This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk00: THE END THE END THE END THE END I don't know. THE END Thank you. THE END THE END THE END
spk07: Greetings. Welcome to the Every Holdings Incorporated Third Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. The question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note, this conference is being recorded. I will now turn the conference over to your host, Bill Fund, Vice President of Refugees Relations. You may begin.
spk02: Bill Fund Thank you. Welcome, everyone. Our team is working from multiple locations today, and while I don't expect any gremlins, I would ask your patience if we experience any technical difficulties. Let me remind everyone of our safe harbor disclaimer that covers today's call and webcast. Our call will contain forward-looking statements and assumptions, which involve risks and uncertainties that could cause actual results to differ materially from those discussed during our call. These risks and uncertainties include, but are not limited to, those contained in our earnings release today and in other SEC filings, which are posted in the Investors section of our corporate website at every.com. We do not intend and assume no obligation to update any forward-looking statements. You are cautioned not to place undue reliance on forward-looking statements, which are made only as of today, November 2nd, 2020. We will also refer to certain non-GAAP financial measures, such as adjusted EBITDA, free cash flow, total net debt, total net debt leverage ratio, and net cash position. A description of each non-GAAP measure and a reconciliation to the most directly comparable GAAP measure can be found in our earnings release and related 8K, as well as in the investor section on our website. This call is being webcast and recorded. A link to the webcast and replay of today's call can be found in the investor section of our website. Joining me on the call today are Mike Rumbles, our chief executive officer, Randy Taylor, our president and chief operating officer, Mark Labai, executive vice president and chief financial officer, Dean Ehrlich, our games business leader, Darren Simmons, our fintech business leader, and Harper Coe, chief legal officer and general counsel. Now it's my pleasure to turn the call over to Mike Rumbles.
spk09: Thank you, Bill. Hello, everyone, and thank you for joining us today. Now, before Randy and Mark share their insights into how our business performed during the quarter, I'd like to share a few highlights and observations. Overall, our third quarter results were significantly better than expected. Our revenues, operating income, adjusted EBITDA and free cash flow all meaningfully improved sequentially over the second quarter of this year. This faster than expected recovery, driven by the strong performance of our large base of tribal and regional customers, is clear evidence of the ongoing strength in our business. In particular, the third quarter results highlight the resilience of the contributions from our recurring revenue streams, which comprised more than 75% of our third quarter revenue. Our third quarter results also demonstrate that the focus on our long-term strategies and investments across our product portfolio have positioned us to continue to grow both of our business segments going forward. Furthermore, it's notable that our adjusted EBITDA has a percentage of revenues improved by 500 basis points from last year's third quarter, reflecting the actions that we've taken to reduce our overall cost structure and the benefit from a greater mix of our higher margin products. In games, the ongoing success of our portfolio of premium units in both tribal and commercial casinos, together with the overall growth in our installed base of operating units, despite this pandemic, has clearly reinforced the benefits of our strategic planning. We've prioritized the execution of our game development, And in preparing our roadmap for future development, we have based it not only on the creative talent and experience of our studio teams, but also on data analysis of player trends and feedback from operators. I am proud of the great collaboration between our product management people and our game development studios under the leadership of Dean Ehrlich. Together as a team, They have driven positive performance for an extended period of time, both prior to the pandemic and following the reopening of casinos. I have never felt more confident in our pipeline of new games than I do today. Likewise, the growth and recovery in our fintech business under the leadership of Darren Simmons reflects the strength of our execution and strategic focus on developing a comprehensive digital neighborhood for our casino customers our digital neighborhood encompasses far more than the atms cash access solutions and our fully integrated kiosks it also extends into products like jackpot express and central credit as well as a full array of compliance services needed in the highly regulated gaming industry of today furthermore in 2019 we added a range of strategic player loyalty products that added to our comprehensive solution set and was an important step for us in the path toward the convergence of loyalty and payments in the digital world importantly what sets us apart in the industry is that all of these products and services are fully integrated with each other This increases both the standalone value of each service and, due to the tremendous efficiencies that we realize through their use of these products, this significantly increases the total value that we bring to our customers when these products are embedded into their casino's enterprise-wide network. Now, one of the most important advancements in the development of our digital neighborhood is the introduction of our digital, white-labeled, Cash Club Wallet solution. The Cash Club Wallet is simply the next step in bringing value to both the player and the operator. Offering convenience for players and significant cost efficiencies for operators, the Cash Club Wallet is a convergence of our digital cash access funding capabilities with our digital player loyalty services. It is a mobile app and a true digital wallet. It can act as the hub for payments across the breadth of a casino operator's resort enterprise, from the gaming floor to food and beverage, from retail to hotel and resort amenities. It can even provide the funds for players to engage with an operator's online retail and entertainment channels, such as iGaming and online sportsbooks. In addition to the cost efficiencies for the operators, Our wallet has the ability to extend the relationship and the connection time between our casino customers and their players. Another key feature of our digital wallet is its flexibility. White-labeled to carry the casino's branding, the Cash Club wallet is fully customizable so that the operator can deploy it with a customer experience that is reflective of their brand and meaningful to their patrons. Our digital wallet also meets the extensive needs of the various gaming regulators across multiple jurisdictions throughout the U.S., as well as banking and other financial regulations. We expect to have the first operational uses of the wallet with two large, well-known tribal casino operators later this month. The use of the Cash Club wallet will enable guests to access their funds and loyalty program benefits when they want, how they want, and where they want to use them, all across the casino financial ecosystem. In addition, all of this will be seamlessly integrated for the convenience of the patron and will carry those increased cost efficiencies for the operator. And with that, let me turn the call over to Randy.
spk06: Thank you, Mike. Hello, everyone. Throughout the third quarter, more casinos continued to reopen And despite limitations such as restrictions on capacity and social distancing requirements, player attendance at casinos was good, as you've heard from a number of public operators that have already reported. With the majority of our revenues driven by recurring activities, such as play levels on our gaming operations units, transactional funding actions, or subscription models for player loyalty and regulatory compliance services, our business recovery has occurred quicker, and stronger than we originally expected. Let me call out just a few notable metrics. During the third quarter, many operators focused on optimizing their slot floors to enable a greater number of their gaming machines to remain active. The combination of more active games, a greater mix of premium units, and our games' strong performance yielded a daily win per unit of $32.81. This was well ahead of the second quarter and just below the average daily win per unit generated in the 2019 third quarter during which all of the games in our install base were active. We estimate that the daily win for only those games actually active during the quarter exceeded $37 per unit. Our total install base of leased machines increased 7% over a year ago, and by more than 300 units on a quarterly sequential basis, from the end of the second quarter. This growth was largely due to our base of premium games, which increased both year over year and on a quarterly sequential basis. Higher yielding premium units now represent just over 40% of our total installed base. Recent additions to our game portfolio, such as our premium non-WAP game, The Vault, and the two new wide area progressive games on our dual curved screen DCX cabinet, the Mask and the Karate Kid, are continuing to perform well. These additions were the primary driver behind the increase in premium units in the third quarter. Existing premium units with original themes such as Shark Week and Smoke and Hot Stuff Wicked Wheel also remain strong performers. While The Vault is our best ever performing game, with a lot of runway for further placements in the quarters ahead. While unit sales of slot machines improved 29% over the second quarter, most operators remain in capital conservation mode. Our average sale price was up slightly year over year, partially reflecting a favorable mix of our new premium flex cabinets and the overall mix of units sold. We continue to expect that slot spend by casino operators will remain at reduced levels during the fourth quarter and at least through the first half of 2021. However, we believe the broad strength of our high-denom mechanical reel offerings and the launch of our for-sale Flex video cabinet at the beginning of the year positions us well to continue to gain ship share. Eighteen of the 25 top indexing high-denom mechanical reel games In the latest Eilers and Kryjack game performance report are every. The initial performance of the Flex with its combination of a differentiated cabinet and new game themes with proven features and play mechanics provides further support for growing our ship share. In the FinTech segment, cash access revenues improved dramatically over the second quarter. The decline versus the 2019 third quarter reflects both the impact of casinos closed during the quarter and a modest decrease in transactional activity on a same store basis. While same store transactional activity did improve from the beginning of the quarter, it appears to have plateaued during recent weeks to a level modestly below pre-COVID levels. Reflecting ongoing operator interest in our player loyalty products, Information services and other revenue grew 22% over the 2019 third quarter, driven by the year-over-year increase in player loyalty subscription revenue. Compliance services and self-service loyal products are becoming must-have solutions for casino operators. The operator interest in our self-service player loyalty kiosk led to a 33% increase in loyalty equipment revenues. However, this was more than offset by a decline in other equipment sales, reflecting operators' capital conservation efforts. A portion of the increase in loyalty shipments reflects the postponements associated with orders placed earlier in the year. Having said that, I'll highlight that our backlog for loyalty deliveries remains strong. We have integrated our loyalty acquisition assets into a single platform, which is integrated into our digital neighborhood that Mike discussed. and have rebranded all our player loyalty products and services under the Trilogy brand. With a significant install base of existing products in the marketplace, we will continue to support all our customers, but all future product developments will be under the Trilogy brand efforts. I also want to bring attention to some of the terrific industry acknowledgements we've recently received relating to our products and our product roadmap. As part of their 2020 Gaming and Technology Awards, Global Gaming Business once again recognized Avery for two notable awards. The first was for our premium game theme, The Vault, which received the Gold Medal for Best Slot Product. This is the second consecutive year that one of our premium slots was recognized as the casino industry's Gold Medal for Best Slot Product. Winning the top spot last year was our Smokin' Hot Stuff Wicked Wheel premium theme. Our fintech business is recognized for the third consecutive year by the Gaming and Technology Awards. This year we received the silver medal for the best consumer technology for our digital cash club wallet solution. Last year, Quick Ticket, another cashless solution, was awarded the silver medal. Now I'd like to turn the call over to Mark to share his perspective on our performance and trends as we begin the fourth quarter and what that could mean for the remainder of the year. Mark.
spk05: Hey, thanks, Randy. While the awards and recognition with the industry always provide a great validation from our customers and peers of our product investment strategy, an even better measure of our success is the improvement we are achieving in our financial results and free cash flow. So with that, let me focus on some of those highlights for the quarter. Driven by the strong recovery in our recurring revenue streams and the margin enhancement we achieved in part from our efforts to reduce our costs, our third quarter adjusted EBITDA was $59.8 million and our free cash flow was $22.8 million. Our free cash flow more than doubled the amounts we reported for the third quarter of 2019. With this strong free cash flow generation and our improved liquidity, we were able to repay the entire $35 million outstanding on a revolving credit facility in the third quarter. At current interest rates, this will save us almost $500,000 per quarter in future quarterly cash interest costs. Reflecting that debt paydown, the total principal face amount of our debt outstanding declined to $1.1 billion at September 30th. Our net cash position at the end of the quarter was $128 million as compared to $133 million at the end of the 2020 second quarter. However, the second quarter net cash position was reflective of the cash on hand from the $35 million in revolver borrowings. I'll finish up my debt discussions by pointing out that at the end of the third quarter, despite the $125 million increase from our new incremental term loan that we borrowed in April, The total outstanding principal face amount of our debt less our actual net cash position is more than $100 million less than it was at the end of the prior year period. While we are currently maintaining our cash balances to preserve liquidity through these uncertain times, this overall decrease supports the progress that we have been making in our goal to de-lever. Moving on to our outlook. As we look to the fourth quarter, there is still uncertainty in the current gaming environment. This includes visibility for the portion of our gaming operations footprint that is currently installed but inactive. However, because we expect our total premium footprint will continue to grow, more of the inactive units in our installed base will become activated, and the units that are active will perform at levels consistent with our current performance, we believe that our active units will continue to over-index their performance relative to their prior year pre-pandemic levels our strong third quarter performance offers encouragement for continued momentum in the recovery of our business based on the levels of activity we are currently experiencing our continued strong relative performance in both our games and fintech businesses and the number of casinos open as well as their player visitation levels across the country we are guardedly optimistic that our fourth quarter adjusted EBITDA will be comparable to the third quarter performance. This is despite the typical fourth quarter holiday declines, which have historically resulted in slower quarter for some of our revenue or recurring revenue streams. In the fourth quarter and for next year, we expected adjusted EBITDA as a percentage of total revenues will remain stronger than a typical historical levels. This reflects the current mix of our business, as well as the ongoing benefits of the overall cost improvement initiatives taken in the second and third quarters. On a quarterly sequential basis, revenues are expected to increase slightly over the third quarter levels, and we anticipate that adjusted EBITDA as a percentage of total revenues will contract slightly as we start to see increasing equipment sales. The third quarter was exceptionally strong as the faster than anticipated recovery enabled the revenues to ramp more quickly than our costs. However, as I have suggested on previous calls, we expect fourth quarter SG&A and R&D expense, exclusive of non-cash compensation, to increase slightly from the third quarter levels in order to support the increasing business volumes, as well as prepare us for future growth opportunities. Having said that, going forward, we still expect to have an overall cost structure that is lower when compared to pre-pandemic run rates. I want to remind you that on our last call, we stated our intentions to continue to evaluate and optimize our general office and warehouse facility needs to support a changing business climate and a more remote work environment. In the fourth quarter, we expect to see further consolidation of warehouse and assembly operations, as well as some other general office consolidation. as a result in the fourth quarter we expect to incur certain one-time non-recurring charges of between 1 million and 2 million as we exit certain of these existing facilities but we believe these charges will position us to save future operating expense we expect the free cash flow will remain positive in the fourth quarter despite higher sequential cash interest costs as a reminder in the fourth quarter we will pay $10.7 million of semiannual interest on our 7.5% unsecured notes. With adjusted EBITDA and capital expenditures coming in comparable to the 2020 third quarter, no additional placement fees, and an immaterial amount of cash paid for taxes, free cash flow is anticipated to exceed the $4.4 million generated in the fourth quarter of 2019. That concludes my prepared remarks, but before I turn it over to the operator, I want to remind you all that we're responding to these questions from remote locations. While I think we're getting pretty good at this, I apologize in advance if we're still a little clunky as we handle the responses. With that, I'll turn it back over to the operator for questions.
spk07: At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. The confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. And our first question is from George Sutton with Craig Hamlin. Please proceed with your question.
spk09: thank you um just to be consistent uh randy i wondered if we could walk through uh the car type that you currently are seeing so in february you felt you were driving a ferrari with the throttle wide open on an open road the stock was thirteen dollars in june you felt like you were a Jeep on a rugged road that stocked with $6.50. So here we've had a great third quarter and a good fourth quarter outlook. I'm just kind of curious what car and what road this would represent.
spk06: Well, George, you know, I, again, didn't put a lot of thought into this, but I, you know, I think that we're definitely off that rugged road and I'm, I'm trying to upgrade. I haven't quite got back to the Ferrari yet, but, I feel like, you know, the road is smoothed out slightly. And, again, can't see everything up ahead of us. But, you know, George, we had a really good quarter. And we're, you know, we're very, I would say, you know, as we said, guardedly optimistic about, you know, where we go from here. So how's that? I'm not going to pick out a card just yet. I've got to think about it some more.
spk09: all right one question for dean if i could um the congratulations on your second annual award of the top game and i'm just curious with your very low share in in an area like vegas if i was a buyer seeing you produce the top game each of the last two years i'm just curious can you just give us a general interest level for those who haven't been working
spk01: uh with your game product in the past is that starting to change in your view um i think so george thanks for the question i do believe that uh it is and it has been for a little while you know it's a marathon you're not gonna all of a sudden go get 100 of the ship share um it takes a little bit of time and we've been uh gaining our fair share as we continue along um As long as we continue to produce what we had with respect to our mechanicals, especially high denomination, and now all of a sudden with our flex portrait cabinet coming out and doing extraordinarily well with, you know, 11 different games that our operators can choose on that brand-new cabinet as of right now, we feel very good about it. So I look forward to see how it plays out. We're positioned very well.
spk09: All right, if I could just thank whoever forced Randy in his script to say smoking hot stuff Wicked Wheel twice, I appreciate it.
spk05: Thanks, George. I love you, George. Thanks.
spk07: And our next question is from Barry Jonas with Trual Securities. Please proceed with your question.
spk04: Hey, thanks so much. Look, obviously G2E this year is a little different than prior years. I'm wondering if you could talk about what you've been doing there. As you're speaking with customers, what's feedback been on any new products or any indication around budgets for next year? Thanks.
spk09: Yeah, that should probably be taken by Dean and Darren. They did the customer interactions on both our virtual G2E, but also we had some customers that actually made their way to our showroom. So gentlemen, you want to take it first, Dean, and then Darren?
spk01: Okay. I think the response has been great. It's, you know, the real challenge is trying to present and have it come across in a similar format as actually being able to see, feel, touch the machine and just get a much more immersive experience in terms of understanding that. But with that, I mean, we're doing our best virtually and our customers are very receptive, right? They're They believe that we are completely going in the right direction and our product strategy is sound. And there's just as high of a level of confidence that I've seen in the four years that I've been here about our product strategy. I mean, with that said, you know, capital and, you know, obviously on our operator side, things have got to – not just sustain, but continue to improve as we get through this pandemic, right? So, you know, from a capitalist standpoint, if they get money available, we feel very good about it. But it's a big if, you know, especially as we go through winter. We just, you know, got to make sure we stay the course. But as far as the product side of it, very encouraging. Darren?
spk05: Darren? Yeah, similar, I guess, absent the actual physical show, we have been easily as busy as last year with lots of the virtual, you know, we're still using the same nomenclature, kind of pre-G2E meetings, and we've actually had some where we've been able to have in-person with all the social distancing and safety protocols, which have all been very well received. I agree with Dean that, you know, from a product strategy standpoint, we are very much resonating with our customers from the FinTech side. You know, you heard in the prepared remarks, and we've been talking about the expansion of our digital neighborhood, and all very well received by our customers, a lot of enthusiasm. I do believe that they're going to be constrained on budgets from a capital standpoint. So, you know, that will, as I think it indicates in the prepared marks, affect some of the, you know, some capital purchases on hardware. You know, good thing is, is our loyalty hardware has been doing very well. And, you know, I think we'll just kind of be in a wait and see as they plan their 2021 budgets. But I would say it's going to be constrained for the foreseeable future.
spk04: Great. And then I guess relating to those answers about budgets and capital purchases, do you think more operators are moving to gaming operations or participation models just in response to that? And then after, I have a quick follow-up on cashless. Thanks.
spk09: So, Dean, do you want to take that?
spk01: Yeah. So, Barry, I think the answer is it depends, right? It just depends on the operator and their particular situation. I will say that if you have great premium product, it seems to find its way on the floor. But they're going to be a little bit more scrutinized. As far as product sales, definitely a wait and see. Do I think it's going to migrate between one or the other? I think it just really honestly depends. It's a tough one to answer. Certain customers for sure are going to try and get product on as – suppliers get creative with trying to get new product introduced on their floor in terms of, I don't know, pricing models and so forth. But, you know, it's just once again, it's a really tricky question to answer that I think it's not a one size fits all.
spk05: Yeah, I would agree. I think we're We're probably in a similar position. What I will say, though, is from the fintech standpoint, operators are certainly willing to invest capital to look for products and services that do create operational efficiencies and can reduce OPEX. I would say things like the digital wallet that we're selling certainly is an opportunity for them to find some operational efficiencies and cost savings and create some great guest experiences. Other things like our promotional loyalty mobile app, you know, again, you know, again, moving to, you know, a more operational efficient where people can self-serve promotions on a mobile phone app. So a lot of those types of things are going to be, you know, I guess, you know, sort of capital constraint questions that they can look for efficiencies, and then they'll make the proper investments.
spk04: Great. And I guess the last one, just following up on digital or cashless, you know, I know it's sort of developing real time. And many operators have already talked about it on earnings calls this season. But how are you thinking about how this could ultimately transform your business? I guess, to what extent should we think about it replacing current revenue streams versus being entirely additive?
spk05: Well, remember, right, so the digital wallet is an extension of the services that we're providing today in terms of how people access their funds. So it provides opportunities for us to, you know, provide a new sort of form factor in terms of how people access their money. So we believe it additive from the standpoint is it's a new way to get money for people's, you know, entertainment experience. And then there is opportunities for us to introduce new transaction types, which again is going to be additive. So, you know, I think it's sort of multi-threaded in terms of the opportunity. And remember, it's just how it connects with the rest of our products and services in that digital neighborhood. So it adds value to everything that we're doing because they are integrated, they are interconnected in the digital neighborhood. And, you know, as Randy indicated earlier, you know, from From an AML standpoint and a loyalty standpoint, you know, we've got kind of the must-have products, which are all integrated with the digital wallet. So does it transform it? Yes, as people move towards cashless. But is it a – so that's how it will transform. And I think it will be an evolutionary process.
spk04: Great. Thanks a lot, and great quarter.
spk07: Thanks. Thanks, Bernie. Thank you. And our next question is from David Katz with Jefferies. Please proceed with your question.
spk08: Hi. Afternoon, everyone. Congrats on the quarter. I have to say I'm certainly surprised by the magnitude of the number, but not the tone and direction for sure. Can we just talk about some of the commentary that you made in the release around the FinTech segment? um where you referred to you know some 80 of you know one specific segment of it being recurring what i'm getting at is i'd love to know just within you know that the that segment which portions you would consider to be sort of recurring fees so to speak right and you know which would be sort of recurring volume based obviously we know you know some of those but help us break down that whole half of the business and understand what's sticky and what's not so that should we have, you know, heaven forbid, further shutdowns or et cetera, we know where the pressure points are or are not.
spk09: Yeah, sure, David. Darren, do you want to take that? You might have Mark. You want to have Mark?
spk05: Yeah, that's good. No, that's good. Yeah, so none of us can see each other. David, the cash access line is primarily the recurring revenue from our longstanding contracts. That clearly is recurring in nature. What we would deem not necessarily recurring are the kiosk and loyalty sales and the equipment sales line. When you move on down into the information services, another which is not readily broken out is activity such as the new software sales for our compliance products or new software sales for our loyalty products. But beyond that in there is your kiosk maintenance and service contracts, your loyalty support. and your compliance support, as well as your central credit subscriptions, revenue services. So I would tell you a small portion of the total revenue that we generate in that other information services and other line is probably what I would call non-recurring, as we would look at it. And it's probably, if I had to frame it out in terms of relative size, it's maybe $5 million or so of that total number in Q3 would be one-time sales. The rest is pretty much recurrent.
spk08: Okay, perfect. And if we could switch over to the gaming side of things, if you could just give us a tad bit more color on, you know, what you're thinking about in terms of unit sales in the fourth quarter and what that looks like, that would be helpful also.
spk05: I'll jump in here. Go ahead, Mark.
spk08: Yeah, go ahead, Mark.
spk05: You know, in the quarter, we were just under 500 units in this quarter, this quarter, and we think there will be some sequential growth there. I don't know how much more sequential, how much higher it's going to be than that, but it will be slightly up from that number would be what I suggest is Q4. We suspect it's kind of a little sequential for the next quarters as customers start releasing some more capital possibly as well.
spk08: Got it. Look, I don't have any more insightful questions. Nice quarter. I think I'm all set. Really appreciate it.
spk07: Thanks, David. And our next question is from David Bain with Roth Capital. Please proceed with your question.
spk00: Great. Thank you, and congrats on everything. It was great to see. I was hoping I could just briefly dive into your 4Q guidance. First, can you confirm 4Q quarter-over-quarter historical game-op seasonality that you cited? I mean, that we're not going to feel. They're typically about 4% or so. I'm just trying to go back and see that. And then you mentioned a slight increase of active units so far in 4Q. If you can give us a sense, I didn't hear the active units in 3Q. I'm sorry if I missed it. And if you're just using kind of the live game run right from here, so any significant increase in live games would be gravy or kind of just how you're looking at this 4Q over 3Q a little bit further would be great.
spk09: Yeah, I don't think we did get it. You didn't miss anything, David. I don't think we gave actual numbers of what was active in 3Q. But, Mark, do you want to address that?
spk05: Sure. I'll try to break apart the pieces for you. In terms of our kind of that – I use the term seasonality just because you used it in terms of what you see in Q4. We usually do see a lull on a like-for-like unit basis in terms of, you know, if the same – footprint were out this year, Q4 versus Q3. The interesting thing about our business and really where we've had some great success, if you look backwards to 2019, we actually grew that pretty substantially, but there was a lot of growth happening in our premium units around the same time as well. So I think your framework of, call it 5% or so, is probably a reasonable way to think about how you see a little bit of some of those holiday times where the gaming ops volumes maybe aren't as strong for a couple of those bigger holidays, Thanksgiving and Christmas, for example. And that, we believe, as we said in our guidance, would kind of be more than offset by continuing placements of total units primarily premium units in q4 plus more units becoming active again we didn't really talk about what percentage of our our footprint is active but we are still seeing new properties that were previously either totally shut down or coming back online growing so we think that that that kind of lends itself to showing uh some some growth in the uh uh from q3 levels of gaming ops revenue for us as as we kind of move forward into q4 so instead of seeing a decline you probably see a flat to maybe even slightly up from Q3 levels.
spk00: Okay, great. And then if I could just one on Cash Club, it's kind of bifurcated as well, though. So, you know, it gives a sense as to kind of the initial capabilities that the placements are going to have in the next a couple of weeks, but how does that augment or change a year from now? And given this is going to increase the number of transactions, as you said it earlier in the call, is there going to be a different surcharge to the end customer by casinos? Have you discussed that with casinos and just ways of increasing awareness of the product when it launches?
spk09: Well, as you can imagine, David, there have been tons of discussions ongoing with operators about the launch of the wallet. But let me have Darren take you through what the bulk of those have been about.
spk05: Sure. So from a patron fee standpoint, I would say there's a lot of philosophies around, you know, the acceptance and whatnot. For the most part, operators are looking at a consistent structure. There is potentially opportunities for there to be, you know, flex of fees to incentivize and or, you you know changing you know the the the other fees other transaction fees to incentivize people to go more cashless um so i would say right now most are planning something consistent with where they're at today with opportunities to flex fees for uh for ways to motivate motivate patrons to adopt it and or incentivize them to to to convert off of of of other transactions um the idea is you know ultimately um You know, we have the opportunity to convert, you know, the existing physical cash transactions to digital, but then also offer new transaction types, which allows people to actually move money outside of their wallets and back into their bank accounts. So we see velocity increases, you know, monies coming in and velocity potential opportunities for monies going out where we'll have fees associated with that also. So that's sort of where we're at with those.
spk00: Okay. And then product adoption, like just how you're going to increase awareness when it goes live?
spk05: Sure. So this is significant for the operator and their marketing teams that we work with in order to get the right marketing messages. And a lot of the experience is really around, you know, the integration that we have with the system provider because that's really the technology that gets it down into the game. And so from that standpoint, there's all sorts of opportunities from the website, email communication, text message communication, on-screen messaging with the applications themselves, at the game itself, if it's going directly into a slot machine. So a lot of that is being worked on with the operators for communication to their players. So we believe that it's a fairly seamless user experience from the standpoint of they're not going to see anything that's really different than I think than other sort of mobile app experiences they're using today. But certainly the operators are very keen from a marketing standpoint to get those marketing messages right. And, you know, of course they're going to, you know, amend them and tweak them and refine them, you know, as we launch.
spk00: Okay. Great execution on the quarter. Thank you.
spk07: Thank you, David. Thanks, David. And our next question is from Chad Bannon with Macquarie Group. Please proceed with your question.
spk03: Hi, good afternoon. Thanks for taking my question tonight. Your installed base and premium growth, as we've talked about, you know, is certainly a bright spot. And I wanted to dive into this a little bit more, maybe reverse engineering into the I guess what's left from an aged third-party unit standpoint or older proprietary cabinet standpoint? I know you gave us some figures on percentage of premium, but I was wondering if you could shine a light on that. I believe it's pretty low. And then related just on the CapEx side, how are you thinking about an updated CapEx number to support your growing premium footprint? Thanks.
spk09: Yeah. Randy, do you want to? Do you want to get into that?
spk06: I can. I think, you know, Mark probably has a little more, but I would say, or on the CapEx. I was going to give him the CapEx. I was going to give you the boxes. You got it. So, you know, look, you know, we feel like the older third party, Chad, was the only one I want to talk about, I think we have, and Mark can correct me, somewhere around 200 units, a very small, that's the old wide body. So that is immaterial, not even really an impact to us. But, you know, from there, you know, our Core HDX has been out for a little while, but, you know, relatively probably three to four years. And then, you know, the mechanical, which is a big part of us, again, fairly new product out there. So, you know, I would say I don't think our, you know, and then the Flex is new. So you have the Flex coming out, and then you've got the premium games coming out. So, you know, I feel like our footprint is, you know, It's fairly new, but it's always one that you fight with. As we bring out these newer cabinets, we're always going to be looking back at some of the older stuff. As you know, sometimes some of the older stuff just doesn't move until somebody makes you move it. I think we feel pretty good where our overall age of that footprint is, and really where we want to grow, and I talked about it, is really in the premium products, which is what we've done, and those are relatively new between Hot Stuff Wicked Wheel and now the Vault. Where we're really growing our footprint is with newer product.
spk05: Yeah, and Randy, I'll just pile in. The number is right around 300 units for those third-party games. It's out there, and again, to your point, they've been out there for a while, and they're still generating returns, so we're happy to leave them on the install base at this point. CapEx. For the quarter, we're still obviously working around where our customers are in terms of their desire to get new product on their floor. What we saw in the quarter was probably just under $13 million in terms of game refreshes and new unit placements for Q3. I think you'll kind of see us in that similar neighborhood in terms of where we think CapEx kind of looks like going forward into Q4. And as we start 2021, we haven't come up with guidance yet. But again, maybe a small little uptick up is that more casinos or more casino customers are willing to take product in here from that call of $13 million-ish game refresh level. So call it 13 to 15 for the near term. And maybe, again, it's all a function of the level of interest in our customers and some of the new products it's very successful so what you saw last year at the same time period is we were growing the premium installed base uh very rapidly that number was approaching 20 million dollars plus a quarter so if we're spending that kind of level it means our installed base is growing pretty rapidly and I think in the near term though I would be planning on something a little less but still seeing growth in the installed base okay
spk03: Thanks, Mark and Randy. And then, separately, a high-level one, just given your strong free cash flow and your guidance for the fourth quarter, I think, allows me to ask this question. Is it time to start thinking about more accretive tuck-in acquisitions and go back on the offensive, given how accretive loyalty and some of the fintech ones were, or is it still too early to think about some of those items?
spk09: No, Chad, I think you're absolutely right. I think we've been very successful with the small acquisitions, the tuck-ins that we've acquired so far, both on the compliance side and loyalty. And we continue to be looking all the time. And as you know, given the current environment, there are some developers of products that we find very interesting that may be interested in finding a new home. And so we are continuing to look, absolutely. Thank you. Best of luck, guys.
spk07: Thanks, Jeff. Our next question is from John Davis with Stevo. Please proceed with your question.
spk05: Hey, guys. You changed? Did you change? Did you change? I did not. No, I didn't change. All right. So, Mark, maybe start off. margin was up 500 basis points year over year you alluded to uh your cost structure staying you know i guess reduced relative to prior codec numbers but how should we think about that 500 basis points you know there's 200 basis points of that do you give that back so it's 300 basis points on a go-forward basis but anything you can kind of give us directionally um for the margin as we kind of think about next year um and beyond Yeah, I think we're still, you know, obviously looking ourselves where we think forecasts would be for revenues for overall. But I think you're thinking about it in the right way in terms of how that number comes down just a little bit. Again, because as we start selling more equipment on both the fintech and the game side of the business, it's very reasonable to think that a couple – 200, 300, 400 basis points start coming out. And I would tell you the only reason that's going to fall more than that is equipment sales and those one-time sales that are hardware-driven that have lower margins are making up more of our revenue numbers. So I'm hoping it falls even faster because that means we're selling a lot of equipment hardware out there. But I think at least in the near term, you should expect to kind of see that kind of erosion a little bit in the overall blended market. adjusted EBITDA margin as we progress until equipment sales kind of start returning more to normal. Okay, thanks. And then, you know, Randy, I think you gave us $37 number per win per day on active units, which is almost mind-boggling at this point. But just, you know, some quick math off of that. That would imply, just correct me if I'm wrong, about 85% of your machines are are currently being operated, which would be kind of 90% or so of, you know, machines, the casinos that are open, just wanted to check the math there, see if that if those numbers, you know, make sense. And, you know, why you think that so many of your machines that open properties, I mean, close to 90% of machines that open properties is pretty staggering. So what's driving as just performance? Is it newer games, just just anything that would be helpful?
spk06: Sure, John. I mean, look, I think your percentages are in the ballpark. I mean, even some of the stuff you will see in Eilers where they try to, you know, parse that out puts us in that high percentage. And we believe, really, it's the premium games. When you have 40% of your install base now premium and, you know, between – you know, the Vault, the DCX, the dual screen that we came out with has done very well. Smoke and Hot Stuff still does well. Shark Week, Renegade even still performs well. So, you know, when you look at that base and how many of those units are premium, it's, you know, it's, to your point, it's very, very strong. And I think that's a very reasonable number based on you know, as we, as we talked about, uh, you know, Mark alludes to, you know, thinking that, you know, things will continue that way into, uh, the fourth quarter. If, if, uh, you know, the environment stays the way it is, we just feel like we have a fairly good hand with, um, uh, with the vault and some of the other, uh, themes that are coming out. And those, those are the games they're leaving on. And those are the games that are performing well. And, We feel very good at where we're at right now going into the fourth quarter.
spk09: And, John, you've seen the ball. I think, Dean, you're going to say the same thing I would, so go ahead.
spk01: It also helps being in a carousel configuration where it could have more games turned on because it promotes social distancing. So some of the strategies that we're doing is to either have them banked in a carousel configuration or additional wedge strategies that meet the needs of our customers and so forth. Those are the things that will help continue to do our part to have more games turned on than otherwise.
spk05: Okay. That's helpful. And then the last one for me, just on the fintech side, just cash access volumes. Yeah, I think they were down about 10% year over year, which is pretty impressive. I think like an average of 85 or so percent of casinos were open. So that would imply your cash access volumes were up modestly at properties that were open. One, just wanted to check and see if that was the case. And then also kind of what you're seeing so far in October. That would be helpful. Thanks, guys. Yeah, I'll take this one to start. You know, I think... There's guys out there like Fantini who will pull together all the commercial jurisdictions and the state-level reporting of revenues and volumes. And again, I think what we were very pleasantly surprised in the third quarter that we saw was, you know, he reported gross gaining revenue for the commercial jurisdictions. They reported in July. We're down, call it, 16%, 17%. For August, it was down only 15%. Hasn't come out with September yet, but I think those are good data points showing that it progressively got a little better as we progressed through the third quarter in terms of how revenues were tracking for the commercial guys' report. Logical to assume that tribal and regional guys that aren't in those reports probably transacted similar kind of volumes, maybe slightly better, just because regional guys seem to do very strongly in terms of what you're seeing from operators out there. You know, what we've seen in October right now, and it's still, I would say, relatively early, and obviously there's quite a bit of other stuff going on in the macro environment right now, particularly with things like the election, COVID starting to come back, a resurgence a little bit, making a fight as the weather's cooling off. And we have seen a little bit of, I'll say, softening in October compared to that kind of run rate of where we were exiting September, the monthly activity in the September quarter. But still, it hasn't totally fallen off the cliff by any stretch. It's just a little bit of a downtick on there. You know, all of our analysis or all of our measures that we've done in terms of forecasting or projecting as we move into Q4 assume that there's no backslide or material backslide in any of those kind of Individual properties have had recent closures in terms of outbreaks or COVID outbreaks that they've looked to shut down for a day, a couple weeks, just to clean the property and make sure it's covered. So I think those little one-offs are still happening and contributing to some of that overall slide in what we're seeing as we start Q4 and a little bit of the election noise. I think that's also starting to contribute a little bit, but nothing material has changed. All right. Thanks, guys.
spk07: Thanks, John. Thanks, John. And our next question is from David Katz with Jefferies. Please proceed with your question.
spk08: Thanks for letting me circle back. Mike, I just wanted to get a quick sense, or whomever you'd like to farm it out to, which you're doing quite well. When we look at the cost savings, the gross margin in total was up considerably. The degree to which you're able to save costs across the two divisions, is it just aggressiveness within each division? Given how well you're doing and cutting costs at the same time, how did you think about that, and how should we think about that as an ongoing problem?
spk09: I will say that I think both businesses were aggressive and looked very carefully at all of their costs. But I think Mark really spoke to it going forward. And I'll turn it back over to him. I mean, you shouldn't expect that we're going to be able to continue with that kind of a rate or improvement rate going forward. But Mark, do you want to step to that?
spk05: Sure, sure. You know, David, I think I've been trying to frame out on Q2 call, I kind of said on this call, that when we look at R&D and operating SG&A expense, exclusive non-cash comp, I've kind of been framing out, look, we think those are going to run about $35-40 million a quarter this quarter, probably near the middle of the high-end range. And as we move into Q4, that steps up just a little bit as, again, employees are back and we've ramped the business to the expenses match more of the revenues that have come back on board for the entire quarter in there. I think those kind of frameworks look good for us as we move forward. You know, you think of it kind of at $40 million, a little more than $40 million maybe in Q4, and then as you start moving into next year, slowly ramping up from there throughout the progression of quarters throughout the quarter. I remind you when you look back to 2019 Q4, you have a lot of expense sitting in there related to our turn event of champions event and G2E costs that are not going to be present in the current year. But I'm talking in absolute saying it's kind of around that $40 million plus range as we move into Q4. And then moving forward, you should expect to see those G2E kind of level costs coming back in Q4 that would be a little bit of an outlier for that kind of progression of run rate from there.
spk07: Thank you.
spk09: Thank you, David.
spk07: And we have reached the end of the question and answer session, and I will now turn the call over to CEO Randy Taylor for closing remarks.
spk06: Thank you for joining us on the call today. With the actions we've taken, the gaming industry's ongoing recovery, and the business strength we have in our games and fintech segments, we believe we are well positioned to enhance the long-term value of the company. We look forward to providing you an update on our next quarterly call. Thanks for joining us. Thanks, everyone.
spk07: This concludes today's conference. You may disconnect your line at this time.
Disclaimer