously mentioned, domestic RPD increased 2% year-over-year.

Our international our RPD for the second quarter decreased by $0.58 or 7%, as we grew our installed base in different markets in Mexico, and to a lesser extent, the effect of foreign currency. Now, turning to table products, second quarter revenues increased by $600,000 or 35% year-over-year, primarily due to the 23% increase of our installed base.

The increase was driven by growth in each of our product categories, most notably progressives and side bets. We're pleased to have hit a milestone in the quarter by surpassing 2,000 side bets, driven by the success of Buster Blackjack.

In the second quarter, adjusted EBITDA margin was 33% for tables as compared to 4% in the prior-year period, and we expect margin will continue to improve as we move forward.

Moving to our interactive segment, the decrease in revenue was driven primarily by a $770,000 decrease in social gaming revenue and slightly offset by $220,000 in iGaming revenue, which we expect to ramp in the back half of the year. The decrease of $250,000 in interactive adjusted EBITDA was primarily due to increased iGaming operating costs.

Turning to operating expenses, SG&A expenses decreased in the second quarter by $700,000 or 5% to $14.6 million. The decrease in SG&A was primarily driven by $2.2 million in decreased professional fees due to acquisition and integration-related costs from the Gameiom acquisition and secondary offering costs in the prior year.

The decrease in professional fees was partially offset by increased stock-based compensation of $1 million, as well as greater headcount-related costs of $700,000. Adjusted SG&A expense in Q2 was $12.6 million, compared to $12.1 million in the prior-year period. The increase is primarily due to an increase in headcount-related costs year-over-year.

Our R&D expenses increased $1.5 million to $8.4 million in the second quarter, due to an additional $600,000 of non-cash stock-based compensation expense, as well as an increase of $400,000 in headcount-related costs. Adjusted R&D expense for Q2 was $7.6 million, compared to $6.7 million in the prior-year period.

In the quarter, development-related expenses of $600,000 increased $600,000 with the remainder of the increase due to headcount-related costs. Adjusted R&D expense as a percentage of revenue was 10.1% as compared to 9.1% in the prior-year period.

We expect quarterly non-cash stock-based compensation expense to be approximately $2.2 million for the remainder of the year. Moving on to our capital structure update on Slide 8, total net debt, which is the principal amount of total debt less cash and cash equivalents, was $518.4 million compared to $468.1 million at December 31, 2018.

Net debt, as of June 30, 2019, increased by $50.3 million compared to December 31, 2018, primarily driven by the acquisition of Integrity, which closed in February of this year.

For the trailing 12-month period, our total net debt leverage ratio, which is the total net debt divided by adjusted EBITDA, increased from 3.4 times at December 31, 2018, to 3.8 times at June 30, 2019.

Adjusted to include an estimate of trailing 12 months adjusted EBITDA contribution from Integrity, adjusted total net debt leverage ratio increased from 3.4 times at December 31, 2018 to 3.6 times at June 30, 2019. Capital expenditures were approximately $15.1 million for the second quarter of 2019, which comprised of several components.

One, $6.8 million of growth capex; two, $6.3 million for intangible capex, which included placement fees of approximately $2.7 million; and three, $1.1 million of corporate capex; and four, $0.8 million of maintenance capex. 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 sold footprint for slots in North America, and as of Q2, we were nearly at 3% market share, up 500 basis points from Q2 of last year.

This reflects steady growth, which is the result of placing approximately 6000 sales and recurring units in the domestic marketplace in the trailing 12-month period. We continue our progress toward 5% market share and believe that our current slot price[Phonetic], along with our new launches, will help get us there in the next several years.

Slide 10 shows our updated adjusted EBITDA guidance range, which we have revised to $145 million to $150 million, or 6% to 10% annual growth. We are lowering guidance, due to several factors, the majority of which center on revisions and our recurring revenue outlook for the remainder of the year.

First, as covered earlier, we are experiencing some challenges in Oklahoma, where we have our largest base of recurring revenue, EGM. We mentioned several factors for decreased RPD earlier and one of the issues we are actively working to fix is product underperformance. I'll give you some color on what's driving this.

Over the past year, we've grown our Oklahoma footprint with 800 incremental units and separately optimized numerous existing units. Some of the underperformance is a result of going too hard and fast into the market with certain products.

We also went too deep into our portfolio of titles, where we should have focused on our most successful game themes. As Kimo mentioned, we have identified a few specific properties, where we see the highest concentration of these issues. At these properties, we know how to improve the overall performance.

One, a better mix, where we will exploit our highest performing cabinet types; two, improve the game title selection across all cabinet types; and three, better floor placement in conjunction with my first two points. So, in short, this problem is known and fixable.

We are implementing a variety of measures to help correct this and improve performance in Oklahoma going into the second half of the year. What's important to know that this is not attributable to the market itself. Oklahoma has been and continues to be a healthy market.

That said, the impacted changes won't happen quickly enough to make a significant impact this year. Hence. our decision to revise our game ops revenue forecasts for the remainder of 2019. The second reason for the revision is due to the timing of EBITDA profitability in our Interactive business.

On our Q1 call, we talked about how we believe this would turn the corner in the back half of the year. However, because of delays in getting necessary approvals and licenses, we think it's prudent to anticipate that we will exit the year at/or near neutral. Every opportunity in this space that we have previously communicated continues to exist.

The RMG market continues to grow both internationally and domestically. We recently rolled out our AGS content and our initial game performance supports the thesis that our proven land-based content resonates online.

Finally, we still believe that EGM sales in the second half of the year will be an improvement from the first half, where we saw some softness from certain corporates.

That said, some of that softness may carry throughout the year, given recent acquisition activity, significant restructurings and management changes at several large corporate customers.

Moving to our CapEx guidance, we maintain that we communicated on the last call, reiterating $65 million to $69 million for the year, driven by the number of incremental game ops units placed for deployment in the back half of the year from both new openings and game optimizations.

Given the EBITDA guidance revision, I want to talk to you about a few things that give me confidence about our momentum, heading into 2020 and beyond. First, EGM sales will continue to scale on an annual basis. We are doing the following to help drive greater placements moving forward and secure more game sales than last year.

We've already started to improve our distribution channels by adding multiple industry-leading sales resources and gaining ops leadership with proven experience and strong relationships. We have officially launched the Orion Upright with installs at Mohegan, Foxwoods, Pechanga and San Manuel to name a few.

We operate along with the Orion Slant and Portrait, now allows us to attack nearly 70% percent of the addressable market in the United States. Second, we are launching several new products in major slot categories that will enable us to drive growth in both sales and recurring revenue.

In fact, we will be showcasing more slot product than ever before in our Company's history at G2E 2019, where we will unveil three new AGS slot contents. First, as a unique and innovative merchandising and sign package that we call Candice.

Candice utilizes led titles and is tightly integrated in an immersive fashion with our award winning Orion Portrait cabinet. This lease-only product package will debut at G2E and will fit nicely into the EGM's premium game segment, a category that with the exception of big rent, we have never participated in.

Second is a Orion Rise, our tallest candidate to date at over eight and a half feet, featuring a 55 inch HD LCD that showcases jackpots and interactive bonus events. Orion Rise, launching in late 2019 along with Candice will give us a second cabinet offering in the premium lease-only game segment.

Our third new product to be displayed at G2E is the Orion 49C, our first ever curved screen offering. The 49C, our sale product is a subset of Portrait cabinets, which continue to be the hottest cabinet segment in the marketplace. This adds to our most stunning iteration of the Orion family yet.

Finally, on the table side, beyond the addition of new games and progressive enhancements, we will be showcasing our new single best software for proprietary table games, giving us another growth lever in the software division.

Although we revised our guidance range, we remain confident in our opportunities previously communicated and those forthcoming in 2020. We remain focused on the future and on the path to 5% domestic EGM market share.

We are well-positioned for sustainable growth in all three business segments and our content of fundamentals have not changed for the business or for the road to $250 million in EBITDA, which we will discuss during our Investor Day at G2E.

Our current game performance, our upcoming product launches, the new strategic hires we've made and the vast white-space all create compelling long-term growth opportunities for AGS. I want to thank our shareholders and our customers for their continued support.

We look forward to providing further updates and more detail on our road map at our Investor Presentation at G2E on Monday, October 14th and we look forward to seeing many of you there. With that, we will move to the Q&A portion of the call..

[Operator Instructions] And our first question will come from Brad Boyer of Stifel. Please go ahead..

Yes, thanks for taking the questions guys. First one here is just a big picture question for you, David. I think, you touched on this a little bit in your prepared remarks, but I mean, obviously at this stage of your evolution, I don't think any of us on this call expected to see EBITDA decline year-on-year and a quarter.

I guess, what gives you confidence as to what you're seeing out there and whether the drivers of that decline and the deceleration in the growth were sort of transitory in nature as opposed to being driven by any sort of structural change in the business or demand for your products..

Right. Good question, Brad. I think, if you go to sort of what drove that decline year-over-year, we talked about it. It's the game ops. It's interactive, and to a much, much lesser extent, its EGM unit sales, right.

If we start with game ops, we covered this again during the prepared remarks, but if you break it down in Oklahoma, it's the majority of the game ops shortage, if you will. And we can even attribute that, as Kimo said in his remarks, to maybe three or four properties that constitute a good amount of that.

Diving into it, we broke it down for you in the remarks, where we said, hey, we've added about 800 new units in the market over the last 12 months. On top of that, we've been optimizing. And so, it's a really came down to -- it looks like we didn't go hard enough with something like Portrait.

And as we said again, we went a little too hard, too fast with some products and with some titles. We went in much deeper into our title portfolio than we should have. We have proven products. They show up in the EILERS report, they show up very consistently, and we went much deeper into the portfolio, which did not yield performance.

Lastly, I said on those remarks as well that I hate the position on the floor, as well as very important, we have the relationships, we have the clout, we have the respect in the market to really manage that well, and look after that really account by account. And we have to do a better job of that as we move forward with those accounts.

So, in the end, we know that that recurring revenue or that game ops situation, we can see what the dollars are, where they are and what state, very flexible, again transitory to use that word, interactive to transitory issues, not a long-term issue.

We know that this business will transition to break-even, then it will transition to positive EBITDA for us. And then, lastly and we can see signs of that. We can obviously see signs of that already.

And then lastly, if you get into the game sales challenge, I think we talked about there's a little bit of softness there, that too to a much lesser extent. The first two items alone really account for the drop year- over-year in the miss..

Okay, that's helpful.And then I guess as we think through some of these new product launches that are in the pipeline, how should we think about segmenting content on the new hardware? And where I'm getting at is.

I mean, obviously in the industry, you generally seeing manufacturers steer their higher-performing content to a lease-based revenue model.

As you think through all of the new hardware and form factors you have, coming out over the next twelve months, call it, how are you thinking about segmenting the content for those form factors?.

Another good question. I think what you'll see there. So you heard in the remarks that we've got three new products coming, right. Two of those three products are really not for sale products. We'll say Rise and the Candice are lease-only products. And obviously, yes, we will steer some of our highest-performing product to both Candice and Rise.

We also have some new products that will come out that are based on some of the successful products from the past, but there will be new twists and there'll be new turns with that.

As you look at the Candice and when you get a chance to see the canvas in person, you'll see that the Candice itself, this immersive display, if you will, is very interactive with the game. It's not just independent. It will be part of it at some point. So, clearly, yes, we will steer some of our very successful content on the new content.

We'll have some stuff that's very unique to Rise and Candice. And then, of course, we're excited about having a curved cabinet and the Portrait segment is really dominating the sales and the placement space right now.

It's not the majority of the units in the field, but it certainly is the majority of everything that's being shipped from a ship share point of view. Orion Portrait right now is very successful. So, we're excited to get sort of another iteration or a sub-set of Portrait there as well to be out there. And now that will be lease or sale, of course.

Obviously, we have some great content for them as well..

Okay, that's helpful. And then lastly, just a housekeeping question for Kimo. I may have missed this in his prepared remarks, but do you have a sense of what type of leverage ratio you're sort of targeting by year-end? I know, pro forma for integrity is about 3.6 times net here at the end of the quarter.

Where should we think about that possibly going by the end of the year? And that's it for me. Thanks..

Thanks, Brad. So, by the end of the fiscal year, based on, I think, the revised guidance that we put out, we will be somewhere around that 3.3 to 3.5 range is what we're targeting right now..

Our next question comes from David Katz of Jefferies. Please go ahead..

Hi. Afternoon everyone. Apologies if I'm asking you to go back over something. I just think it's sort of critical that I get it right. In terms of the units sold in the back half of the year, where we've had an expectation of a pretty meaningful ramp.

Would you remind me what you've said about that and what the ASP should do, given what we got today?.

So I'll turn it to Kimo in a second, but in our prepared remarks, we didn't really we didn't really guide anything on ASP there. I think that where our ASP is right now within the quarter, we were around that $18.1 range or $18.2 range. We expect it to stay somewhat steady within that range for the remainder of the year.

And as far as units go, listen sort of we're reguiding here for the year. So, there will be obviously a slight reduction there; a slight reduction from the original number, but still around approximately around the 5,000 number..

Okay. And if you don't mind, I'm going to ask the same sort of detail. just one more time in terms of the total installed base. Again, we've had a pretty meaningful ramp into the back half of the year and we're just coming off a negative quarter. And then, I have one just quick strategic question..

So, David, just to clarify, you're looking for directionally what's going to happen with the domestic installed base here..

Right, trajectory around the back half of the year, yes..

Yes, I think right now, with where we stand, we'll look at another 200 to 400 over the second half of the year, that's net installs, net of removals and net of conversions and everything domestically..

Right, okay. And then just going back to the prior question a little bit and coming out of it a slightly different way, we've obviously sort of gone back, we've gotten a fair amount of inputs throughout the course of the quarter, Including spending some time at GameON, and we get the surveys and the like.

And so, I guess I'm likely not alone that this is a bit of a surprise. How can we be comfortable, and I know you said you do consider the issues to be transitory, but how can we be comfortable with the trajectory with where we are today versus what next year could ultimately look like.

And I asked the question in the context, David, that it's not infrequently that when companies trim, that the trim isn't enough, the first time trim..

Okay. Getting back to really the issue and whether it's transitory or not, I think a lot of it, David, has to do with understanding and analyzing the actual issue itself. If we go back in time and we sort of where we'll look at, and I think the place to really look first is game ops. Interactive is very, very clear, very well-known.

We understand what that is. And we do believe that's transitory. It's a new business, we're going through our growth phase, we'll turn the corner to break-even, we'll turn the corner to positive EBITDA, obviously at some point there. We're very confident in that. We understand the business and how it will go.

From the game ops perspective, I understand the question and the concern. And it was important for us to analyze and understand it. If you go back to last year and you just start tracking things from a game ops point of view, the fourth quarter of every year typically has a little bit of RPD softness.

In Q1, we saw anomalistic weather that we hadn't seen before, which might have provided a little bit of a head-fake, when analyzing numbers. In Q2 we could [indiscernible] signs say, there was no weather, it's a time of year where we understand our RPD and RPD trends to be. And we're able to dive into every single jurisdiction and understand it.

Going back to Kimo's comments. Ex-Oklahoma and even some excellent cleanups that was very favorable to us, if you just exempt Oklahoma, we're up over 9% in RPD year-over-year. If you actually clean off for the VLTs and the taxes account, we're still up 2% in RPD. So, those are the kind of things that we went and we analyzed and understood them.

And we said, hey, where does this exist, well it comes down to Oklahoma, it comes down to certain decisions we made there and it even comes down largely in that space to just a handful of accounts. So, it's very well-known. We know what we need to do. We know where we missteped on that.

And then, we know how to get out of there, I mean, understand how to fix it..

Our next question comes from Chad Beynon of Macquarie. Please go ahead..

Hi, thanks for taking my questions. From a cabinet life cycle standpoint, wanted to ask about the new release of your Portrait, you mentioned you're up almost to 7,000 Slant, roughly 2,500. Based on the sequential growth, I don't think we'll get to the Portrait levels.

When you think about expectations for your team on the Upright, obviously over several quarters, maybe even several years, should this be somewhere in the middle closer to Portrait? David, you talked about hitting about 70% of the market.

Is the Upright attacking a big part of the market and should we have high expectations in terms of total units out there? Thanks..

So, you sort of did a good job of like framing up. Will it be in the same range of Portrait. Portrait is the hot [Indiscernible] right now. And that is one of the reasons why we're doing the the curve, which is like a sub-set of Portrait in the industry, right. So, we want to stay in that segment. We want to stay strong in that segment.

The Orion Portrait, we still think there's mileage on that cabinet clearly. We continue to sell, and it continues to be a big chunk of what we lease and sell out there all the time. From a magnitude of like what's in the field, Upright is more than sort of even it's almost 6.7x what is in the field for Slant.

If you were to look at what ships [Indiscernible] recently and you took our AGS of weight. The ship share for Slant might have been as low as 4%. Now, if you add in AGS, it might be up in that 6%, 7% range. So, Upright is going to be a multiple of that.

I wouldn't call it Portrait because Portrait truly is the dominant cabinet in the space, but it's going to be a much more sort of higher volume cabinet than the Slant one.

But I think the key is if you set Portrait aside, when you put together Slant and the Upright sort of cabinet space, and what ships, you're really looking at sort of tripling or a little more than tripling -- maybe 3.5 times the opportunity, if you will, to ship into the space. I don't know if that helps from framing in that perspective..

Yes. That's perfect. Thanks.And then as you reflect on the Rocket acquisition, the Integrity and acquisition, you look at the free cash flow generated from those installed bases and the implied multiple that you paid for those acquisitions. And then you compare that against just running the business and fighting for market share. A.

Are there more opportunities to tuck-in acquisitions that can be done at low tuck-in multiples, and b. based on just the volatility in the space and kind of what we've heard from operators and then some of your competitors, does it make a little bit more sense to maybe look at some of these other acquisitions in the near term? Thanks..

Thanks, Chad. Yes.So, as you know, we haven't been shy about M&A. We've done quite a bit since late 2014 and 2015.Do these kind of acquisitions make sense? I guess I'd say, first, yes, they do, especially at the multiples that we were paying for them.

Second, are they out there? Yes, they are; they are definitely out there; we're always hunting for them. We're always establishing relationships in these various markets. So that, a.

we're aware of exactly how their business runs, what it's going to look like going forward, but also we want to have an inside track obviously on M&A, if the opportunity should present itself. We are pretty aggressive in that space, but these exist.

They do make sense because, in the end, they are very cheap from a multiple basis versus I'd say a regular acquisition.

And although in these spaces those RPDs sometimes are lighter than what we do, when we refer to our game ops situation, that we just detailed out, in Oklahoma and even in Oklahoma just at a handful of accounts, these are not things that really affect us.

When we think about RPD, we can sort of set these off to the side and make sure that we are analyzing the rest of our base properly. But we're very confident in those small tuck-ins and we think that they have value, and we think that, they're relatively inexpensive versus other deals in the space..

Great, thank you very much..

Thanks..

Our next question comes from Barry Jonas of SunTrust Robinson Humphrey. Please go ahead..

Hey, guys. So I just want to start with the Oklahoma issues.

Now these placements, where you're having issues, are they all locked up in placement agreements or is there any risk to losing the real estate here?.

Now, those are locked down. There is not really a risk of losing placements there. They're contracted and locked down. And as you know with the relations we have, we can go in there, we can change cabinet, we can change games and in many cases, we can even change floor position..

Okay, that's great. And then, look I know you'll get into more detail on the road to $250 million at G2E, but at this point, it would take sort of a mid-teens CAGR to hit that by 2022 or five years from the time you guys said it would be a three- to five-year target.

So, is that still achievable, excluding any meaningful changes in M&A assumptions?.

I think, if you look at all the opportunities that we have, when we look to update that and before we get to G2E, we had a lot of irons in the fire there, when we presented that. right. We said, hey, there is the core business, and then there's tables and shufflers, and then there is interactive, right.

And then there is international, and then there is Brazil, and there's all these things. And we didn't count many of those things. But we feel like, with the number of opportunities we have and really how shufflers and tables can go for us, where Interactive can go, we still believe we're in that range that you described.

And '19 wasn't great, clearly, as we're talking about it right now, if you look at that analysis. But ' 18 obviously was a huge one for us. We're still confident in our prospects, like we said in the prepared remarks, and we'll will give a much more detailed update as to how we get there at G2E..

Okay, great. And then last one for me. Look, free cash flow is inflecting, stock is off, you guys still have a positive long-term view here.

At what point do you consider share repurchases?.

Yes. So, we get this question quite a bit. I'll sort of return that over to Kimo and I'll tack on when he is done..

I think Barry, it's a good question. Like David mentioned, we're getting it quite a bit, but it goes back to I guess our capital allocation strategy, right. I think if you look at where we are in our level of free cash flow like, I think the priorities don't change.

I think it's investing in the business by growing the lease base, which we have good visibility this year that we're going to do. Like David mentioned, there is good property openings that we're going to end up being net up several hundred units domestically.

Contrary to the short-term results, it is optimizing the base and being a little more strategic about it, and spending some time and effort back into Oklahoma. And then, there is other opportunities like we are not going to back down from R&D. And I think you can see how we continue to spend in that area.

And then you get free cash flow and then you get to the analysis of buyback stock or pay down debt. But I think where we are now, it's in the sausage maker for consideration, but the capital allocation strategy has not changed..

And I have nothing to add to that, Barry, I apologize. That was pretty full answer..

All right, thank you guys..

Thank you..

Our next question comes from Shaun Kelley of Bank of America. Please go ahead..

Hi, thanks for taking the question. Good afternoon. So, Kimo, just hitting on your last point about not compromising on R&D. Can you help us frame that in terms of full-year expenses, I mean as we look at the overall here, I mean just taking a step back for a second, I think total revenues grew 2% in the quarter, operating expenses grew 6%, right.

Should we be thinking about these operating expense levels as a little bit more fixed in the near term, meaning you need revenue in order to hit and achieve EBITDA growth? Or are some of these targets, R&D being a very big bucket, SG&A being the other big bucket, are these flexible to match the revenue levels at all?.

I think a good way to answer it would be, if we look at H2, and you look at adjusted SG&A, we'll get some operating leverage in H2 versus H1. We will remind everyone that in Q4 we have G2E. And for again a Company of our size, it's a meaningful amount that you'll see. But we'll get SG&A leverage in H2.

As far as R&D, I think we always communicate pretty openly that we always look to spend at about 11% of revenue rate; H1 might have been a little bit light, but I think based on the development and the different projects that we have, you'll see H2 be closer to that 11% of revenue target. And we'll end up the year slightly under that..

Okay, great. And then thinking about the just digging in on the game ops piece. I guess, if we just take a step back, how much is Integrity contributing on -- like there a run rate or on an annualized basis, right now. So, we can kind of strip that out to see what's happening to the kind of core business.

Can you give us a sense of just how much that's contributing for the year or for the quarter?.

So, for the quarter EBITDA contribution from Integrity was about 2.5 million to 2.7 somewhere around there and revenue was about $3.3 million to $3.5 million for the quarter..

Okay, so ex that revenues, would have been down year-on-year.

So, is the expectation that game ops will have organic revenue growth in the second half, because I think, in the prepared remarks, in some of these issues, there was some comments that the corporate customers, those delays may take a little longer, and then on the Oklahoma side, you may know, the issues, but it will take time to address it, you going to work on floor placement.

I mean, they doesn't sound like it's going to be an immediate fix..

So I think, in one of our questions, we are just asked, we are asked a little bit about game ops and to give a little bit of guidance there on units. And we said, hey 200 units to 400 units for the remainder of the year.

So, you will, if you incorporate that 200 units to 400 units and certainly if our RPD is stabilized here throughout the remainder of the year, you can see what that result would be. On top of that, of course, just setting aside, just the normal RPD and with the work we know we have to do in Oklahoma, it certainly should stabilize.

And with 200 units to 400 units more in the field, we'll see a little bit of growth there..

And I think, if you think of the dynamic that happened last year in 2018. Q2 is really like a high watermark for EGM game ops and if you look at -- remember, in Q3, we took out those Texas units, those are a little over 500 units. And then in Q4, we had 420 VLTs come out related to that end-of-lease buyout.

So, we set up I think nice comps going into H2, specific to game ops. So, yes, I think you can expect in the back half, some organic growth in game ops..

Okay, last question would just be, can you elaborate a little bit on this corporate customer issue, and how you think about that being temporary versus being rent or maybe around M&A or purchase delays versus something a little bit more permanent as some of the major operators, just dial back on, either capital spending or how they're treating leased games, given that they are trying to optimize their own expense structures?.

Right. So, I mean I think it's a lot of what you're saying there. It's a lot of restructuring, there has been some restructuring; there has been some M&A that's going on. These things aren't going to be permanent. Will some of them impact the industry in the way that things are purchased for a period of time, that's certainly possible.

But I think you also have to look at some other M&A that has happened and that has been now. It's sort of put behind us, right, where the purchasing with some other companies will pick up again. We always see this during the M&A process, it gets quiet during the M&A process. When the deal closes, it gets even quieter.

Post close, it continues to be quiet for a while. And then usually, there starts to be some make up purchases or at least that begins to stabilize. So, nothing stays the same in this industry, I've noticed that for sure. I don't expect this to stick for a long time, but there was that softness there, it's all the things that you just described.

It's all the things that we talked about on the call. But no, for that to stick around and be permanent, we don't expect that..

Thank you very much..

[Operator Instructions] And our next question will come from John DeCree of Union Gaming. Please go ahead..

Hi, everyone. So just, I guess a couple of housekeeping questions from me here.

As it relates to kind of mitigating and fixing some of the things going on in Oklahoma, Is there a capital that you need to spend and is that in your capex guide for the year? If so, is somehow dollars being allocated over to get Oklahoma working in the right way or could we expect to see a little bit more capital spend maybe into 2020?.

So, I think that it's just going to be within our range that we stated. There is no need from our perspective, knowing what the problems are. There is no need for our perspective to go outside of that range. Is there going to be some cabinet changes? Sure.

But it's going to be a lot of title changes, it's going to be a lot of cabinet movement, if you will. And as some cabinets go in, others that come out will be redeployed elsewhere for other purposes. So, we think we will be able to manage that very well and keep it within the constraints of what we described here for CapEx.

So, no, we don't believe that there will have to be a bump up there at all..

Got it. Thanks, David.And then with respect to the change in the outlook today as it relates to Oklahoma. I was wondering if you could qualify a little bit about how quickly things have changed. Was it more -- the 800 units added.

not ramping up to your expectations? Or was it a little bit of those titles deeper in the library that you pulled out for those that just didn't maybe faded a little quicker than you thought, I guess? Where do you see it relative to your expectations, perhaps a quarter ago.

Is it just not getting there or did it taper off a little bit quicker than you may have thought ?.

Yes, I think this is just a little bit of a cumulative effect over time. If you turn back the clock 12 months, it would be be very hard to detect, right. You go back nine months, once again difficult. We get in the Q4, and then, out of that seasonality, I know I answered this question this way earlier I apologize.

If you look at seasonality in Q4, and it just looks very normal. You dive deeper in the numbers, OK, It still seems like there's seasonality. Get in the Q1, we have anomalistic weather, but in Q2, we had a nice clean sheet that we could work off of, and we were able to analyze everything down to the machine, down to the property.

There wasn't a polar vortex or any of these things happening. We did have weather in Oklahoma, but it wasn't to the magnitude that we saw in Q1. So, it just was very clear for us to look at it and how it accumulated over time. And we're able to understand it.

We could actually look back at Q1 and say, with some of what we saw in Q1, like I referred it, it was little bit of a head-fake. And it very well could have been, but now in Q2, it just became much more clear to us. But in that clarity is the solution, right. And that clarity, we know how to fix it.

We know how to go out there and get after the problem and resolve them over time..

Yes David, you did give us that answer to a prior question, but I appreciate the additional clarity.

Lastly for me, as we look at white space and some of your early entry markets, and potential new markets that you might expect to get your license and start shipping, is there anything over the next couple of quarters related to timing that you could share for any markets that we should be paying particular attention to?.

So, Canada I think that BCLC is on trial. Again, I think there is a little we hinted that during the script, but with more color, not only the game is doing very well, but that will come out of trial sometime this year, and will begin to move forward with BC here in Q4 and beyond.

Arkansas was also just opened up, Pennsylvania just got going, a little while ago. So, we're just starting to crank that up. So, if we look at it, are we approved in those areas? Yes.

we're approved now in Arkansas, we just got in Arkansas recently, Pennsylvania, we've been approved, but we're just starting to really ramp up there, and then BC, very promising jurisdiction, where I said the numbers are just once again off the charts for us in Canada as far as game performance.

And we look forward to them placing their first orders..

Thanks David..

This concludes our question-and-answer session. The conference is now also concluded. Thank you for attending today's presentation. You may now disconnect..