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spk04: Hello, everyone. Thank you for standing by, and welcome to the Every Holdings 2021 Second Corner Earnings Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the prepared remarks, the call will open for questions and an answer session. As a reminder, this call is being recorded. Now let me turn the call over to Bill Fund, Senior Vice President, Investor Relations. Please go ahead, sir. Thank you, operator. Welcome, everyone. Let me remind everyone of our safe harbor disclaimer that covers today's call and webcast. Our call will contain forward-looking statements which involve risks and uncertainties that could cause actual results to differ materially from those discussed in 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 investor section of our corporate website at every.com. We do not intend and assume no obligation to update any forward-looking statements, which are made only as of today, August 4, 2021. You are also cautioned not to place undue reliance on such forward-looking statements.
spk03: We will refer to certain non-GAAP financial measures, such as adjusted EBITDA, free cash flow, and net cash positions.
spk04: 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 a replay of today's call can be found in the investor section of our website. On our call today are Mike Rumbles, Chairman and Chief Executive Officer, Randy Taylor, President and Chief Operating Officer, Mark Labai, Chief Financial Officer, Kate Lowenhar-Fisher, General Counsel, Dean Ehrlich, Games Business Leader, and Darren Simmons, our FinTech Business Leader. Now I will turn the call over to Mike Rumbles. Well, thank you, Bill, and good morning, everyone, and thank you for joining us. I'd like to begin by sharing a few highlights and observations from the second quarter. Our outstanding results and strong growth relative to 2019 are clear evidence of the success of our organic growth initiatives, as well as the sustained recovery in the gaming industry. All of our key financial and operating metrics are up impressively compared to the pre-pandemic 2019 second quarter, and we significantly exceeded our results for the second quarter of 2020. On a consolidated financial basis, we set all-time quarterly records in revenue, net income, earnings per share, and adjusted EBITDA. With that financial performance, free cash flow generated in the first half of 2021 exceeded the free cash flow we generated over the prior two years combined. Our results were even slightly ahead of the expected range that we announced in June in conjunction with our refinancing activity. Operationally, our excellent performance clearly demonstrates that the complementary nature of our games and fintech segments has never been stronger. In games, the investments that we made to expand our game development studios and broaden our portfolio of differentiated cabinets continue to drive sustained growth in both our ship share of for sale units and in our gaming operations installed base. Each cabinet style that we produce is supported by a strong pipeline of original content that is available for distribution in both class two and class three markets. And this library continues to expand. This content pipeline is also supporting our growth in the digital iGaming space. In FinTech, we have successfully expanded our product offerings through investments in both internally developed products as well as through strategic accretive acquisitions of complementary products and technologies. As a result, Today, we offer the most comprehensive portfolio of integrated financial, loyalty, and reg tech solutions for the casino industry. Furthermore, since we had the vision several years ago to create a digital neighborhood with a focus on cashless technology, our products are integrated with one another. This provides casino operators additional value and ensures the seamless operation of these mission-critical solutions, while at the same time providing casino patrons with player-friendly offerings. As a result of our operating progress, the successful refinancing of our debt, and our substantial free cash flow, Every has never been in better shape. As we shift our focus from deleveraging, our disciplined capital allocation practice will remain the same to stay the steady course of return-focused investments. Our investments will be made with an eye toward expanding our range of complementary products to drive further share gains in our core games businesses, as well as to broaden the capabilities of our digital neighborhood in our fintech business. You can think of our integrated digital neighborhood as a broad platform upon which we can layer new products that will continue to grow our business by increasing the value that we offer to casino operators and their patrons. We will also remain focused on investments in newer technologies that leverage our core strengths. Our digital cash club wallet solution is just one example of this. Today, we are live with our cashless wallet solution at 10 casino properties that have more than 24,000 gaming machines and 700 table games. These casinos encompass both tribal and commercial operators, and we are facilitating cashless transactions for thousands of casino patrons in multiple states. Our cashless wallet technology places us squarely at the forefront of the dawn of an exciting new long-term growth opportunity in the casino industry. Our competitive advantage draws its strength from our substantial experience and expertise in funding transactions across the gaming industry. This strength is combined with our unique banking as a service solution focused on the Cash Club wallet and strategically integrated with all of the products on our digital neighborhood platform. This creates a seamless experience for casino guests and enables significant cost efficiencies in the back of house operational side of the casino. We also have several new loyalty and reg tech related products that are under development and are continuing to extend our range of products in these categories. Another example of our return focused investment strategy is our remote game server. Our creation of a state of the art technology infrastructure leverages the strength of our successful game development. This has favorably positioned us to become a leading content provider for the rapidly expanding iGaming world. As our track record demonstrates, our search for new technologies, geographies, and interesting products can provide further sustainable growth across our fintech and games portfolios. We will invest in both internal development and in strategic acquisitions that can combine with our core strengths to provide accretive growth. And now let me turn the call over to Randy so he can provide you some more insight into our operational successes. Thank you, Mike, and hello, everyone. We hope you are all safe and doing well. Beyond our focus on technologies and products that Mike just mentioned, We also have strengthened and broadened the depth of our management team over the last several years. This enhanced leadership is evident across our product development, sales management, and production execution teams. We have never been stronger or had a more aligned workforce worldwide. As a result, we are executing at a high level, which in turn is delivering financial growth. Our track record also reflects the emphasis we've placed on striving to build a corporate culture focused on people and collaboration. This includes intangible but important elements to foster minds that will accept the prudent risk-taking needed to create new products while also driving home the disciplines needed for consistent execution and operating processes. We believe the strength of the worldwide every team, the culture of collaboration and innovation we continue to foster, and having the right people in the right positions are key factors in why we have so quickly regained the momentum that our business was demonstrating just prior to the onset of the pandemic. The heart of our success is our core recurring business operations, which represented approximately 77% of second quarter revenue. These operations are performing beyond our initial expectations and are providing exceptional growth in today's environment. While the casino industry has rebounded solidly from the depths of the pandemic, we believe our performance reflects our growth focus and consistent operating execution. The success of our premium games remains the primary growth driver of our install-based unit count and the higher average daily win per unit. These in turn drive significant gaming operations revenue growth. Our base of premium units has increased every quarter for the past three years and now is 43% of our total installed base. This is the leading contributor to the 61% growth in gaming operations revenue that we achieved relative to the 2019 second quarter. In the second quarter, we had initial installations of the new Monsterverse wide-area progressive game on our Empire DCX dual-curve cabinet. While it is very early in its rollout, the initial performance is highly encouraging. Following regulatory approval in April, we also made the first placements of our wide-area progressive games in Nevada. This opens up a substantial commercial marketplace for future growth. Also contributing to the gaming operations growth was the 139% year-over-year increase in revenue from our digital operations compared to the 2020 second quarter. Our digital revenue was also up 50% on a quarterly sequential basis, as during the quarter we went live at customer sites in the additional jurisdictions of West Virginia, British Columbia, and Manitoba. We firmly believe that our proprietary content positions us very well for long-term growth. Alongside our success in gaming operations, product sales rose compared to the 2019 second quarter. Both replacement sales and total shipments, which includes several hundred units for new casino openings and expansions, also increased sequentially over the 2021 first quarter. In the new casino openings, we garnered strong relative floor shares and our ship share of unit replacement sales increased compared to our typical historical share. This is partially driven by the success of our Empire Flex Cabinet and its library of what has quickly become player popular video content. Turning to our FinTech business, total segment revenues increased 21% over the 2019 second quarter, reflecting growth in each of our three line item categories. Our financial access services revenues, formerly Cash Access Services, which includes our cash and cashless financial service solutions, increased over the 2019 second quarter by 13%. This growth was largely driven by higher same-store transactional activity, which was up at a mid-teens rate consistently throughout the quarter. I would note that this is a much higher rate compared to the mid single digit percentage growth rate that we typically experienced in recent years pre-pandemic. Contributing to this growth were incremental revenues from new customer wins and customer expansions during the period compared to 2019, partially offset by a few customer sites that are still closed or operating with limitations, as well as an almost nonexistent international player in the U.S. due to the ongoing travel restrictions from foreign countries. Another quarter of growth was also achieved in our software and other, Formally, our information services and other, which includes growth from our loyalty software sales and subscriptions and from our reg tech software for regulatory compliance. Like financial access services, revenue from software, reg tech solutions, and annual maintenance and support services has a large recurring revenue component. Recurring revenue portion represented 80% of software and other revenues in the second quarter, while initial or other one-time sales accounted for 20% of Q2 revenue. Revenues from hardware sales, formerly called equipment, increased 63% over the 2019 second quarter. Growth over both the 2021 first quarter and the 2019 second quarter reflects a meaningful contribution from the sale of loyalty and financial access kiosks, cage, and other equipment for new casino openings, expansions, and new customer wins. After being delayed due to the pandemic, we believe there was also a slight pickup in replacement sales of financial access kiosks. Now I'd like to turn the call over to Mark to share his perspective on our free cash flow and outlook. Mark. Thanks, Randy. On today's call, I'm first going to focus on the significant increase in our free cash flow. Then I'll turn to the improvement in our capital structure, and I'll finish with our outlook for the remainder of 2021. As Mike noted, our second quarter free cash flow increased substantially over 2019 and the prior years. This growth represents a more significant flow-through from the increased adjusted EBITDA, along with a more modest level of capital expenditures in the quarter as measured as a percentage of total revenue. We believe the CapEx run rate in the first half of the year reflects how we have managed our capital spending to match our customers' recovery. With continued improvement in our customers' operations, and as we look to restart certain capital projects that were deferred during the height of the pandemic, we expect the second half CapEx spend to be modestly higher than the first half of 2021. Looking forward, we expect our free cash flow will also continue to increase as a result of lower cash interest. This will come from both the lower effective interest rates and the lower debt levels we have achieved following our recent refinancing. Compared to the balances outstanding at June 30th of this year, our annualized cash interest costs are expected to decrease by more than $23 million based on current run rates. It's also important to note that through this refinancing, we've extended maturities on our borrowings, with our term loan now due in 2028 and our notes due in 2029. Needless to say, this decrease in cash interest will flow directly through to future free cash flow. As a result of our enhanced cash flow profile, the very significant portion of our top line that is derived from recurring revenue streams, and our expectation for continued growth of adjusted EBITDA, we are now comfortable with a long-term net leverage ratio target of 2.5 times to 3 times adjusted EBITDA. We believe this level maintains a healthy and reasonable balance of debt given our size. and provides the flexibility for us to pursue high-return, accretive, organic, and acquisition-related growth opportunities. With the cash balances we have on hand and the additional capacity of our new, undrawn $125 million revolver, we believe we have adequate liquidity and flexibility to support our ongoing business needs, including any short-term setbacks. Turning to our outlook. For the full year, inclusive of the expected early debt extinguishment costs associated with our refinancing, we expect net income to be in a range of $87 to $95 million and adjusted EBITDA to be in a range of $332 to $342 million. Let me share some of the variables that shape these views. First, as a result of the recent refinancing transactions, we expect to incur approximately $32 to $35 million of pre-tax charges in the third quarter related to the extinguishment of debt and the write-off of prior financing discounts and fees. Approximately $21 million of these charges relate to the redemption premium and make-whole interest on the former borrowings, while the rest are largely non-cast charges that will impact net income but not adjusted EBITDA. At a macro level, we believe the first half of 2021 benefited from pent-up demand, improved vaccination rates, and the easing of limitations on our casino capacity. Government stimulus also likely played a role. For every, as Randy noted, the growth in our financial access transaction activity as compared to 2019 was well above historical levels. This strength also likely benefited the daily win per unit of our gaming operations. Therefore, while we believe much of this increase is sustainable, we are taking what we believe is an appropriately conservative view on the back half of the year due to preceding government stimulus benefits, an increase in pressure on consumer discretionary spending, and the more recent and renewed overhang of COVID and the Delta variant. As you review your models, in the third quarter, we expect to see a temporary, one-quarter-only pause in the growth of our installed base. As we started the third quarter, a large customer converted a couple hundred units from leased to purchase units as they transitioned their floor away from a leased model. This will result in an initial reduction of our leased footprint of gains. And while we continue to see growth outside of and beyond this single customer, we expect the total installed gaming operations base to be down slightly to perhaps flattish for the third quarter before again resuming growth in the fourth quarter. Contributing to our expectation for the resumption of growth in the fourth quarter is the expected opening of a tribal customer's new Class 2 casino facility. In conjunction with this casino opening, we expect to incur between $2 and $3 million of new placement fees that will lock in a footprint of approximately 200 units until mid-2028. We expect to have the majority of the initial total footprint of games at this facility. Moving on to equipment and hardware sales. In the second quarter, we generated strong units for both our games and fintech segment as a result of new casino openings and expansions. While new openings and expansions are always part of our quarterly results, the second quarter had a larger quantity than we normally would expect. Accordingly, because of fewer new casino openings and expansions in the second half of 2021, we do not anticipate the same level of expansion sales of both games and fintech hardware in the third or fourth quarters as we had reported for the second quarter. Therefore, without that second quarter bump, we expect to see shipments of equipment and game sales at levels more closely aligned with the first quarter of 2021 rather than the second quarter. I do want to take a moment to highlight how our second quarter results have reinforced the evidence of the gains we are achieving in ship share for unit sales. While our customer's purchase decision horizon remains focused on only the next 60 to 90 days, and they appear to be waiting until G2E to see what is in the pipeline, we are seeing clear evidence of improved spending in conjunction with the success of their slot floors. We believe we are capturing a higher percentage of the spend compared to our historical levels. There are also still opportunities for continued growth, primarily from our international operations. Certain customers, like those in Canada and other international markets, where the casinos have remained closed, are only now starting to reopen. As these locations begin to see their gaming revenues return, this could lead to further revenue growth opportunities for both our games and fintech segments. We expect free cash flow will remain strong in the back half of 2021. The fourth quarter will also benefit from the one-time change in the timing of the semiannual interest payment on our new unsecured notes. Our new notes were issued on July 15th and now have semi-annual interest payments that will occur in January and July as compared to the previous payments we made in December and June. Thus, our former comparable December interest payment will now be made in January. With that, I'll now turn the call back to the operator for questions. Thank you. Ladies and gentlemen, at this time we will be conducting a question and answer session. If you'd like to ask a question, you may press star 1 on your telephone keypad. A 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 key. Our first question comes from the line of David Bain with B. Riley. Please proceed with your question.
spk02: great thank you and congratulations on the results again and improved capital structure um the first question i had was on the cashless digital wallet side if maybe you could provide any broad-based initial thoughts on end player adoption and frequency rates if you've noticed a learning curve or if it's proven super intuitive you know any kind of commonalities developing that may give us a sense to end user cadence or adoption
spk04: sure david thanks and and uh thanks for thanks for the question that's going to make it difficult to answer um uh before i turned over to darren to give you to give you some color um you know we're not at a point yet where i think we want to drill down into um the level that you're you're seeking um right now we're i i think as i said in the prepared remarks we're really at the beginning of the age of cashless. And as we work with our customers on this, we're trying to nail down those numbers that you're interested in ourselves. And as we gather those from our customers, we're trying to make our own decisions as to how we think the product is not just working now, but how we might tweak it in the future. But if you want to get some high-level color, Darren, Sure, yeah. Yeah, David, so I think we are certainly encouraged by the user experience that we've worked with our customers on delivering to their patrons. So in general, I think what we've done is something that is going to make this a, you know, again, we've looked at this long term. It's a marathon, not a sprint in terms of rolling this out. And so, again, our customers are being very measured in terms of, of the pace of how they're rolling out. And I think, you know, as we look through the second half of the year, I think, you know, we'll be able to have more data points as we expand, you know, customers through the second half of the year. And so I expect, again, I think I said last call even, you know, I would say the results that we have in terms of, you know, run rates and all that kind of stuff. We'll have a much better picture of that, I think, you know, after sort of the second half of 2021. David, the one thing I would share with you is we're seeing more than half of the wallets are being signed up for our customers that are over the age of 50.
spk02: Right, that's great. That's great. Okay. That leads to the intuitive section, I think, so that's great. So I guess my next question is only one more. Mark, you gave some net leverage thoughts, which I thought were really helpful, and I was just hoping to follow up. You know, looking out 12 to 18 months, leverage should be below that lower end of that range, you know, if there's no MA. I guess the question is, Rather than going under levered, if there is no M&A, are there thoughts on return of capital and anything along those lines? Or if you are targeting potential M&A, any kind of strategic thought side segment would be helpful.
spk04: Sure. Look, I think we certainly are in the best position we've ever been in in terms of the capital structure right now. Our leverage profile is right, you know, kind of where we wanted it to be. If you take the midpoint of our year-end guidance for adjusted EBITDA, I'm assuming we pay nothing down on the debt will be right around three times total leverage by year end. So kind of right in that sweet spot for us of where we think from a leverage profile. I think we're now on a different view of our capital allocation, and we can look to grow this business both organically, as we talked about in my prepared remarks, and looking at the M&A side of things. I think we believe there's opportunities to take those smaller tokens like we've been doing and maybe even look at some more strategic kind of additions that might be a little bit larger and continue to keep the growth profile going with the business going forward. So I think that's how we're looking at this as opposed to us focusing more on thinking about returning capital in the form of dividends or other means. But we would evaluate all those options as we move forward, and nothing's off the table.
spk02: Okay, great. Thanks so much.
spk04: Thanks, David. Our next question comes from the line of David Katz with Jefferies. Please proceed with your question. Good morning, everyone. Thanks for taking my question. Look, just taking in all of the commentary in the context of a super strong quarter, I think it might be helpful or constructive to just speak a little bit longer term. My sense is just from the stock reaction that there may be concerns about what the growth trajectory ultimately is. you know, to the degree that you're comfortable, you can talk about sort of the 22 and onward trajectory from where we sit. And, you know, as I sit here and look at the, you know, consensus of estimates and so forth, you know, any anything around kind of what the longer term growth trajectory here, I think might be helpful. Sure, David. Let me take a first shot at that, and I'll turn it over to Mark and maybe Randy and our business leaders. We're in a position right now where we have been continuously growing for the last several years, and we've been doing it in a combination of both organic as well as acquisition-related product sets. One of the things that we continue to look at is additional products that may have been developed outside of our company that were not invented here that would fit well with our digital platform. As I indicated in the prepared remarks, our platform really is designed to bring other products onto it and have it fit seamlessly and then speak to the existing products that are currently in the digital neighborhood. And so we're going to continue to pursue that both internally as well as look at external product sets. In addition to that, I mean, we are not bound by simply the casino industry. When we look at this, I think we have very broad horizons available to us. We can look into the entirety of the hospitality and entertainment sector when we look at the products that we've already developed that would have application in other industries or other verticals. So I'm not concerned about our ability to grow there. And in our game segment, we're just kicking off on the iGaming side. We've had a couple of years under our belt now. We've just finished building the RGS and getting it up and running and integrating it with the websites of the casino operators. And we're now proving out that our content is working both in bricks and mortar as well as in the digital space. And I think we're on the verge of additional growth that will be equal to potentially larger as we go forward in the next several years than we've had in the past. So I'm very optimistic about the future, despite the headwinds that we have with COVID and what's going on in the macro environment. I'm very bullish on it, but I'm happy to have Randy, Mark, or anyone else weigh in on that. I would say, David, that this management team, you know, is not satisfied with, you know, a single-digit growth. So we are going to be looking at all things that are out there to continue, you know, the growth that we've seen to date. So, as Mike said, we think there's a number of avenues that we can grow in, and there's other areas we haven't touched, you know. So I would say, you know, You know, we're only at a 10% ship share right now on the game side, and so we still think there's room there, as Mike talked about, iGaming. And I think on the fintech side, you know, the digital neighborhood that we're working, we can, as Mike said, there's areas to grow. So it's both organically we believe we can do it and inorganically. Okay, and if I can just circle back on one of Mike's comments around the digital stuff. I just want to make sure I heard correctly. Were you suggesting that the digital opportunity could be as big as the land-based gaming opportunity that you have, or just the growth of it could be as big as the growth you have elsewhere? Yeah, I was really speaking to the growth of it, David, because as you know, the iGaming, the actual iCasino space is smaller right now than even sportsbooks. So I wouldn't compare it to the land-based. But I think what I was really trying to say is that growth could be very similar, if not even bigger, because it's a smaller space, and that our content is working extremely well there, just as it has in the land-based and those And as you know, the content on the gaming side is king. And so I think we've got growth opportunities in both land-based and in iGaming. Okay. Thank you very much. Thank you. Our next question comes from the line of Barry Jonas with Truist. Please proceed with your question. Thanks. Just following up on that theme, can you talk a little bit – you mentioned international before. I was just curious how you see international as a growth driver going forward. Well, Barry, the one thing I'll tell you is that we're always looking at other markets outside of the United States. As you know, we're in Canada. We're in the United Kingdom. We even have a very tiny footprint in Macau. So we're always looking for – for markets that we think would be not just good markets for our games products, but also good markets for our fintech products. And so as we look at both sides of our businesses, we think there are international locations that could be valuable to us to enter. We look at a lot of aspects of those markets to make sure that we'll be able to enter those as easily as we have the markets that we're in today. We think we've identified a number and we'll continue to look at those and look at M&A opportunities as we go forward. I don't think we've put emphasis on one or the other at this point in time. I think we're looking at both. That's great. uh you know scientific games just announced this parts of their business i know we've discussed this before but maybe worth revisiting in the level of imbalance and as it relates to every so i guess one can you talk about uh how many is across games and fintech and two would you still be open to selling anything for the right price I'm not sure I heard the first question, Barry, but look, we're always willing to sell one or the other at the right price. But I would say we believe that these two segments are continuing to operate very well together. They're complementary. They really feed off of one another. So I think a lot of our success recently has been part of that. So we will entertain anything that is at the right price. But I think right now we're focused on offering the company as it stands. Yeah, Barry, what I would say to that is, I mean, Randy's absolutely right when he says the right price. You just have to understand that because they are working so well together, that price will be higher than perhaps people have thought they could purchase one or the other of our businesses in the past. Great to hear it. Thanks so much. That covers it. Appreciate it. Thanks, Barry. Okay. Our next question comes from the line of John Davis with Raymond Gates. Please proceed with your question. Hey, good morning, guys. Hey, John. Just wanted to start off, Mark, on your comments around the 3Q install base, you know, I think being impacted by some lease to sale. So I think you said a couple hundred units. Maybe just help us, you know, what's a normal quarter lease to sale? Like how much of a headwind is it? And just kind of contextualize the commentary there would be helpful. I would say lease-to-sale is always a normal recurring part of our business operation. So what we tried to call out, or I called out, and this was the really one-time large, I'll say a major casino shift in how they're progressing or how they view the lease model. So I would tell you this is additive to the normal cadence of what we normally see. So usually we've been kind of growing. you know 150 200 250 units a quarter on average historically per quarter and you know that includes those lease to sell conversions so that is a normal recurring piece of it so this was additive again and that's why we think it kind of puts this kind of flattish to maybe slightly down in q3 when we end the quarter but we'll still have that normal kind of growth in there plus q4 going forward we expect to see growth with a new new casino that we expect to have the initial, the largest portion of the initial opening floor of it that we should be able to grow from there nicely in Q4. Okay, so said another way, there's kind of an additional couple hundred units relative to normal. Correct. But you don't see any issues getting back in 4Q to grow? No. No, we do not. And then maybe another one for you, Mark. Just free cash flow conversion here. I think if you kind of adjust the timing of interest payments, you get something a little north of 50% of EBITDA into free cash flow. I assume that that should kind of drift higher as we go forward because EBITDA growth should more or less fall mostly to the bottom line, maybe a little bit of increasing capex. But just help us think about how you think about free cash flow conversion kind of on a go-forward basis, at least as a percentage of EBITDA. Yeah, look, I think you've hit the nail on the head that I think it should be going higher. The first half of the year, we had the old debt structure in place, so our cash interest was much higher. So second half will benefit from that, and that kind of gets you your full year, roughly that 50% number you're talking about. We've kind of always felt the CapEx of the business, supporting this business, is fairly consistent from year to year, call it $110, $115 million a year of CapEx. We don't see that changing materially with the core operations today. So as we're able to grow that install phase, grow the unit sales, grow the fintech business, we should get a little better flow through as we move forward. Okay. Is that something you guys see kind of creeping towards 60% or even higher? Do you guys have kind of any sort of internal targets on what you guys think free cash flow conversion can look like in the future? You know, I think it could start creeping up a little bit higher towards 60%. I don't know if it gets to 60% at least early on. But, again, it should be creeping up towards there. You know, I think with what we've done on the debt side, you've got a really nice cash interest component going forward. You know, you'll save quite a bit of dollars there, probably closer to $40 on just the debt a year. And then, you know, with bulk cash interest down there, you're mid-$40. So I think you're in a really good spot. You know, the one piece – We don't pay cash taxes today, so that's not looking to change. We have quite a bit of NOLs on the books today, so that won't change. So I think that's what's going to drive you getting closer and closer to that 60%. One thing I would add to that, John, is look, as we increase the EBITDA, I think that's also going to be more development costs, which could be capitalized. So, you know, whether we can hold the capex that the number Mark's talking about, I think your bigger EBITDA will require us. or a little bit more either in install-based CapEx or just development costs because that's really how we're driving the EBITDA increase. So I think that's why the guy would, like Mark, hesitate about getting to 60% just yet. Okay. And then two very quick ones to wrap up here. One, FinTech margins, I think, versus 19 were down about 300 basis points. I'm assuming, you know, anything there. I'm assuming some of it may be confidence-related given the performance of the company. But any comments there? And then quickly, just any comments on July trends? You know, as stimulus starts to wane, are you guys seeing, like, how should we think about July versus June and kind of the trajectory from here? Thanks, guys. Yeah. Yeah. Remember, we kind of called out in the call to the prepared marks that Q2 was an extremely strong quarter for us in light of the pandemic from an equipment and hardware sale perspective. And that obviously has a much lower margin profile on there. So that's contributing in this quarter to some of your, you know, even down margin decline that you're looking at or gross margin decline because we have so much more volume in terms of of hardware sales. And in fact, moving forward, you should be looking for Q3 and Q4 to be more like Q1, not necessarily like Q2, just because we had this inordinate amount of new location openings and expansions that were going on in the quarter. And then I would say from a July standpoint, John, we continue to perform very well. So July was in line with what we had expected and probably just a little bit better. So I know we gave some guidance there that takes into consideration whether uh things um you know i guess normalized a little bit but so far uh july uh fairly strong for us uh we'll just see how the rest of the quarter ends up okay appreciate it guys thanks for all color got it our next question comes from the line of george sun with craig hallam please proceed with your questions Thank you. I wondered if we could just dial in a little bit more on a buy versus build thought process. You mentioned on the build side that you were looking at developing some loyalty and regulatory tech elements. Just wondered how narrow or potentially how significant some of those might be. And then on the buy side, you mentioned a focus on getting high returns. I'm just curious if you could share hurdle rates or and how you're thinking of that buy side of the equation. Thanks. Well, yeah, George, let me speak. I'll let Mark speak to the hurdle rates that we have for our acquisitions. But when we look at spending R&D on our fintech side or even on our cabinet and game side, you know, we look for particular IRRs that we think will be additional to what we already expect to glean from the existing product set, but We also looked to see what it would be if it was someone else's product and we were purchasing it and what would we expect from them. So we try and do the analysis that it makes sense for us whether we acquired it or whether we built it ourselves when we do that R&D spend. And the products that we're looking at, quite frankly, as you embed loyalty and reg tech into the digital neighborhood, which means you brought it into your cash access functioning across your various products, I mean, you're providing something to the casino that they have not had abilities to use before or use in the manner in which we're bringing it in before. And we find that extremely valuable for the casino operators, certainly as we speak to them, but we think it's also going to be helpful to the patrons. to be able, for example, to get your W-2s at the end of the year with the push of a button and have them all sent to your email. Those are the kinds of things that patrons have never seen before. And so as we embed all of those together, I think, we're going to see a greater return on the products that we develop internally. And as we look externally, we're always looking at anything we think that would benefit from our ability to distribute it widely throughout the casino industry. We will use not just our sales channel but our existing locations. And if anything looks extremely good, we'll put it into our digital neighborhood. But we're always looking at accretive acquisitions, and that's going to continue no matter what. And look, George, Mike said a lot of the key points I would have hit on as well there. I'll tell you, we're not going to talk about specific growth rates, but we're looking to make sure these deals that we do are accreted to us and are additive to our growth on both our revenue and our bottom line in terms of net income and adjusted EBITDA over the long haul. We're finally in a great position from a capital structure perspective and the free cash flow we generate to allow us to make some more choices. And I think we've proven our track record of successful acquisitions and making sure we're making smart choices with respect to how we buy and acquire things to leverage the growth going forward. And we look to continue. doing that moving forward. But we do do an analysis to make sure they make sense to us from the spreadsheet map perspective. But I think Mike covered all the other intangible aspects of it. How does it enhance our products? How does it strengthen our position with our customers? How does it provide more value in return to patrons over the long haul? Those are the things we look for from that position. Great, guys. Thanks for the perspective. Our next question comes from the line of Jeff Stantinow with Stiefel. Please proceed with your question. Great morning, everyone. Thanks for squeezing in here and congrats on yet another excellent quarter. I wanted to drill into the forward guidance, specifically the cost side of the equation. Even the margins, again, coming in over 50% during the quarter. It looks like the guide suggests sequential stability on margins for the back half of the year. We have heard some peers highlight potential cost headwinds towards the back half of the year, just given some supply chain issues. Can you comment on this trend as it relates to your business? And then more broadly, can you help us think about the sequential puts and takes that are based into your margin guidance for the back half of the year? Yeah, when I look at where we've kind of been running from an operating expense perspective, and I kind of always talk about operating expense exclusive of non-cash comp. Non-cash comp runs roughly $4 million a quarter. Second quarter, usually when we do our grants, maybe it creeps up about $1 million, $2 million just because of how some of the expirations work and the accounting treatment. But excluding those, our operating expenses have kind of been running around 25% or so, plus or minus a little bit, in terms of total consolidated revenues. And our R&D expense has kind of been close to, say, 6% of those consolidated revenues. So the good news is we continue to grow the business. We expect to keep similar leverage. But to some of your pointed questions, we do see impacts in the cost structure related to Things like just rising wage rates. We're looking to fill positions. It's costing us a little more to fill some of those positions. But specific to us as we come out of the pandemic, we've also had increases in costs like things like travel as our field techs are being able to travel more, see our customers more, do more with our customers. Those costs are kind of rising, and we've been focused on advertising and marketing. You know, shows, gaming shows are coming back. So, you know, we just had Niagara. We just completed a very successful Niagara conference, and we'll have G2E in the fourth quarter. And, again, when you think of that percentage that I gave you, you've got to add a couple million dollars probably in Q4 to cover the cost of G2E in your OpEx forecast. But those kind of things are rising in the second half of the year. But we think – The revenue is also going to be rising for us, and that will help offset some of that cost. But, again, there will be a little bit of a convergence, if you will, on that EBITDA. So we probably won't be at that second-level EBITDA, that $90-plus million EBITDA level that we just suggested for Q2 in the second half as a result of some of those rising costs and some of the pullback in the equipment. Got it. Helpful. Thanks. And then, you know, you talked to success with some of your WAP games. It looks like another 16 or so units placed during the quarter, including the first commercial installs in New Jersey and Nevada. Can you talk a bit here more on the strategy moving forward on the commercial side, which states are near-term priorities to expand into, and how quickly should we expect you to expand geographically speaking? Sure. Sure, Jeff. Actually, Dean's on the line with us. Let me turn that to him.
spk03: Okay. Hey, Jeff. This is Dean. So on the WAP strategy, I mean, obviously, we look to grow in not only new markets, just a ton of runway in Nevada. We're just really getting started there. But even in our existing both Class 2 and Class 3 Native American markets as well. So to me, it's predicated on product. The one thing I would mention that there was a couple questions earlier on the call as far as product pipeline, where we just have just a tremendous amount of new product that's coming out between now and the end of the year between, I'd call it eight premium banked concepts. On the premium side, I'd say most of them would be in the wide area progressive category. Uh, and also even in our for sale side where we have, uh, upwards to, uh, you know, 20 different, uh, for sale themes that are going to cover both our, uh, video and mechanical products. So, um, I think, you know, we're poised and ready to grow, you know, on all fronts. Um, You know, obviously, we look to expand the wide area progress of install dates as much as possible. That one takes a little bit more time, but as you can see throughout the quarters, we always can have, always to this point, continue to trend up. And that's what we're looking forward to doing.
spk04: Great. Thanks. Very helpful and thoughtful as always. Appreciate the color and looking forward to seeing you all out at G2A.
spk00: Great. Thanks, Jeff.
spk04: Thanks, Jeff. As a reminder, it is star one to ask a question. Our next question comes from the line of Chad Baynon with Macquarie Group. Please proceed with your question.
spk01: Hi, good morning. Thanks for taking my question. Just wanted to ask a high-level one on the cashless adoption or the digital neighborhood adoption. Given some of the results that we've seen from your clients and the operators in the space, most are up 20% sequentially, putting up some really strong margins. Do you think the conversation for them to move to cashless adoption has actually accelerated just in the past couple months because of the performance that they're they're generating and the leverage reduction that they're able to see. Just any changes in your conversations with some of the operators in the past couple months. Thanks.
spk04: Yeah, absolutely, Chad. Thank you. Actually, I don't... I don't think that that is, in fact, what's occurring. I think what you see with our customers is they're going through a very strong period of demand, and they've been able to reopen their operations. getting both the bang for the buck in terms of not having to move cash and cash equivalents all over the floor. They can do it with digital. And the adoption by patrons, especially those that a lot of people thought weren't going to be able to do it, those over 50 that people thought, oh, gosh, they'll never use technology, has been extremely strong. And so I think that's been driving a lot of it. And I think you'll see over the course of the next six to 12 months, you're going to see a lot more of them. But the one thing I would remind everyone is that ticket in, ticket out, took well over five years to really penetrate the industry to a 90% or greater level. And so as we roll the wallet out, we think some casinos are comparing different offerings, others are dealing directly with us, and it's still sort of a sorting period that's going on right now. You cut off a little bit. I'll maybe just kind of add on to that. The cashless discussions, I guess, just to remind you, these are not new. And we've been talking about this now for several years. We actually, if I think back, even at G2E 2018, we talked about the digital journey. We talked about cashless. We talked about delivering cashless. contact list cashless uh technologies to customers and what that customer journey is like and so that's what we've been focusing on the last uh you know several years and and and i think you know look we talked about this last year right the discussions of cashless uh actually increased right so i don't think there's been anything necessarily new in terms of you know their performance and their desire to go cashless i think this is part of their strategy And I think, you know, look, we are in deep with many customers in these discussions and projects. So I don't think there's anything special about, you know, what's gone on in the last couple months. This has been ongoing discussions for a couple years now. I think in earnest last year they accelerated. And so now it's just, you know, the operators articulating internally what they want that digital journey and cashless journey to be in terms of their enterprise. And as I think, you know, what we've stated many times in terms of what we've delivered in terms of our digital wallet technology, you know, embedded into what we describe as our digital neighborhood, you know, the features and the attributes, you know, I think ours ticks a lot of the boxes in terms of what the operators want and need at the end of the day. And, you know, I think we talk about, you know, again, the opportunities with it in terms of you know, not only, you know, the gaming side, right, connecting into slots and tables, but into the iGaming space, the sports space, but as we mentioned, you know, earlier on this call, getting into the non-gaming space where we certainly have opportunities, you know, across what we call our digital neighborhood in terms of the products and services that we have. So I think the discussions are, I would just say, as strong as ever that they've been in the last several months. you know, from last year. And so we have lots of projects in the pipelines with customers. So I don't think there's anything, you know, especially aggressive on it right now. But I think, you know, again, we're at a pace where we expect to be.
spk01: Great. Thank you, Eddie. Appreciate it. Yeah, Chad.
spk04: This does conclude our question and answer session. I'd like to hand the call back to management for closing remarks. We'd like to thank you all for your interest in every, and in closing, I would like to remind everyone that our focus is clearly on maintaining sustainable growth and building long-term shareholder value. We look forward to providing you with an update on our next quarterly call. Thank you. Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.
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