FINAL TRANSCRIPT

Transcription

FINAL TRANSCRIPT - INNOVA Gaming Group

FINAL TRANSCRIPT
INNOVA Gaming Group, Inc.
2015 Third Quarter Financial Results
Event Date/Time: November 11, 2015 - 11:30 a.m. E.T.
Length: 42 minutes
FINAL TRANSCRIPT
November 11, 2015 – 11:30 a.m. E.T.
INNOVA Gaming Group, Inc. 2015 Third Quarter Financial Results
CORPORATE PARTICIPANTS
Richard M. Weil
INNOVA Gaming Group, Inc. – Chief Executive Officer and Chairman
Stephen Koo
INNOVA Gaming Group, Inc. – Chief Financial Officer
Jonathan Ross
INNOVA Gaming Group, Inc. – Head of Investor Relations
CONFERENCE CALL PARTICIPANTS
Robert Young
Canaccord Genuity – Analyst
Maher Yagi
Desjardins Securities – Analyst
David McFadgen
Cormark Securities – Analyst
Ralph Garcea
Cantor Fitzgerald – Analyst
Suthan Sukumar
Dundee Capital Markets – Analyst
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FINAL TRANSCRIPT
November 11, 2015 – 11:30 a.m. E.T.
PRESENTATION
Operator
Hi, everyone. Welcome to INNOVA Gaming Group’s 2015 Third Quarter Financial Results
Conference Call. As a reminder, this conference call is being recorded on Wednesday November 11,
2015. At this time, all participants are in a listen-only mode. Following their presentation, we will
conduct a question and answer session. Instructions will be provided at that time for research Analysts
to queue up for questions. If anyone has any difficulty hearing the conference, please press star,
followed by the zero for Operator assistance at any time.
I now turn the call over to Jonathan Ross, Head of Investor Relations for INNOVA Gaming Group.
Please go ahead, Mr. Ross.
Jonathan Ross – Head of Investor Relations, INNOVA Gaming Group, Inc.
Thanks, Aaron (phon). Good morning, everyone, and thanks for joining us today. INNOVA
Gaming Group’s 2015 third quarter results were released this morning. The press release, financial
statements and MD&A are available on SEDAR, as well as on our website, innovagaminggroup.com.
Before I pass the call over to Rick and Steve, we would like to remind listeners that portions of
today’s discussion, including those that express Management’s expectations or estimates of our future
performance or future events, including with respect to the deployment of additional machines and
terminals, including in new jurisdictions, continuing increased demand for our products, continued
improvement of our product and product features, and the creation of higher sales volumes and
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ongoing revenue, constitute forward-looking statements within the meaning of applicable Securities
laws.
Forward-looking statements are necessarily based upon a number of estimates and assumptions
that, while considered reasonable by Management at this time, are inherently subject to significant
business, economic, regulatory, and competitive uncertainties and contingencies that could cause actual
results or events to differ materially from those expressed or implied in such statements. Investors are
cautioned not to put undue reliance on forward-looking statements.
The forward-looking statements contained herein reflect INNOVA’s current views with respect
to future events and, except as required by law, INNOVA does not intend and undertakes no obligation
to update any forward-looking statements to reflect, in particular, new information or future events, or
otherwise.
I will now pass the call over to Rick Weil, Chairman and Chief Executive Officer of INNOVA
Gaming.
Richard M. Weil – Chief Executive Officer and Chairman, INNOVA Gaming Group, Inc.
Thanks, Jon. Good morning, everyone, and thank you for participating on today’s call. I’m joined
on the call today by Steve Koo, Chief Financial Officer of INNOVA Gaming.
Q3 is our second quarter as a public company and the first full quarter under INNOVA's
leadership. I am every bit as confident today about our future, both near-term and long-term, as I was at
the time of our IPO. We made some significant progress with customers in the third quarter. The
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announcement we made in Missouri alone will take us above our targeted LT-3 deployment, up 25 to 30
units per month for 2015, and help us set a strong foundation for growth in the coming years.
I'd like to turn the call over to Steve now to walk us through the financials and then I will discuss
some of the opportunities we're working on.
Stephen Koo – Chief Financial Officer, INNOVA Gaming Group, Inc.
Thanks, Rick. Good morning, everyone. Before I walk through the numbers, I just want to point
out that INNOVA's financial statements are presented in US dollars and the results discussed during this
call are US in dollars. Total revenue for the quarter was $5.3 million, driven primarily by revenue related
to our growing LT-3 business. This is 19.3 percent higher than the $4.5 million in Q3 at 2014. LT-3
revenue accounted for 86 percent of overall revenue compared to 77 percent in Q3 2014. The shift was
a result of both growth in LT-3 win per unit per terminals already in the field, as well as additional
deployments coming online, albeit, at a lower initial win per unit.
At the same time, revenue in our Legacy AGP business continued to taper off as expected due to
the continued challenging Class 2 market and our shift in focus towards the lottery sector. This has
impacted our deployed footprint and wins per day.
We continue to focus the majority of our efforts on growing LT-3 installs and expect the AGP
revenue to continue to decline as a percentage of overall revenue in total.
We installed 34 new LT-3 machines during Q3, bringing our total machines installed at the end
of the quarter to 1,720. As of today, we have 1,744 LT-3s in the field. Q3 was a slow seasonal carry for us
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this year due to our customers' summer vacation schedules. In Q3 last year, we deployed 182 LT-3s
units, reflecting the initial launch of our Quebec and Maryland Lottery program.
Gross profit for Q3 was $5 million or 94 percent of sales. This compares to $3.8 million or 85
percent of sales in Q3 of 2014. This increase in gross margin was driven by a combination of factors,
including the strategic decision made in 2014 to focus on our core LT-3 business and a substantial
reduction in the costs of our paper tickets realized through the transition from a large third-party twoply (phon) Break Open Ticket to a smaller, more price efficient in-house bona fide barcode ticket.
As we mentioned last quarter, 2015 also reflects the full benefit of the investment made in late
2014 to upgrade the printing press images, which has improved printing efficiencies and costs across all
LT-3 markets.
Selling expenses were flat quarter-over-quarter as decreased machine shipping costs were
offset by increased paper shipping as a result of our higher LT-3 (inaudible). Since the IPO, we've
invested incrementally on our selling infrastructure and Team as we look to continue to grow on
installed LT-3 business.
G&A expenses in Q3 2015 were higher than Q3 2014 by $900,000. The largest driver there was
$0.5 million in additional salaries and wages related to hiring key new Management personnel. In
addition, we incurred roughly $200,000 in increased public company costs that we didn't have in Q3 of
the prior year.
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Adjusted EBITDA was just under $1 million in Q3 2015 compared to $650,000 in the prior year.
Average revenue per unit on our net worth developed Q3 terminals was $29 (inaudible). While the
deployment of new machines in the back half of Q1 and through Q2 and Q3 has reduced our ARPUs, we
expect those machines to move towards the $30 range as they become more seasoned in the field.
With that, I'll turn it back over to Rick.
Thanks, Steve. I'm very pleased with the progress we made during Q3. The extension of our
agreement with the Missouri Lottery is important both within the state, as well as to showcase
INNOVA's ability to execute a program in bars and taverns. There's a significant opportunity in Missouri,
both for INNOVA, as well as for the state itself. These machines will contribute revenue to small
business, nonprofits, and education for the State of Missouri, and we look forward to accomplishing
great things with the lottery there.
We are approaching this market first by deploying LT-3 terminals behind the highly successful
Keno program in the state. In fact, we have hired the individual responsible for getting keno into 900
locations, many of which are in bars and taverns in Missouri, to lead Diamond Games in Missouri-based
direct sales efforts. We are now in the process of going out to Keno locations with the Missouri Lottery
Team to work with owners of bars and taverns to position the LT-3 in that market.
We are starting with a hundred units in 50 bars by the end of December and we'll be deploying
an additional hundred units in another 50 bars by the end of February 2016. While this is a big
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opportunity in Missouri, we see it as a much broader case study where other state lotteries can use it as
an example of what can be done in their own states.
In Q2, we announced the trial at three bingo halls on Ontario with local progressive and multipriced features. Performance of this upgrade has been well above our expectations. There is a
noticeable difference in customer engagement and win per unit in the province, and jackpots are
moving higher and higher with the largest jackpot to date of just over $24,000 on November 1.
We now have a selection of machines in each of the 30 bingo halls in Ontario where Tab-6 is
already deployed that are using these new features.
Recently in Ontario, the AGCO removed regulatory language that would have required bingo hall
operators to invest in additional security to install more than 49 LT-3 machines. As a result of this, and
given the demand we already have in the pipeline for Ontario hall operators for additional LT-3s, we
expect to be able to expand our presence within existing halls over time. This is a win for INNOVA, the
OLG, and the local charities that rely on seed (phon) gaming revenues to support communities in the
province.
One of the themes we've been—that we've seen gaining traction is additional regulation in the
charity gaming sector. New Hampshire went this direction recently, bringing the racing and charitable
gaming group under the New Hampshire Lottery. This will delay our deployment in the state, however, it
is a medium- and long-term positive for the LT-3. The LT-3 provides regulators with a way to exercise
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appropriate management and control over their charitable gaming space. We expect to rollout in New
Hampshire to kick off in 2016 now rather than late in 2015.
In October we participated in NASPL, the National Association of State and Provincial Lotteries
Conference, as a sponsor. The conference was well attended and we had a full suite of products on
display, including new game content, hardware tailored to the bar market, as well as our progressive
and multi-priced features. During the conference we had the opportunity to present to a large group of
lottery directors and May Sheve Reardon, the executive director for Missouri and the president of
NASPL, presented along with us. We certainly want to thank her for that, and it's nice to see lottery
directors telling their peers about the benefits that the LT-3 can unlock in non-traditional locations.
Before I hand it over to Q&A, I'd just like to say I'm very pleased with our deployment numbers.
In Q3 2015, we had 449 more LT-3 terminals than we had in Q3 of last year. We are looking forward to a
good fourth quarter and to 2016 as well. We will be deploying a hundred units in Missouri before the
end of the year and a hundred by the end of February next year. We expect to continue to see progress
in jurisdictions where we have an established terminal base, as well as new states and provinces.
Though the sales cycle can sometimes seem prolonged, once successfully traversed, it acts as a
significant barrier to entry for others. The demand for non-traditional lottery venues is only getting
stronger for the LT-3 and we're the only player purely focused on growing in this space and on tailoring
our solution to exactly what the venues are asking for. I am very confident that we're going to grow our
LT-3 business in the coming months and years.
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At this point, I'd like to ask the Operator to open the lines for questions. Thank you.
Q&A
Operator
At this time if you'd like to ask a question, please press star, then the number one on your
telephone keypad. If you choose to withdraw your question, please press the pound key.
Your first question comes from the line of Robert Young from Canaccord Genuity. Please go
ahead.
Robert Young – Analyst, Canaccord Genuity
Hi. Good morning. Can you hear me okay?
I can.
Okay. Great. I just wanted to ask about—first question for me is on the cadence of deployment.
You said 100 by December and 100 by February in the Missouri contract, and I was wondering if you
could talk about how much—is all of that going into the liquor by the drink opportunity? Then outside of
that, how should we think of deployments outside of Missouri, because you'd said you're going to be at
the high end of the 25 to 30 range? You're right around that now and so should I read into that that
there's very little outside of that contract in the remainder of Q4? So, two questions there.
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Yes. Sure. This is Rick. I'll answer it. Yes; you're right. With respect to the Missouri contract, the
hundred that we're deploying the end of the year is in—those are specifically for the bars or the liquor
by the drink locations, and the same thing is for the second hundred units that by the end of February
we'll have in 50 more bars or liquor by the drink locations. We do have, as you know, machines in
veteran and legions in the State of Missouri, and our expectation is that we will be adding some more
terminals to that program as well, but the more significant Missouri effort is in the bars and the taverns,
and it's our first real push, as you know, into those kind of venues.
I think if you look out into the rest of the year, we're, as I said, working with other jurisdictions
other than Missouri to be adding more terminals, and so I think my view is we're still very comfortable
with the sort of staying on track for the average of between 25 and 30 terminals per month.
Okay. Then on revenue per day? I think Stephen said something about $30 per day in the
dialogue. I'm not sure I caught all of that. Should we expect that it'll dip down in Q4 because of—and in
Q1 because of the new machines that you're deploying in Missouri? The new—we don't know how they
are going to perform in liquor by the drink, and so should we—are expecting it to drop?
Yes. No. That's right. I think if they're getting deployed in Q4, you probably—if they're going in,
in December and February, you probably will see the impacts are indicated in our Q1 number as well as
our Q2 number, but, again, just sort of based on averages. They won't really get deployed until middle of
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Q1 of next year, like fully deployed and operational, and I do expect them to start out at a little bit under
the $30 a day ARPU that we currently have across all our machines.
Okay. The 200 that you deployed was I guess in Q2, are you starting to see those ramp up to
regular $30 per day average?
Yes. I think Q3 numbers, there's—in some of our jurisdictions we have a little bit of seasonality. I
think if you look at the Maryland bingo halls and in Missouri, there's a little bit of seasonality in third
quarter. But I think the units that we deployed in Q2 are all starting to hit their stride and ramp up
nicely.
Okay. So one more question and I'll pass the line. The New Hampshire region, I think you
needed to find a distributor there before you were able to move forward. Maybe give us an update on
how that region is doing; where you are in that process? I'll pass the line.
Yes. This is Rick. Well, what we did is we were—we're starting to talk to a couple of distributors
there and then what I was explaining happened, which was a bit of a surprise in the market actually,
which was the takeover of the racing and charitable gaming division by the lottery itself. So we're sort of
exploring right this moment which approach—and we don't have to do one or the other to be honest
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with you, but we could conceivably find ourselves doing business directly with the Lottery and possibly
with the distributor. But what we don't want to do is get in there with the sort of current program that's
kind of not really that controlled like the Lottery is going to want to do it, and then have to redo our
games or whatever.
I think there's going to be a lot of shakeup quite frankly in New Hampshire with this, and so our
view is sort of step back a little, work with the Lottery in terms of how they would like to see this,
because one of the reasons they did take over control was that I don't believe they were getting that as
the State, the accountability and whatever, and the management of all of that at a level that they
wanted, like they do with the lottery. So I think it's a bit of a wait-and-see, Rob, and then we'll decide.
You know, in the New Year once things settle down, what's the best way to approach it. But we have—
our product is approved in the state now and so then it's just a matter of what's the best way to get into
it.
Okay. I've got more questions. I'll hop back in line. I don't know if there's anyone behind me in
the queue. I could keep going if you want or I could…
All right. I think we do have it, so I appreciate it. We could get you back on.
Yes. Thanks.
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Operator
Your next question comes from the line of Maher Yagi from Desjardins Capital Markets. Please
go ahead.
Maher Yagi – Analyst, Desjardins Securities
Yes. Thank you for taking my question and good job on the quarter, guys. I just wanted to talk
about—for Missouri and what's your expectation about the average revenue per machine compared to
what we've been accustomed to seeing in bingo halls. Is it similar in nature or there are some potential
differences that you've experienced somewhere else that can be seen taking place in Missouri? The
second part of my question, as you mentioned, Rick that this experience is allowing you to potentially
make pitches on for other jurisdictions about this initiative. Can you talk about where you could see this
being replicated in other states, which states, or how fast can this be replicated?
Sure. Yes. Well I think, first, in the case of Missouri, we're in a pilot now. We have been for just
almost a year-and-a-half. So we have machines in the state. They're in the legion halls and vet halls on
average about around six machines per, but they're doing very well there. We've designed a specific
game and a product for the Lottery and now sort of the next phase here is to put them in bars and
taverns, which was the conversation or—and a contemplation that we had when we first for started
talking with Missouri, but typically the way these things go, they go on a pilot and then they rollout
methodically.
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We're going to be putting two machines per bar, and our expectation is that these machines
should be able to generate very close to or perhaps maybe a little bit higher, we'll see, in terms of the
win per unit per day. We do have other locations, like in Maryland, a couple of them are in facilities that
do have Keno and we've seen in those locations that the game play is pretty solid. People like to come to
these establishments. They're familiar with some kind of gaming going on and this is just another
product, quite frankly, that helps build up sort of the clientele in these bars that people come back
because they've got multiple types of gaming products to play. So, we're looking forward to putting
them out, but I believe from what we've seen in the state already in the other locations and what we've
seen in places like Maryland, this should be really very good.
As far as other states, the one I can talk to specifically is Michigan. Michigan, as you know, is in a
very early, relatively early stage pilot and their intention there is to do something similar to Missouri. So,
there's a state that we're in communication with fairly regularly and they're going to be watching very
closely as we rollout. That's a customer that we're already doing business who we expect, like what
happened with Missouri, that we'll be seeing that rollout sometime next year. As far as states and
jurisdictions that are not currently customers, I can't comment directly on that, but suffice to say that
many of the states that we're in conversation with are looking very closely at what's happening in
Missouri.
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Great. The economics of these machines in bars, are they similar to the machines in bingo halls
or veteran’s halls for you guys?
Yes. Yes. They're similar. It's a similar contract arrangement in the case of Missouri and so the
machines will be out on the floor and our share of the revenue is consistent with what we're getting
across the other machines in Missouri.
Okay. Great. In terms of—just one last question here before I hop back—in terms of—we've
seen margin improvement year-on-year that's significant because of your revenue growth rate. How
would you—can you help us maybe understand which part of the curve are we on right now, and as you
look into 2016, do you expect to continue the improvement in margins or there are some additional
costs that you might incur that can work against you?
Yes. No. It's a good question. I think in 2016—I mean, to tackle the back-half of your question
first—I think we can continue the trend in margin improvement. The beauty, if you will, of this business
is that you get a lot of leverage from deploying machines, and once they're deployed, if you can
generate increase in win per day then your share of the win per day goes up, the bulk of that drops to
the bottom line.
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In terms of just the rest of this year, some of what you see in our Adjusted EBITDA margin is
reflective of one-time costs of going public. So I think there's room for improvement next year. I think
currently through three quarters we're at 24 percent Adjusted EBITDA margin. I'd expect us to end the
year around that level, and then next year build on that.
Okay. Great. Thank you very much.
Operator
Your next question comes from the line of David McFadgen from Cormark Securities. Please go
ahead.
David McFadgen – Analyst, Cormark Securities
Hi, guys. Couple of questions. So, first of all, just on the direct costs, you indicated that you've
been able to reduce those a little bit and it looks like it's sustainable. I just wanted you to confirm that, if
that is sustainable.
Yes. I'd say it's absolutely sustainable. Again, the bulk of the savings on the direct cost side are
coming from the investment we made in the printing presses which enabled us to really reduce the cost
of our pay for tickets we produced. In the prior year, in fact, we purchased some of our tickets from
third-parties, and by bringing all that in-house, we're able to really save a bunch of money, which you're
seeing in that number.
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Okay. Okay. Great. Then also just looking at the MD&A on Page 8 on the outlook section, you
talk about some of the new features that you've introduced having a positive impact on win per unit and
ARPU. I was just wondering if you could flush that out a little bit and maybe get specific on how much
the impact is actually; and like we're seeing a 5 percent increase, a 10 percent increase, any comment
on that?
Well, we have to be a little bit careful because that information, and specifically that's for
Ontario. But what I can (inaudible).
Sorry Rick, go ahead.
No. The bump in the features, what we refer to in there was the features that we’re deployed in
Ontario and what I can comment on is that we started with a pilot in three locations to confirm—you
know, one was the technology and, two, to see whether or not there was going to be a difference. Then
once we were able to confirm both those, the Lottery and the charitable halls collectively agreed to
allow us to roll that out. It's only a month ago that we did it, but what we've seen pretty much all of the
locations where we've got it, a marked improvement in the win per unit.
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I can't be too specific to say whether it's 5 percent or 9 percent, but that it was significant
enough that there's a noticeable difference, particularly with the progressive jackpots. It makes a real
difference in a location when you can run those.
Okay. All right. Then just talking about the installs, so 2016—if you look out to 2016, you're still
comfortable with your monthly install rates I would imagine; just wanted to confirm that. Then when
you look at Missouri, you're talking about a hundred installs by February. Would that mean that maybe
the installs in Q1 might be a little more weighted in 2016 towards Q1 and Q2 and a little less weighted in
the back half of the year or we shouldn't assume that?
Well, we—you are correct that we will be putting a hundred out in Missouri before the end of
the year. We are still comfortable with sort of this average. You know, we've commented on sort of the
lumpiness or the way our deployment are going or goes, and so I think if I look at right now, as you
commented on sort of Q1 with the Missouri second wave of a hundred and our expectation that we'll be
deploying some more terminals in some of our other customer jurisdictions, we could find ourselves, as
you say, a little bit higher. But as we just talked about, you know in Q3, there's a little bit of seasonality
in the summer when our customers, the lotteries in particular, shutdown and so we don't do as many
deployments in sort of the summer months. So, yes, I think there is that sort of imbalance, if you will,
but that between 25 and 30 on average for the year, we're very comfortable with.
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Okay. All right. Okay. I think that's it for me. Thank you.
Great. Thanks, David.
Thanks.
Operator
So again, if you'd like to ask a question, that is press star, one on your telephone keypad.
Your next question comes from the line of Ralph Garcea from Cantor Fitzgerald. Please go ahead.
Ralph Garcea – Analyst, Cantor Fitzgerald
Hey, Rick. Thanks for taking my questions. Just on the Missouri contract, if you find success now
with possibly getting into the Keno locations, is that going to be a new sales process or are you sort of
covered with a blanket agreement to keep doing sort of hundred unit pilots as you expand throughout
the state?
You know, our agreement is still what we would call a pilot, but it allows us to continue to add
more locations and terminals to it if the Lottery decides to do that. So the first tranche of this pilot
extension has the 200 machines that I described, the 100 in December and then the 100 by the end of
February. It also includes within that contract the ability to put more machines into the vet halls, as I
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mentioned earlier, which is a separate program, but still all with under the Lottery's management. So,
yes, I think the first 50 locations that we are deploying in are existing Keno locations, so that was sort of
a relatively easy sort of scheduled deployments because we went out to the top 50. As I mentioned
earlier on the call, we've hired the person who sort of did a lot of that work for the Lottery and now
they're working for us.
The next wave of terminals, we're actually going to be looking for a mix of some that are existing
Keno, but we also believe that there's some locations that would really like our machines, and for
whatever reason other, aren't Keno operators today. So we actually envision our ability to expand Keno
alongside of our machines in the state, which is very attractive for the Lottery as well.
Okay. I mean, it makes the whole process much more efficient, right, if you can get into those
900 locations or so and…?
Yes. Exactly.
The more interesting one is OLG. I mean, what do you need to do to go from 40 a location to 80
units at location now that sort of the wording's been changed that you can do it?
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That's a good question. Again, you know, it's not a simple answer because we're working in sort
of tandem with the OLG as well as the gaming hall operator, which as you know, is a private operation
and the OLG is the OLG. We're sort of looking now because we're still just examining the performance of
the machines in all the locations, and quite frankly, there's a number of locations that I think it's pretty
clear would benefit from more than 50 with the lift of that AGCO requirement, as well as there are other
locations that now are significantly below 50 and probably wouldn't make sense. You know, one of the
things that we're able to do with the system that we've got managing and controlling all of this is give
and work with the OLG and get business intelligence to understand better—you know, which locations
are doing what and, quite frankly, balance the number of machines per location.
So that's sort of a conversation and what we're doing right now. I think with the holidays and all
that, we don't expect that we're going to be adding any more terminals before the end of the year
there, that's for sure. But as we look ahead to 2016, we can definitely identify the ones that would
benefit from it and we'll work with both the OLG and the bingo hall operators to devise a plan to
expand.
Okay. Thank you.
Thanks a lot.
Operator
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Your next question comes from the line of Suthan Sukumar from Dundee Capital Markets.
Please go ahead.
Suthan Sukumar – Analyst, Dundee Capital Markets.
Hi, guys. Just a couple of questions from me. The first question, on the $29 in ARPU this quarter
for LT-3, is that kind of the floor going forward or is there further downside over the next couple of
quarters as you continue to deploy units?
Yes. The $29 is—I wouldn't call it a floor. Again, as we've talked about in the past, when we
deploy new unit, it takes a little while for them to get up to speed. Of course, with our larger—as each
quarter goes by, we have a larger installed base, so the incremental impact of new units is less on the
overall ARPU, but, again, I wouldn't necessarily characterize $29 as the floor. I could see it potentially
moving down. I know that I would want to remind folks that ARPU in and of itself isn't necessarily a
measure of the health of our business or our machines. It certainly is a metric that we use to take a look
on an average across all of our machines, how much revenue they've driven and that's a metric I think
that helps Investors like yourself sort of measure the business and forecast the business going forward,
but we certainly would not walk away from an opportunity to install a bunch of machines that maybe
are lower ARPU because it's still profitable to us.
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So when I think about ARPU and the $29 we're currently at, I certainly am comfortable with that
level. I think it'll grow as the machines become seasoned. But I guess to answer your original question, I
don't think that's necessarily a floor.
Okay. Okay. Great. My next question is more specific to the OLG. Have you guys started
upgrading units outside the three initial locations in terms of progressives and the multi-bet
functionality?
Yes. I guess perhaps maybe that wasn't clear. Yes, the answer is we did the pilot and now we're
actually deployed in all 30 locations with that feature set, which is the progressive and the multi-bet
feature. So, yes, all 30 of the locations now in Ontario have that.
Okay. Great. Are all the LT-3 units at those facilities, are they all updated or is there still a
portion on the upgrade at this time?
Yes. Well, the way it works is that we didn't have to do anything really to the LT-3, to the
machine itself. It's all—this upgrade and feature set is all pretty much software. Not all the terminals in a
given location are connected to the progressive because we have different game types, different price
points, and so what we basically look at is given the size of the hall and the different sort of mix of
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machines that are there, we then connect up the appropriate number of machines within that location,
because these are all local area progressives, to the progressive with the feature set. So we're working
with the operator and the OLG to decide what's the best mix within the location, and so every location
has the ability to connect up to that, but not every terminal in the network is connected up to it.
Okay. Great. With the current upgraded units, are you guys seeing I guess a faster ramp in ARPU
right off the bat with these machines versus the non-upgraded machines?
I don't think so. I mean, when we put machines in for the first time, there's this natural ramp-up
because it's a new product in a particular jurisdiction or location and so there's a natural sort of time
progression. It varies anywhere from three to six months depending on where we are. In the case of
Ontario, we've got some machines that have been in locations for over a year now, others, because we
were deploying in the last 12 months, that are less than certainly, and we're still opening up a location
later this month.
The progressive feature certainly doesn't—you know, in a new location, I don't think would
ramp-up the time at all. I think what the progressive feature really does is bump up—once things are
rolling in a location and people are familiar with the product, it just then is more attractive to players, so
they'll enjoy the experience; and perhaps what we're seeing is they're playing a little bit more because
they have an opportunity to win a large jackpot.
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November 11, 2015 – 11:30 a.m. E.T.
Okay. Great. Just lastly, just want to quickly touch on your M&A strategy. How does your
pipeline look today and are there any near-term (inaudible) we could get into?
Well, that's not an easy question to answer. We continue to explore and look at opportunities
for M&A. I said that in the IPO and I continue with that. We're looking within our sort of lottery gaming,
charitable gaming industry, and so we're actively involved and having discussions with different sort of
people within that group, and all I can say is that if we find ourselves in a situation where we can make
an attractive acquisition—you know, Steve and I have that a lot of experience with that—we certainly
would move forward with it.
Okay. Great. That's it for me, guys. Thanks for answering my questions.
No problem. Thank you.
Operator
Your final question comes from the line of Robert Young from Canaccord Genuity. Please go
ahead.
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November 11, 2015 – 11:30 a.m. E.T.
Just a quick one. The AGP product, should we expect that to start steadily decline or should we
expect Q4/Q1 to see a bit of an inflection down because of this—I think you talked about a transition in
Texas. How should we be modeling that AGP decline? I'll pass the line. Thanks.
Yes. The AGP decline, I think if you look at this past quarter, the—it's bottoming out to a certain
degree. I think we're hopeful that the units that are out there today are units we can all maintain with a
little bit of continued attrition. So I think the rate of decline that we've seen over the past year in the
AGP relative to prior years, I think the—well, the worst part of that is over and now we're hopefully
reaching more of a steady state where we'll continue to obviously to do our best to maintain the
machines that we have out there, but I expect there'll be some continued attrition.
I think in Texas we're—you know, I can't really comment on what's going on there. It's fair to say
that we're doing our best to maintain our deployment there.
You there, Robert?
That's it for me. Thanks.
I think that was Robert's last question.
Operator
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November 11, 2015 – 11:30 a.m. E.T.
That ends the Q&A session. I'll turn the call back over to Mr. Jon Ross.
Jonathan Ross – Head of Investor Relations, INNOVA Gaming Group, Inc.
Thanks a lot, everyone, for participating today, and if we can answer any questions, obviously,
we're here to help. Let us know and thanks for your continued support. Have a great day.
Operator
This concludes today's call. You may now disconnect.
28

FINAL TRANSCRIPT - INNOVA Gaming Group

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