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spk09: Hello, everyone. Thank you for standing by, and welcome to the Every Holdings 2022 Second Quarter Earnings Conference call. During today's presentation, all parties will be in a listen-only mode. Following the prepared remarks, the call will be open for a question-and-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.
spk13: Thank you, Operator. Welcome, everyone. Let me begin with a reminder of our safe harbor disclaimer, which covers today's call and webcast. Our discussion will contain forward-looking statements that involve risks and uncertainties, which 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. Because of the potential risk, you are cautioned not to place undue reliance on forward-looking statements. We do not intend and assume no obligation to update any forward-looking statements which are made only as of today, August 3rd, 2022. We will refer to certain non-GAAP financial measures such as adjusted EBITDA, free cash flow, 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 today and 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. On our call today are Randy Taylor, Chief Executive Officer, Mark Labai, Chief Financial Officer, Kate Lowenhar-Fisher, General Counsel, Dean Ehrlich, GAINS Business Leader, and Darren Simmons, our FinTech Business Leader. Now, I'm pleased to turn the call over to Randy Taylor.
spk03: Thank you, Bill. Good morning, everyone, and thank you for joining us. I'd like to begin by sharing a few highlights of our second quarter financial results. Recurring revenue increased 7% in total from both our games and fintech segments, each reporting record recurring revenue. Revenue from sales of gaming machines and fintech hardware performed even better, growing 37% year over year, also reaching a record revenue level in both segments. This strong revenue growth drove an increase in operating income, pre-tax income, adjusted EBITDA, and pre-cash flow even with higher supply chain related costs and increased costs for internal product development, which is focused on ensuring that our pathway to consistent long-term growth remains within our control. Our record results are even more impressive when you consider the tough comparison against last year's record second quarter results. Those results included the benefit from government stimulus payments together with pent-up demand as players re-engaged at their favorite casinos following the reopening of most properties and the acceleration in vaccination rates. These record results reflect the foundational strength in our core businesses and our attention to operational execution on a daily basis. I want to highlight my appreciation for all of our team members for the dedication they bring to the job each day, whether they are collaborating to take care of customers' needs, developing and enhancing our product portfolios, or addressing the many opportunities or challenges across our operations. Their efforts result in the successful execution of our long-term growth priorities, initiatives that are focused on high return investments in new products and technologies, customer satisfaction, and new geographies for our games and fintech business units. The strongest proof point of the success of our investments has been the growth in our free cash flow. We generated $49.5 million in the second quarter and $101.1 million of free cash flow for the first six months of 2022, driven by increased contributions from both business segments. Even as we, like all of our peers and most other industries, address the fluid nature of the macro economy, I firmly believe we are well positioned to continue to succeed based on the significant free cash flow we generate on a quarterly basis. This enables us to look beyond servicing debt to place our focus on our capital allocation strategy and how we position ourselves in the future. This strategy is aimed at optimizing shareholder value through both further investment in our growth initiatives, as well as in returning capital to our shareholders through opportunistic repurchases of our stock. A key driver behind our sustainable performance is the high margin contribution from our core recurring revenue operations. Representing more than 70% of total consolidated revenues in the second quarter, our recurring revenue operations provide stability and also serve as the foundation to integrate and scale newly developed products and acquired operations. Mark will review our financial and operating performance in more detail in a few minutes, But first, let me share several key operating accomplishments. In the second quarter, our games business sold a record 1,957 gaming machines. For perspective, the last three quarters games sales have been the best three quarters in our history. I believe this is evidence that we are achieving increased ship share in the product categories in which we compete today, and benefiting from an improving industry-wide replacement sales trend. The success of our recent sales activity has been driven by our industry-leading, high-performing mechanical reel games, along with the ongoing success of our games library on our flex cabinet. Adding to this increase was the recent launch of our newly released mechanical reel cabinet, our player classic signature. Supporting these cabinets is our growing library of innovative content, in which we continually invest to ensure a robust pipeline of new original content. This enables us to support and maintain performance of our existing installed units and fuel further growth as we continue the march towards our latest target of 15% ship share. With industry unit sales strong for the first half of the year, we expect to see continued strength over the second half of the year as operators remain comfortable with releasing additional capital for machine purchases. We also look for opportunities to expand our capabilities and addressable markets. Through our recent acquisitions of IntuCode and Australian Game Development Assets, we increased our capacity to develop more games by adding two teams of talented gaming people in additional design studios. This strategically positions us to address two incremental market categories that will further channel and leverage our gaming content. A great example of our ability to leverage our content to generate growth in new markets is the success of our digital iGaming business, which has proven to be a key driver of our growth. We're able to leverage the success of our current and historical library of games that have proven popular with gamers and land-based casinos to be repurposed to the online gaming space. Our digital gaming revenue grew 61% year-over-year and was up 5% on a quarterly sequential basis. This growth reflects the quality and ongoing growth of our proven land-based content library, which we leveraged to add more titles with our existing customer platforms Combined with our ability to enter new markets as they open and to increase the number of operators to whom we supply games to in our existing markets. Following our successful launch with six operators in Ontario, as that market opened at the beginning of the second quarter, we are now featured on nine operator sites in Ontario. Another driver of our growth is the success being achieved with the launch of progressive jackpot linked games. We recently added some of our linked progressive games to six new customer sites and created four additional bespoke progressive games for customers. In our FinTech segment, we had another record quarter with gains across all parts of the business. This was the second consecutive quarter in which our core recurring financial access business delivered more than $10 billion of funds to our customers' casino floors. These results are being driven by consistent share gains, as well as increased activity on a same-store basis. We expect this trend to continue at levels similar to our pre-pandemic levels of historic growth, generally a low to mid-single-digit percentage increase over the prior year period. Our FinTech hardware sales reached a record $15 million in the quarter, driven by the ongoing demand for our fully integrated self-service kiosks, and the sales contribution from the recent acquisition of eCash, a leading provider of self-service voucher redemption kiosks in Australia. We are still in the early stages of realizing the growth potential from the eCash acquisition, with opportunities for product integration and cross-selling amongst our respective markets. I'm pleased to see eCash be the accretive contributor to our business that we expected. As a leader in providing financial access, loyalty, and reg tech solutions, we expect to generate continued growth through our relentless focus on internal innovation to develop new features and services that improve a patron's experience while also providing greater cost efficiencies for casino operators. The recognition of our innovation and the value we bring to operators continues to grow as evidenced with the SBC Award as Payment Solution of the Year for our digital wallet. In addition to our internal focus, we also review and evaluate opportunities that will enable us to acquire and scale up new products and expand into new geographic jurisdictions. The addition of our loyalty assets in 2019 and our ongoing focus to provide an integrated digital platform of loyalty, compliance, and mobile solutions has expanded the total addressable market for our FinTech business. To support the continued organic introduction of new technologies and products to capture this growth, we have ramped our efforts and investment in internal research and development over the last two years. On a year-to-year basis, on a year-to-date basis, R&D expense within the FinTech segment is running at nearly 6% of revenues compared to only minimal amounts pre-COVID. While we are clearly seeing the value and benefit of these investments in our record results, we are also making prudent investments to sustain a strong longer-term future. Our track record clearly demonstrates our search for new technologies, geographies, and interesting products can provide further sustainable growth across both our FinTech and games portfolios. Our priority for capital allocation will continue to be first, ensure that we are successfully investing in high-value internal opportunities. Second, evaluating and acting on strategic acquisitions that can combine with our core strengths to provide accretive growth. And third, opportunistically investing in our own stock when we feel its valuation is not fully reflected in the market relative to our future growth prospects. Now let me turn the call over to Mark to provide more insight into our operational successes.
spk02: Thanks, Randy. Our strong operating momentum continued throughout the second quarter with sequential growth in both segments. We recorded $32.5 million of net income for the quarter and we had our highest ever quarterly pre-tax income of $42.3 million and adjusted EBITDA of $94.4 million. For comparability purposes, It is important to note that our effective income tax rate for the quarter was 23% of pre-tax income versus a low single-digit effective tax rate throughout most of 2021. The difference is due to the valuation allowance reversal that occurred in the fourth quarter of the prior year and will negatively impact the quarterly and full-year comparisons of net income on a year-over-year basis. As Randy noted, a key driver of our continuing strength is our core high value recurring revenue operations. These revenue streams accounted for 71% of the second quarter revenue and 74% of the year to date revenue. In total, recurring revenues were up 7% year over year against a very tough comp and grew 4% on a quarterly sequential basis. In the gaming operations business, the most important driver of our sustainable revenue performance is the growth of units in our installed base. We ended the quarter up more than 500 units from the beginning of the year and over 1,200 units from the end of the second quarter in 2021. Our premium unit count continues to grow at a faster pace overall, and this is the 16th consecutive quarter of sequential growth in our premium unit installed base. In the coming quarters, we expect to see further increases in both premium and total units installed. On our last call, we noted we were one of only two major suppliers to grow their total installed base since 2019. And I'd like to reiterate that point while also adding that since 2019, the growth rate of our domestic installed base on a relative percentage basis has been the highest of any major supplier. We continue to invest in the development of original content to support our current footprint and drive future placements. For those of you who are newer to the every story, our steady long-term increase of both core and premium games reflect the benefit from the cumulative investment we've made to expand our game development studios and broaden our portfolio of differentiated cabinets, as well as the high priority placed on managing this space for optimal performance. We're also continuing to expand and broaden the number of casinos in which our premium products are placed. We always look to maximize total revenues and cash flows. This considers both the longevity of an individual placement as well as its total earnings potential. Our overarching goal is the sustained profitable growth of our total installed base. It is important to note that we can generate high quality returns on capital placements and accelerate our revenue growth by adding new units even at daily win per unit levels well below our existing average. Since daily win per unit is a blended metric, influenced by the size and volumes of the individual customer locations, as well as other macroeconomic influences, it is highly profitable to expand our placements at lower yielding locations. For the quarter, our daily win per unit, at nearly $40, is up 20% from pre-COVID 2019 levels. As expected, we saw a decline in our daily win per unit on a year-over-year basis, but on a quarterly sequential basis, our daily win per unit increased from $39.76. I would remind you that last year's second quarter reflected the benefit of a perfect storm of pent-up player demand, various governmental stimulus monies, and limited alternative entertainment options available to consumers. In addition to our continued success in gaming operations, we achieved a record level of gaming machine sales. Gaming equipment sales reached 1,957 units, an increase of 555 units, or 40% over the prior year. And the prior year benefited from an above average number of units shipped for new casino openings and expansions. This increase was driven by what we believe is our growing ship share, combined with the normalization of the industry replacement cycle. Although long-term visibility into operator spend remains limited, as we enter the third quarter, we currently have a strong backlog of orders. Turning to our fintech business, quarterly record segment revenues increased 16% year-over-year, resulting in record quarterly adjusted EBITDA of $35.7 million. And this total is inclusive of the significant year-over-year increase in R&D expense that Randy highlighted earlier. In the second quarter, eCash contributed $4.2 million of revenue, with growth in organic revenue up 10% year-over-year. Our financial access service revenues increased 14% over the prior year. driven primarily by higher same-store transactional activity. This resulted in the second consecutive quarter of delivering more than $10 billion of funding to customers' casino floors, which is an 11% increase over the prior year period. These trends have carried into and throughout July, including an all-time record volume achieved over the Fourth of July holiday weekend. During those three days, we delivered on average more than $6.5 million every hour to customers' gaming floors, for a total of $468 million over that three-day period. This not only exceeded last year's results for the same holiday, but any other holiday period, including the New Year and President's Day weekends. We continue to see great interest in our digital Cash Club wallet solution, which is a prime extension of our financial access services. Our Cash Club wallet enables casino operators to offer their patrons easy-to-use funding features across multiple properties in multiple jurisdictions and across the entirety of the casino resort, both on-premise as well as online. We continue to work closely with regulators in additional jurisdictions to roll out this new technology. We are currently live in 19 casinos across six jurisdictions. which is an increase from 16 casinos in four jurisdictions at the beginning of the year. While the visibility to specific timing remains uncertain due to necessary regulatory approvals, we believe that we could double that live number of properties in the coming months with an additional 20 new casinos and eight additional jurisdictions going live by the time of G2E in early October. Software and other revenue increased 22% year-over-year. The success of our loyalty software sales and subscriptions, RegTech software for regulatory compliance, and equipment maintenance services continues to drive strong performance. The demand for our loyalty products has been a key contributor to this growth while helping maintain the profile of our company's overall stable recurring revenue composition. The recurring revenue portion represented 78% of the total software and other revenues in the second quarter of 2022. Our fintech hardware sale revenue that had a tough comp a year ago, including significant benefit from equipment sales to new casino opening and expansions, increased 17% year over year. This growth includes sales of voucher redemption kiosks from our recent acquisition of Australia-based eCash Holdings. Through our focus on operational excellence and the execution of our long-term strategies, we have continued to strengthen our core business while simultaneously growing with new products and entering into new markets. This disciplined approach has led us to reaching an inflection point in our free cash flow generation last year. This year, our guidance suggests we will generate full-year free cash flow that is greater than the consolidated adjusted EBITDA we generated just a few short years ago. In the second quarter alone, we generated free cash flow of $49.5 million before amounts expended for acquisitions and share repurchases. The higher free cash flow we are generating provides substantial flexibility to invest in high-value internal opportunities, pursue strategic acquisitions, and repurchase our own common shares. During the quarter, we deployed $22 million for the purchase of acquisitions, including the initial payment and working capital true-up for Intuit Code Gaming, the software license from Zuby, as well as the working capital true-up for eCash Holdings. We also purchased 2 million shares of our common stock during the second quarter for approximately $33 million, which leaves just under $117 million of available buying power as of June 30th. under our $150 million share repurchase authorization. I would remind everyone that we aim to continue to balance capital allocation between attractive token acquisitions and opportunistic share repurchases. We remain comfortable with our balance sheet and our total net debt leverage target being 2.5 to 3 times trailing 12-month adjusted EBITDA. Moving on to our outlook. Today, we reiterated our guidance for net income of $125 million to $132 million and for adjusted EBITDA to be within a range of $368 to $378 million. On last quarter's earnings call, we raised the high end of our EBITDA guidance while leaving the low end intact. This accounted for our strong operating performance in Q1 and the opportunities presented by our recent acquisitions. while still acknowledging the uncertainties in the macro environment. We are just past the halfway mark for 2022, and we continue to have confidence in our operational success and continued growth, even as we carefully monitor the macro environment and consider the potential impact from any headwinds envisioned, including revenue mix shifts and higher R&D and operating costs. With that, I'll now turn the call back over to the operator for questions.
spk09: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please 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 keys. One moment please while we poll for questions.
spk00: Thank you.
spk09: Our first question is from Barry Jonas with Truist Securities. Please proceed with your question.
spk11: Hey, guys. I hope everybody's doing well. I wanted to start off asking about the supply chain. Obviously, you sold a record number of units in the quarter, and I believe you noted a margin hit from supply chain. But can you maybe talk about whether supply chain issues have impacted your ability to sell any more units? And I guess, is it possible maybe to quantify the impact that you are seeing? Thanks.
spk03: Sure, Barry. It's Randy. I'll give some thoughts on it and then pass it over to Dean and Darren in case they have anything to add. But, you know, I don't think we had any material impact in our sales for the quarter related to the supply chain. We've been able to manage it very well. I'm not saying that we won't have potential impact in the second half, but we're continuing to manage it, so I don't expect it right now. It's from a lot of different areas that we look at. We've made changes in our designs of some of our games to offset that. We've looked for other products. We have taken some costs related to having to ship parts in, but I don't look at this quarter with a record number that we put up that there was really anything that didn't get delivered that we wanted to deliver. Some things pushed, and that was probably more from an operator standpoint than us. So, you know, right now, it is a, in my view, it's a day-to-day, week-to-week battle as we, you know, we take a look at what our vendors or suppliers can supply to us and how we can meet the demand of our customers. So I'll let Dean and Darren add anything if they had anything to say.
spk10: The only thing I would add is that we're resilient. We figure out how to work through this. We all understand the challenges that are out there, and whether it's the redesigns or whatnot, we've been very resilient in figuring out how to get product out the door and into our customers' hands.
spk04: Yeah, I'd just reiterate that I think we've been managing this now for several quarters since the pandemic. I think the different teams are doing everything they can to continue to meet the demand of our customers. It had no impact in the second quarter for us, and obviously we're looking at the second half of the year. We don't anticipate anything for the second half of the year being impacted by supply chain.
spk11: Great, great. And just a follow-up question on cashless. I'm curious to get your perspective, sort of what are the next steps towards cashless maybe hitting some longer-term adoption goals. I know you're making progress with Penn, but curious, are there further regulatory roadblocks? Are the CMS providers doing enough? Or anything else that you guys need to do to sort of hit the next targets to get to the longer term?
spk04: Well, I think it's really just about the uptake of our customers and the timing of how they want to implement and go with the digital strategy. So we continue to roll this out with existing customers. Obviously, we've mentioned a large customer that we have that's expanding in the jurisdictions they do business in. We've got new customers coming on. And what I would just say is that as our existing customers have implemented this, the usage grows every day. So I would say we are on track with what we expected in terms of how it would grow and the performance of it. And it's just now just a matter of now penetrating the marketplace. And, you know, look, we've always said and I've always said that, you know, what we're doing here with this is really revolutionary, but the timing of this is evolutionary. So this is just timing of operators taking up the technology, making the investments that they need to make. And in long term, again, I believe that what we've,
spk03: built um you know in terms of of our strategy uh we'll we'll continue to lead yeah i would just add look we're we're i think we're we're happy where we're at right now i mean i would say happy being that we've provided um the the product to the customer it's the customers uh when they're ready to deploy it and and as darren said we have a number that are in the pipeline we think we're hopeful that some of these will you know get uh out in the public in the next uh in the second half of this year So, you know, I think we're ready, and as customers are ready, I think we can meet that demand.
spk11: Great. Thanks, guys. Appreciate all the color.
spk09: Thank you. Our next question comes from David Bain with B Riley Securities. Please proceed with your question.
spk07: Great. Thank you, and great quarter, guys. I guess my first question will be on guidance. Understanding the reiteration doesn't contemplate any significant impact from the macro, but does it also acknowledge some macro risk, meaning would you have looked at, you know, more favorably at raising the bottom or top end of guidance given everything you're seeing on the ground with play levels and fintech relative to what you hear out there on potential macro degradation?
spk03: Well, make sure I understand your question, David. It's Randy. I think what you're saying is, hey, if we had had some of the some of the strong numbers we had coming into Q2 would we have, you know, been a little bit, maybe looked more at our estimates and whether we might change them. Yeah, we definitely said, okay, but let's keep in mind that, you know, there is, you know, who knows what's going to happen in the second half. So I think it was a balance, right? We're comfortable with what we're seeing, what we're seeing in July as far as, you know, as far as transactions go on our FinTech business. So it gives us a lot of confidence that we're still right in line with our guidance. But, you know, it had, you know, we'd be in a different macro environment. We may have done something different, but I think we're very comfortable where we sit. And what we're seeing says we should be, you know, we should be right in there on our guidance. So I would say, you know, we might have done something different, but right now we think this is the best approach to be prudent, and that is to stay with our guidance based on what we're seeing.
spk07: Perfect. Okay, thank you. And then my second one is on the fintech side. Just, you know, bigger picture, we're sort of seeing a multi-quarter trend where the average transaction fee and funding value in BPS per transaction is trending higher. And I understand a mix of type of transaction is a big piece of that, but at least a small amount of that trend, can that be attributed to the higher take rate from digital installations and digital volumes increase?
spk04: I would say, David, that it reflects, I think, a bit of the strength of the consumer. You know, when I kind of look back at the historical transaction size, you know, from 2019 to now, I mean, it's up, I think, probably close to 20% on average. So, you know, that's significant. I think that shows strength of the consumer. We have talked about in the past, you know, sort of, you know, mix of transactions, as you did mention, and debit has grown, right? So as it relates to, you know, some of the transaction types that we offer, things like quick ticket, and now, you know, longer term, obviously, we expect on the digital wallet side to have those impacts because it's introducing, you know, new ways for people to access their entertainment dollars. So I think a lot of it does does reflect the strength of the consumer and the other things I talked about.
spk07: Okay, great. Thank you so much.
spk09: Thanks, David. Thank you. Our next question is from John Davis with Raymond James. Please proceed with your question.
spk04: Hey, good morning, guys. Maybe just start on the game segment first on kind of the daily win and how we should think about that in the back half of the year. You still think we can get to 40% for the full year. I know we're kind of knocking on the door there, but just curious on, on updated expectations there. And then also on the game sales side, you know, ASPs, you know, gross margins got squeezed a little bit there, but ASPs were up about 5%. First time in a while we've seen ASPs grow like that. So you're able basically to pass on some of the incremental supply chain, um, cost, uh, if you will, but just any thoughts there too, on how would you think about second half game sales coming off a record second quarter?
spk03: Sure, John. Look, I'll hit the daily win, and then Dean can add some as well, so he'll talk a little bit about the ASP, because I think there's a little bit of some other items in there to keep in mind. But look, our expectation is that we will still hit 40 for the full year. We've got second half to make up some of that ground. We're very close, obviously. We came in at $39.94, I would round up to $40, but I know that's not the right answer. But that's where we're headed to. And yeah, I think we're still fairly confident. I mean, the offset to that is, you know, if we can grow our install base into a place where it's not a $40 unit per day, but it is still a great return on capital, we're not going to pass those up. So we're going to continue with our strategy, which is, you know, I'm very pleased with the the increase in our install base. Um, and I think, you know, we've got a lot of things in the, in the, in the, in the hopper for, you know, improving that daily win. Um, but, uh, so I wouldn't say we've changed our, our mind. It's still our, uh, our, our goal and our target. And I, I still think, uh, we can, we can reach that. And on the ASPL, uh, Dean, give you some color on that.
spk10: Uh, John, I mean, the reality is our turn event sales, uh, are significantly up, uh, not only quarter over or sequentially, but year over year as well, where year over year we doubled basically the amount of turn event installations. So presume that we kept our cabinet ASP pretty similar. You start adding that in on a blended basis, and that's where you're going to get the majority of your 5%.
spk04: Okay, and then just any comments here on how I should think about game sales in the back half, and then maybe I'll go ahead and I'll throw my last one here at the same time. Historically, 4Q has been a little bit weaker from an EBITDA perspective. So any reason why that would be different this year as we think about 3Q, 4Q? But I think any color on second-half game sales would be helpful.
spk03: I'll let Mark kind of – he's got most of the forecast that we pulled together, and he'll give you a little bit of color on that. But I think how you're thinking about it is probably in the right direction, John.
spk02: Yeah, I think obviously the biggest cadence – Piecing between Q3 and Q4 is usually the timing of G2E. That happens in Q4. It usually has a million and change of impact to us on an EBITDA line, a couple million dollars more of OPEX in the corner hitting in there. Look, we said in our prepared marks that we see a strong pipeline for unit sales in the second half of the year. Team's pretty confident in our ability to fulfill the demand that's coming in for us in the current year as well. So we feel really good about that. Q3 started out strong for us, I'll say on both sides of the business. The cash access volumes in July have exited the quarter a little stronger than we ended the quarter. So we're optimistic that we'll start seeing July reports coming out and people talking about how strong July was for them overall, and we're hoping that carries forward. But I think usually in terms of cadence, you're right, Q4 ends up being a little bit softer unless there's a kind of push by the operators like last year where it seemed like there's a lot of sale opportunities on the equipment side. But I would think that Q3 is probably generally a little bit stronger than Q4 in terms of how we think about the cadence of EBITDA the rest of the way.
spk04: Okay. Appreciate all the color. Thanks, guys. Thanks, John.
spk09: Thank you. Our next question is from George Sutton with Craig Hallam. Please proceed with your question.
spk08: Thank you. I was interested to hear you talk about, on the FinTech side, starting to increase the R&D. And I was just curious how to look at that relative to M&A. Obviously, you've grown FinTech nicely through M&A. Is that suggestive of less M&A opportunities, or is that suggestive of some unique things that you can build more internally?
spk03: Yeah, I mean, George, sorry. I would say no. I think it's both. In other words, we believe there's still M&A activity out there on the fintech side, and we will use our free cash flow for that. But we also believe that, you know, with some of the acquisitions we've made, you know, like with Zuby, you know, Meters Express, and, you know, eCash, that there are other opportunities both here and Australia. And so that will take some R&D dollars. And I think Darren's really focused on both growing it organically through what we've already acquired, but I think there are still opportunities out there on the M&A side. It's just as always trying to get those at the right price. And then really, Darren did a lot of focus on mobile expansion. I don't know, Darren, if you want to add anything else, but I think I would say we still can do both, and that's what we're going to do.
spk04: Yeah, no, I think, Randy, that's 100%. We're prudent with capital allocation, and that includes internal development, both on the fintech and the game side. I'll speak for Dean there. And then certainly the tuck-in acquisitions. Again, we indicated previously that we continue to look for opportunities, and there are opportunities out there. I think as we look at that, we'll find the best ones that fit for us. We've got a great track record with those. And then, you know, as far as the internal development, you know, again, I think, you know, Randy said it best, and it is internal, the remarks at the beginning, you know, this relentless focus on internal innovation. So we continue to invest, and Randy mentioned mobile, so that's become obviously a big part of the whole digital strategy is the move that operators have towards mobile solutions that provide opportunities for deeper engagement with their players.
spk08: Gotcha. And just to clarify, Randy, on the buyback, which encouraging to see you active this past quarter, but you discussed it as an investment in the stock, meaning we'll buy at prices that we find favorable. Is that... how the program will work exclusively. It will be only at times you feel the stock is opportunistic and not necessarily a regular program. Just wanted to clarify that.
spk03: Yeah, George, I think our view is we're going to use our capital first to internal, second to M&A that will help us grow, and then third to really buy back our stock at opportunistic levels. So we're going to continue to find times and places where we think it makes sense and deploy our capital that way. But that is correct. That's our current strategy.
spk08: Great. Thanks, guys.
spk03: Thank you, George.
spk09: Thank you, our next question is from David with Jeffries please proceed with your question.
spk01: hi afternoon everyone or morning everyone. I guess it's morning everywhere. Just depends all depends what time we started. Within your guidance which and some of the color you've given much more of it is bottom line focused. If you could give us just a little bit more insight into what we think, you know, what will happen to the EBITDA margins, you know, as we roll forward, because there's obviously a lot of discussion about investment and, you know, commitment to growth, and I totally get why you're doing that. We just want to try and get our margins dialed in in the right place for each of the segments.
spk03: Sure, David. The tough part on dialing in your margins is what is our mix going to be between sale of hardware, which obviously has a gross margin in it, and then that does have pressure on our overall EBITDA margin. versus, you know, our recurring revenue. And in the last two quarters, you know, we've had just terrific game sales and hardware on the fintech side. So, you know, trying to give you an, you know, giving you an exact margin, you know, it's clearly has come down slightly because of that mix. And as well as, you know, the investment side and R&D and those expenses, yes, they're there, but that's not driving it as much as, you know, as really the hardware sales. So, you know, look, we still think we have a fairly robust backlog going into the second half of the year for those types of sales. So I think the margins will be, you know, closer to what you're, what you've seen now than, than what they were, let's say a year ago when we had so much recurring revenue. And, you know, I think we're, we're still planning on the back half. David being, you know, a double-digit revenue growth side and a, you know, mid to high EBITDA growth. And so, again, the mix of that is just hard for us to, you know, totally give you, you know, insight into just because if we get a chance to do a lot of sales, we're going to take them. We're not going to back off of them because they may impact our margins.
spk01: As you should, but let me just follow it up and make sure I'm getting the right takeaway, which is embedded in the outlook that you've given us, you know, for the guidance and some of the other qualitative commentary. The assumption is that we're a little bit closer to the margins you just reported rather than what they were kind of one to five quarters going backwards. And that's true for both segments. Sorry.
spk03: Yeah, and I would look at that more of like on the first half of the year. I think that that's probably more what you should look at than just this quarter because of just the high amount of sales. And maybe Mark can give a little bit of additional commentary.
spk02: I would just also remind you that, you know, in our equipment sales number for the second quarter, we had – just over $3 million from the acquisition of eCash in that quarter. So additive, helping our total overall sales, I think that's going to continue on. That completely wasn't in the first quarter for us. Again, lower margin of equipment sales compared to the high margin of recurring revenue. So that has the impact of bringing down the overall number. I think you'll see Q3 probably rise up a little bit in terms of EBITDA margins compared to Q2. But again, remember, we have in Q4 with G2E, You have the natural increase of operating expenses, a couple million bucks there. That'll bring your EBITDA margin down in Q4, probably a little below where we ended this quarter just because of that discrete item that hits in the quarter. But I think we kind of start returning, and you're thinking farther out, too, that you're kind of getting to that higher level of back closer to 50, maybe not above, again, because we're expecting to see strong unit sales. as we go into next year right now as we sit here. So I think it probably creeps closer to 50 as opposed to being, you know, go 47, 48 right now that we are right now. Okay. All super helpful. Thank you. Okay.
spk09: Thanks, David. Thank you. Our next question comes from Chad Bainon with Macquarie. Please proceed with your question.
spk05: Hi. Afternoon. Thanks for taking my question. Nice result. I wanted to ask about... the FinTech hardware result, you've kind of loosely mentioned this a couple of times that, you know, you've had some nice sales there. I'm wondering if you're starting to finally see, you know, more of a consistent replacement from your partners. You know, it seems like replacement sales on the game side, we've seen a nice recovery there and that trend's looking up, but I'm wondering on the FinTech, kind of the kiosk side, or is this more of kind of a one-timer or, you know, first half benefit? Thanks.
spk03: Sure, Chad. Look, I think I'll let Mark give you a little bit more color, but I think we've also had some nice new wins in the first half of the year. So that always helps because in those cases, we generally get a chance to replace hardware that they have. But I do think that, you know, we've seen some nice uptick on the fintech sales, and I'll let Mark give you a little more color on it.
spk02: Yeah, look, I think Randy's spot on. The new casino wins for us were good in the second quarter, helping us out this quarter as well as last year in the second quarter. But moving forward, you know, we talked pre-COVID, right when COVID hit, that we felt we were in that kind of equipment replacement cycle, that the age of the kiosk, the average kiosk out in the field was – getting, you know, just a little bit north of three years at that point. And we've seen kind of, I'll say, spotty replacement over the last couple of years from operators. Kind of implies that the chaos in general are getting a little older. So we think that that replacement cycle, as long as operators are still comfortable spending and they seem to be comfortable in the current environment spending, that we do see some more of that refreshes and that we – see them coming in. The challenge with the kiosk side of the business is it does get very lumpy. You know, you have a large customer, we'll do all the refresh in one single quarter. And then the next quarter, you don't have any really large ones. So it kind of bounces around a little bit, but, but I think in general, you should expect to see some relative strength on a full year basis in our, in our kiosk sales moving forward for the next year or two. Perfect. Thanks.
spk05: And then Mark, a follow-up on your free cashflow guide. Thank you for that. Just want to kind of dial in a little bit on taxes, just making sure that the tax rate will be pretty consistent going forward. And then also just wanted to ask about the CapEx input into your free cash flow guidance. Thank you.
spk02: Yeah, so when we talk about the taxes, really there's two pieces. On the P&L, we certainly have returned to what I would call a more normal-looking tax expense, call it 23%, a little over 23% for the full-year kind of effective rate. But what that doesn't take into account is the large amount of the net operating loss carry-forwards that we have that keep us being a relatively low cash taxpayer. We had well over $350 million of NOLs at the end of last year. So from a cash tax perspective, we don't expect to be paying cash taxes for quite some time still. So you should still kind of be expecting on our free cash flow guide to see something relatively light in terms of cash taxes paid from us until we exhaust those NOLs. Definitely this year, probably through most of next year, and possibly the 24 before we kind of exhaust those. So you're probably talking just a couple million bucks for the full year. on average. And then on CapEx? Yeah, you know, look, you saw in the second quarter some kind of strength in our strong number in a CapEx. We've been refreshing the install base. You know, with the supply chain challenges in Q1, we prioritized unit sales. And so, you know, on a full year-to-date basis, we're kind of on track with where we projected. I think we're probably on the lower end of our initial range, probably, you know, close to the 125 range of CapEx for the full year when it kind of all shakes out, plus or minus, depending on what we can do in terms of new placements and growing the install base.
spk05: Thank you very much. Appreciate it. You bet. Thanks.
spk09: Thank you. Our next question comes from Jeff Stanchel with CIFL. Please proceed with your question.
spk12: Hey, good morning, everyone. Thanks for taking our questions. You know, for my first question, I wanted to drill in a bit more on one of Mar's comments way at the end regarding OpEx and R&D, perhaps sticking up a bit at the percentage of revenues into the back half of the year. You know, I think for specific drivers, as you talk about pushing the 15% ship share, refreshing the install base, keeping the fintech pipeline going, among a couple others. But, you know, focusing in a bit more, I guess what's changed since we last spoke at Q1 earnings, I would imagine those were initiatives kind of in place well before then. Like if you just think about now versus three or four months back, kind of what's changed to lead you to think that maybe the right reinvestment rate, I'm thinking more on the R&D side than kind of the non-R&D op-ed side, but what's changed to make you think maybe a higher reinvestment rate is the better kind of profile for this business?
spk03: We've talked about this for several quarters. Trying to make sure I can address your question. question, Jeff, or move it along to Mark. But, you know, I don't think we've changed. I think it's taken us a while to kind of build up the teams and acquire the talent that we need to do some of the things that both Dean and Darren want to do. And, you know, I think sometimes you know, when you look back at what happened in 21, you know, the revenue and a lot of our operations, you know, we did a lot with less people. And so we knew we were going to be investing in some people this year. And that plan has to be for the future. So, you know, we're trying to make sure that we're at the right level with, you know, both R&D and OpEx. And obviously there's some wage uh you know pressure in in in there as well but you know i'm i'm as a i'm also looking forward to 23 and 24 and making sure that we have the teams that we need to make sure we can capitalize on hhr we can capitalize on blts uh we can capitalize on the acquisition in e-cash to both use them here in the us and take our our products to australia so You know, I'm comfortable where we're at, you know, and, you know, if you don't get the talent when you can, it may not be there. And so that's, you know, that's kind of what we've been doing over the last couple quarters, and maybe it just hasn't been, we haven't been, you know, have been highlighted as much, but that's what we're working towards.
spk10: Randy, can I ask something? Sure, go ahead, Dean. So just to put it in perspective, Jeff, you know, you talk about building for the future. You're going to see through to the end of 2023 four new cabinets. So the hiring process, as Randy's talked about, yeah, we're trying to move as quick as we possibly can, but it takes a little bit to bring in the resources. So Not only the new cabinets, but to put into perspective the number of themes from 2023 to 2022 is an increase of about 50% in total number of themes out there to cover new jurisdictions, new adjacent markets, additional content for the existing markets. So it's all of that. So the buildup, you're starting to see it in the numbers, but it has taken a little bit of time for us to get there.
spk12: Okay, understood. That's helpful. Thanks. You know, maybe switching gears here and just taking a step back and thinking about broadly the health of the consumer and maybe asking in a way that's a bit more unique to your business. You know, if you look at the financial access business and look at the mix of debit card withdrawals versus credit card, kind of where does that mix stand today relative to call it 2019 and kind of at the more recent rate of sequential changes, I would assume there's still some normalization in place. as folks unwind the still elevated savings rate, you know, if you kind of run rate the sequential rate of change that you've seen in recent quarters, kind of what does that imply to get back to 2019? Or do you think it stabilizes at higher rates? So let me know if that makes sense.
spk03: No, I get you, Jeff. But I think I'll, I mean, Darren's a little bit deeper in the actual transactions and dollars. So I think I'll push that on to Darren to give you some color. Okay.
spk04: Yeah, look, I think as we talked about, I think the strength of the consumer is there, and the mix shift over the last few years has shown that, you know, again, the debit transactions have increased. I think that is part of around the strength of the consumer. That's also just how we've, you know, focused our business on ways to introduce new transaction types. Again, we've talked about some of the – some of the things around stimulus that have contributed to that. But look, we continue to deliver new ways for the way people can access their entertainment dollars, including the digital wallet. So as we expect growth there and new ways to fund into that digital wallet that we want to introduce into the second half of the year. Again, I think that mix has been fairly consistent over the last 12 months just in terms of we've seen debit continue to grow. So nothing really has changed other than, again, we see that growth across our same-store sales. And obviously with the new wins, we feel good about, again, the second half of the year and long-term with how those transactions are growing.
spk12: All right.
spk04: That's very helpful.
spk12: Thank you all.
spk09: Thank you. Our next question comes from Edward Engel with Roth Capital. Please proceed with your question.
spk06: Hi. Thank you for taking my question, and congrats on another good quarter. On the gross cost side relative to the EGM sales, I guess, firstly, is that pushing up your CapEx spend as well on some of those unit placements? And then, I guess, kind of bigger picture, I guess, How sticky do you think a lot of these lower gross margins are? Do you think margins can maybe normalize when supply chain issues start to ease, or do you think some of these higher input costs are going to be a bit more sticky and kind of hard to shake off?
spk03: Edward, I have a little bit of a problem catching it all, so maybe if you could repeat the first question, because I want to make sure I get your question. Yes, Randy.
spk06: Is the higher gross costs related to the EGM sales, is that also impacting your CapEx?
spk03: Well, so you're saying, you know, we'll have some impact because, to your point, on our install basis, we put it out there, you know, the supply chain, if we have to, you know, freight in certain parts and just, you know, delivery of, you know, we're hoping that will start to ease, but just freighting, you know, a new unit out into a casino operator costs us more. So, yes, I think, you know, that is impacting the CapEx piece, but I don't think materially, but I'll have Mark give a little bit of color.
spk02: Yeah, look, I think Randy kind of hit on the pieces. Really, when you look at what's going on in the cost revenues on the equipment sales side and how it also then translates into the installed base side of things. Certainly we've seen a little bit of pricing pressure on some of the component pieces, so obviously that impacts the overall cost of the unit. Randy hit on the logistics and handling, actually freighting stuff in, freighting stuff to the customer, putting it on crates for example, gas prices of the freight carriers, all that has gone up in recent periods. I'll say hopeful that that's more short-term in nature or mid-term in nature and starts easing up soon. We're already starting to see a little bit of easing on gas prices, so hopefully that will translate into a little bit better freight costs for us. But that does all impact our margins that you're seeing for the equipment sales side of things and does roll right into the lease side. Again, we're optimistic that that's more shorter-term in nature and those gross margins start returning more back to normal levels in the coming quarters and all around.
spk03: So, I'm sorry, Edward, your second question? I want to make sure I had that one right.
spk06: He just answered it, so that was perfect. Thank you.
spk03: Okay. All right. Thanks.
spk09: Thank you. There are no further questions at this time. I would like to turn the floor back over to Randy Taylor for any closing comments.
spk03: Thank you for joining us on the call this afternoon. We look forward to seeing many of you at G2E in October and also to discussing our 2022 third quarter results with you in early November. Thanks for joining us.
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