Q3 2019 Earnings Call

You're currently hold for the every holdings 2019 third quarter earnings conference call at this time, whereas something todays audience appeared to be underway. Shortly I appreciate your patience and please.

Please standby.

Hello, everyone. Thank you were standing by welcome to the every holdings 2019 third quarter earnings Conference call.

Today's presentation, all parties would be to listen only mode.

<unk> prepared remarks, the called the open for question answer session.

This discussion is being recorded today and now I'd like to turn the conference over to Bill Pfund, Vice President of Investor Relations. Please go ahead Sir.

Thank you James and welcome to the call every one.

Let me begin by reminding everyone of the Safe Harbor disclaimer in our public filings that coverage this call and our webcast. Our call today will contain forward looking statements and assumptions that involve risks and uncertainties that could cause actual results to differ materially from those discussed during our call. These rich.

And uncertainties include but are not limited to those contained in our S. He see filings all of which are posted in the investor section of our corporate web site at every dot com.

We do not intended and assumes no obligation to update any forward looking statements. We make you are cautioned not to place undue reliance on forward looking statements, which we speak only as of today November 2019.

In addition, we will refer to certain non-GAAP financial measures such as adjusted EBITDA free cash flow total net debt and total net debt leverage ratio.

Description of each non-GAAP measure and a record reconciliation of each non-GAAP measure. So the most directly comparable GAAP measures can be found in our earnings release and related 8-K, as well as with any investor section on our website.

As a reminder, this call is being webcast and recorded a linked to the webcast is included in the Investor section of our corporate website and a replay of the call will be archived on our website.

Joining me on the call today, or Mike Rumbles, our President and Chief Executive Officer, Randy Taylor, Our Chief Financial Officer, the narrowing our games business leader Yaron sentiment are Fintech business leader Harper coal, our general counsel and Mark Labite Senior Vice President Finance and.

<unk> relations now, let me turn the call over to Mike.

Well, Thank you Bill and good afternoon, everyone. Thank you for joining us.

Before discussing our third quarter results I'd first like to welcome a tool Bali to every his board of directors.

As you can see into separate press release that we issued today I'll throw brings a wealth of diverse gaming sports betting and Fintech experience.

His track record of successful leadership and broad based entrepreneurial involvement in global businesses make him an ideal addition to our board.

We look forward to his strategic insight and counsel as we continue to grow our business and take the company to the next level welcome aboard a tool.

This afternoon, we once again reported strong results, reflecting the solid execution of our priorities across the businesses.

This was our 13th consecutive quarter of year over year growth in both revenue and adjusted EBITDA.

Third quarter net income rose, 350% to nine point, Threemillion or 12 cents per diluted share on a revenue increased 12% to a record $134.6 million.

Our adjusted EBITDA rose, 11% to a record 64.7, noting.

Powering the strong performance in the third quarter, well records for both revenues and adjusted EBITDA in both our games and intact segments.

Oh, Randy will review, our financial performance in much more detail on a few moments, but first let me share my perspective regarding some of our key accomplishments during the third quarter.

In our games business revenue grew 5%, primarily reflecting the strong 11% growth in gaming operations.

Adjusted EBITDA increased 9% to a third quarter record of 34.6 million.

Our progress in gaming operations is especially noteworthy given its high margin contribution and the highly recurring nature of this revenue base.

The primary driver of the third quarter growth was the increase in our daily win per unit.

Our quarterly daily win per unit was 15% to $33, a 95 cents, an all time hot.

This stellar performance reflects the benefits were realizing from the cumulative investment we've made during the last several years.

Just to remind you that includes first and foremost the enhancement of our design and development studios, which allowed our games employees to create ever more player popular game content and design distinctive differentiated cabinets.

Secondly, a refresh and upgrade of our installed base of cabinets and game content on casino floors, and third and expansion of our offerings to include new higher yielding premium units and to grow these units as a percentage of the overall installed base.

These actions have contributed to the improved performance, we're seeing across our entire customer base, including class two and class three with both our tribal and commercial operators.

Additionally, we achieved strong quarterly sequential and year over year growth in the installed base, which reached an all time high at September Thirtyth.

Importantly, we continue to see strong demand for our premium products, which we we expect are going to lead to further sequential growth.

Installed base this quarter as well as year over year gain in daily win per unit.

This in turn will further establish our foundation for profitable revenue growth heading into 2020 .

Our premium units increased 1500, 55 year over year and rose by 982 units were 29% on a quarterly sequential basis.

Premium units comprise nearly 31% of our installed base at September 32019.

Now by comparison, only 25% of our installed base was comprised of premium units at June Thirtyth, and just 20% one year ago.

In fact, the third quarter was our highest ever quarterly period, a premium unit placements and the ongoing demand has remained both robust and outstanding.

An important factor in the expansion of our premium base is the strong demand for the new game themes on our 55 27 cabinet.

As we projected in our second quarter Investor call. The number of shark week units installed by the end of the third quarter more than doubled while at the same time, we continue to grow the placements of smoking hot stuff, where could we don't units.

Given the current performance of these games and the favorable customer reaction at Gtwoe, we do our newest game theme. The bolt on the 55 27, we remain confident in our prospects to retain and build upon this portion of our premium base.

Another subset of our premium gains and another significant contributor within gaming operations is the growth in wide area progressive units.

Our base of wide area Progressive is grew 66 units on a quarterly sequential basis to 866 games.

That's an increase of 331 units from a year ago and wider and progressive units now make up about 20% of our premium installs.

At June two we showcased a number of new winery Progressive titles. This included two games, we're launching on our new Empire Dcs cabinet, the karate Kid and the mask.

Monster burst will be the third game for this cabinet.

We expect to launch it in the spring of 2020, giving this new hardware form factor plenty of content for the foreseeable future.

For our large renegade 3600 platform, we showcased press your luck and Snoop Dogg presents the jokers wild game themes.

Additionally, in our traditional video slots. We've also added two new license titles smoking Hot step jackpot reached spins and little shop, a whores, both on our Empire MPX cabinet.

We also introduced a number of new mechanical spinning real whinery progressive games, including a new Solchart series of games and customer reaction at GE to each of these games was also highly favorable.

We remain on track to launch our wide area progressive linked games into major commercial jurisdictions, Nevada in New Jersey in the first half of 2020.

As a result, we're confident in our ability to continue to grow our premium base of gains in commercial markets and refresh our existing base of wider a progressive and non wide area progressive premium units.

I believe this will also allow us to add incremental units in all of our other markets. During the remainder of 29 team and on into 2020 .

Our interactive initiative continues to progress nicely. While this venture is still a small part of our total business. We continue to be pleased with its growth prospects.

Our third quarter 2019 revenue was more than double the amount reported in the year ago quarter.

Recently, our real money platform went live with a customer in Pennsylvania.

We have additional operator sites pending in both New Jersey, and Pennsylvania for later this year and into the first half of 2020.

Our library includes a broad base of games that are available today with a substantial pipeline of additional new content that will be available online in the coming months.

We expect to see continued growth in our interactive business in 2020.

Turning to us to machine sales.

We sold 1040 gaming machines in the third quarter and our average sales price increased to 17983.

Well in nominal terms unit sales declined I would note that we had a large leads to sale transaction at a single property a year ago.

In addition, we had 60 units sold in international markets last year compared with no international shipments this year.

Without at least the sale conversion, our North American unit shipments increased 6%.

Overall, our average selling price has held steady through the year and I would add that last year's ASP was lower partially reflecting the lower priced international unit shipments.

As we continue to reap the fruits of our prior years investments in game development and infrastructure the benefit of being a nimble supplier is that we were able to focus the efforts of our salesforce to put even greater emphasis on placing our premium participation units.

From a priority standpoint, we believe that growing the installed base of premium units and increasing the daily win per unit creates more cash flow and sustainable value for both our customers and our shareholders.

With the high margin contribution of these units and the highly recurring nature of gaming operations revenues, we're committed to taking full advantage of the strong demand and momentum there were currently experiencing.

Now turning to GE to me.

We had our most exciting gtwoe we show ever.

For those of you that were not able to make it to the show our library of games demonstrated this year increased to 50 original game themes and 15 licensed brand titles and we showcase two new cabinets.

In addition to the premium participation products that I've already discussed we also demonstrated the Empire Flex video cabinet with a 49 inch flex monitor.

This is a new for sale form factor for every and we expect the flex to be available in the beginning of 2020 with completely new and unique game titles.

A key element in our discussions with customers was demonstrating the significant improvement in the depth of our library for each of our cabinets.

Our development efforts are not only directed towards building greater depth and success in video products, but also ensuring that we have imaginative an innovative new content to support our current strength and momentum in high denomination mechanical spending real machines.

If were to continue to expand our market share beyond our existing footprint on customers casino floors, we need to provide them not only with exciting new products, but also with the deep content library that sustains their competency, we will be able to refresh all of our cabinets that they already have on their floor.

And I believe we've done just that with our most recent GTV showing.

Well, we received many accolades for a variety of our products recently, none was more a firming of our efforts in our games business and winning the gold medal for best slot product for our smoking Hot stuff, we could wheel game from the global gaming business annual gaming and Technology Awards.

Game development is a very collaborative process. It's a team effort often across multiple studios with many employees sharing in the creation of our successful gains.

Congratulate the entire team for the honor they've bestowed on every through their winning of this award.

Well listening to customer comments at the show as well as in post GE to reforms such as the operator Roundtable discussion held by Ivers Krajicek Gaming gives me great competence that we've taken our games to the next level across multiple slot floor categories.

We had favorable comments across the board on our full range or premium mechanical and video offerings, our standard mechanical and new video offerings as well as all of our Fintech and loyalty products.

As in the games business development of innovative new products is also a primary goal of the Fintech business.

We continue to develop products that improve the casino patrons gaming experience and enhance efficiencies for our casino customer.

An example of our development efforts is our quick ticket solution, which received a silver medal for best Consumer service technology from the global gaming business annual gaming in Technology Awards.

I also want to congratulate all of the team members across our fin Tech business in Las Vegas, and India, who collaborated on bringing this innovative product to market.

Turning to our Fintech business.

We continued our consistent execution as the preferred provider of integrated solutions for the gaming industry.

That steady focus translated into the 2019 third quarter being our 11th consecutive quarter of year over year increases in both revenue and adjusted EBITDA.

In our cash access business transaction volumes and total dollars processed continued to grow resulting in our twentyth consecutive quarter of increases on a same store basis.

We also increased our customer base with the addition of several new customers as well as expansions with existing customers.

This led to a revenue increase of 10% in the third quarter over the same quarter a year ago.

Fintech equipment sales revenue in the quarter was up 42%, which was inclusive of 1.2 million from the player loyalty business.

Unit sales growth exclusive a player loyalty was up meaningfully on both a year over year and quarterly sequential basis and it generally higher ASP.

While unit sales growth was primarily for new placements and winning new customers.

Portion of our growth is due to the early stages of a refresh cycle for our kiosk equipment.

Given the high transaction volume and productivity of these self service kiosks the need for state of the art cash access equipment has motivated many casino operators to begin replacing older units.

As the overall base continues to expand and products grow older. We expect fintech to benefit from replacement sales that will drive further revenue growth this year and in coming years.

Revenue from information and other services increased 52%, including $3.4 million from the acquired player loyalty and marketing business.

Organically, our revenues grew nearly 8%.

This revenue was comprised of our recurring kiosks service and maintenance revenues as well as revenue from new software license sales and recurring software maintenance and support associated with our credit information compliance and player loyalty products.

Our software based services were one of many things that resonated with customers that GE to eat.

But what else you based products and promotional marketing services as well as our offering of compliance focused products provide us with a growing stream of recurring software license fees.

Now before turning the call over to Randy I would like to add that we continued to be extremely pleased with the integration of our loyalty product business and its growth prospects.

At the time of the acquisition last spring. These products ran about 100 customer locations and we believed there was substantial opportunity to cross sell across our entire customer base.

Based on the reception and feedback at Gtwoe, we I couldn't be more positive about that business its strategic fit within our portfolio of products and its growth potential.

The products and technologies supporting them provide a tremendous opportunity to accelerate our customers acceptance of our fintech digital products.

This opens a huge potential of white space for us to grow and expand into while continuing to draw upon the existing strengths and resources of our company.

Strategically I can envision royalty, becoming yet a third engine driving our future growth.

With that I'll turn the call over to Randy.

Thank you, Mike and good afternoon, everyone.

Third quarter 2019, total revenues rose, 12%, reflecting a 5% increase in games revenue and a 20% increase in Fintech revenue.

Increased 8%.

Organic basis, while the player loyalty and marketing business contributed 4.6 million in revenue in the quarter.

Adjusted EBITDA for the third quarter 2019 increased by 11% to 64.7 million, reflecting third quarter record results in both games and Fintech.

And our game segment revenue grew 5% adjusted EBITDA increased 9%.

Our adjusted EBITDA as a percentage of games revenue increased to 49.9% and the third quarter 2019 compared to 48.3% in the prior year quarter.

The margin improvement primarily reflects the revenue mix shift to a greater contribution of higher margin gaming operations revenue and in particular, the strong improvement in our daily win per unit.

The mix shift more than offset the impact of higher R&D expense in the quarter.

Gaming operations.

Revenue grew 11% to a quarterly record 48.5 million inclusive of 4.8 million from our New York Lottery operations, and 1.2 million from our interactive business.

The 15% year over year increase in daily win per unit is on top of the strong 9% growth in the year go quarter.

As we have previously noted a one dollar increase in daily win per unit on 14000 units for entire year would result in more than 5 million in incremental annualized revenue.

It's operating performance reflects the improvements we've made during the last year across the full range of our portfolio of game content and differentiated cabinets.

These product improvements, including our strong pipeline a premium content, our coupled with our discipline in deploying incremental capital in the form of additional gaming machines that will provide us with at appropriate return.

Premium yields provide some of our highest financial returns.

Based on the strong average daily win per unit performance across our premium units.

Present cash payback for each new cabinet deployed is generally less than 12 months.

Potential to maintain that cash generation over several years with less costly future game refreshes.

While our installed base is up 273 units year to date.

We remain focused on growing our install base and maintaining a high daily win per unit.

Given the investments we continue to make in our installed base and additional capital being focused on pre mutants, we expect to see another double digit increase and daily win per unit in the fourth quarter as compared to the prior year quarter.

Regarding your interactive I would add to mikes comments that although the businesses small we're very encouraged by the social B to C performance being achieved in key metrics such as the conversion rate of players becoming paying players. The average revenue per daily active user and the efficiency of our advertising spend.

Regarding unit sales, we now expect our full year unit shipments to be up between 3% to 5%.

We are modeling purposes, I would remind everyone that we had a large sale alternative at units to a major multi property customer in last year's fourth quarter.

This sale not only contributed 120 units to the prior year unit growth, but also enhance the average selling price.

Our average selling price for the fourth quarter 2019 should be in excess of 17000.

Turning to our Fintech segment, 2019 third quarter revenue increased 20% to a record 65.3 million.

Revenue increased 11% on an organic basis, excluding the player loyalty and marketing business.

Adjusted EBITDA grew 14% to a record 30.1 million.

Our adjusted EBITDA as a percentage of Fintech revenues in the 2019 third quarter was 46.1% compared to 48.6% for the third quarter of 2018.

The decrease primarily reflects a mix shift in revenues towards more equipment sales, which provide a lower gross profit contribution.

Higher incremental check warranty expense and an increase in SDMA and R&D costs.

The warranty expense increase was primarily result of gaining new customers, where our experienced level was low.

We fully expect us to improved during the next couple of quarters as our experienced level with our customers patrons increases, allowing us to reduce our overall check warranty expense.

Just as it we have done in the past with other new customers.

The increase in our SDN and art R&D cost for the Fintech.

Includes the costs associated with the player loyalty and marketing business, which was acquired in March of this year.

In addition, we have increased our focus on innovation and investing in development efforts that we believe will provide significant growth avenues for the future such as our digital cash club wallet, which we demonstrated that GE to lead.

This product is in real world testing at to travel casinos.

As Mike already commented on the individual fintech lines of business I won't repeat the information, but rather focus on our expectations for the remainder of the year.

We expect to continue to report double digit revenue growth in the fourth quarter in our Fintech business, we expect steady growth in revenue from cash access services, which should continue to benefit from the overall macro economy, net new customer wins and additional casino openings.

Faster growth will be driven primarily by equipment sales and information services due to our strong pipeline for kiosks and other equipment sales along with the inclusion of our loyalty and marketing operations.

To Echo Mikes comments on our loyalty business based on customer discussions, we expect to see significant growth in revenue from loyalty products and services in Q4 and continued growth into 2020.

We expect full year Fintech adjusted EBITDA to grow in the low double digits compared to 2018 inclusive of the contributions and integrated related costs from the acquired player loyalty operations as well as reflecting higher SDMA and R&D costs.

Moving to the balance sheet and cash flow the outstanding principal on our long term debt declined to 1.16 billion and we had no amounts outstanding under our revolving credit facility at the ended the quarter.

We generated $39.3 million of free cash flow for the nine months ended Septemberthirty 2019.

Shifting our commitment to reduce leverage we paid down 8 million on our term loan in the third quarter and year to date, we have paid down 25.7 million.

We also utilize 20 million to make the initial payment on our acquisition of a loyalty products business.

As a result of our debt repayments and the improvement in adjusted EBITDA.

Our total net debt leverage ratio declined to four and a half times adjusted EBITDA at September 2019 quarter end compared with five times, one year ago at September 2018.

Our short term target for total net debt leverage is getting it under four times trailing adjusted EBITDA. We believe this is achievable during the next 12 to 15 months.

Our longer term goal is to achieve and maintain total net debt leverage at approximately three to three and a half times trailing adjusted EBITDA.

We achieved such leverage of deck objectives, we will continue to target the use of our accelerating free cash flow primarily toward debt repayment.

The only potential alternative use we might envision were before a compelling complementary tuck in acquisition that would grow future adjusted EBITDA and free cash flow on a highly accretive business.

Accretive basis, such as we are currently delivering with the loyalty products acquisition.

The third quarter capital expenditures totaled 35.9 million and placement fees were 5.5 million.

Game segment, Capex was 30.2 million and Fintech segment, Capex was 5.7 million.

The third quarter, we made the final placement fee payment under the player station agreement with our largest customer in Oklahoma.

This effectively locks in about 30% of our total installed footprint until June 2024.

For 2019, the full year placement fees are expected to be just over 17 million.

We expect only minimal placement fee payments going forward.

This afternoon, we raised our estimate for the total 2019 capex to a range of 130 million to 133 million inclusive of the $17 million and placement fees.

The increase reflects higher games capex.

The success and momentum being achieved with our high performing high margin premium gaming units. We now expect our year end footprint to reach between 14000 514700 installed units with the majority of the added games being premium units.

Games Capex is now expected to total between 96 and 98 million, while our Fintech Capex expectation is 17 million to 18 million.

This afternoon, we reiterated our outlook for 2019, adjusted EBITDA to be at a range of 252 million to 255 million.

While our revenue growth outlook remains strong. We're also focused on reinvesting in internal development activities to ensure that we maintain this level a sustainable growth into 2020 and beyond as well as making sure our compensation levels and incentives are competitive and aligned with our growth in this tight labor market.

Our full year guidance includes our foreseeable opportunities as well the impact from any headwinds envisioned including revenue mix shifts and higher R&D and operating costs.

We expect total depreciation and amortization expense in 2019 to be approximately 130 million to 133 million.

We now expect recorded income tax benefit of between four and 5 million and we expect cash tax payments to be less than $1 million.

For modeling a diluted shares outstanding given recent experience related to the exercising of employee equity awards, we expect the diluted share count to increased slightly to approximately 80 million shares for the fourth quarter of 2019.

Finally, as result of our higher Capex investment in the second half of 2019 to grow to continue to grow our installed base of high return premium you and units. We now expect free cash flow to range from 42 to 45 million in 2019, compared with 25 million in 2018.

While we have not completed our budgeting process, we believe that free cash flow is likely to double or nearly double in 2020.

Course, the final amount will again be dependent on the amount of Capex funding fueling the growth in our gaming operations business with continued success from new games, we will maintain our focus on growing our installed base and daily win per unit, which in turn it will grow our foundation for further long term revenue adjusted EBITDA and free cash flow growth.

With that I will now turn the call back to the operator for questions.

Thank you if you like to ask a question. Please signal by pressing star one on your telephone keypad.

We're using a speakerphone. Please make sure your mute function is turned off to Larson treat your equipment again press star one to ask a question.

And we'll take our first question, Dave from John Davis with Raymond James.

Hi, good afternoon guys.

Just want to John Sean.

Just wanted to touch on the I guess expected uplift or further improvement in the installed base here in the fourth quarter I think it implies about 300 or so units at the midpoint higher.

Break out what percentage of that is coming from premium placements, obviously, given the momentum there I think those are up about 1000.

Quarter over quarter. So just how do we think about that incremental growth and as most of the coming from from premium placements, which would then support kind of double digit or higher win per day.

Hey, John This is Dan to answer that say the growth come primarily from premium units.

Okay.

Any it's still it's shark week.

We could wheel or are you starting to sell the vault available yet, but what are the kind of premium units are driving that.

Shark week, a little bit smoking, how what could will still keep in mind thats been being deployed since the end of last year.

We're releasing the vault initial install that should be prior to Thanksgiving.

Those are the I would say those are the three primary drivers at this point, but also our mechanical as well we have both are coming out that will help give us a little bit of a boost as well.

Okay. Thanks, then randy's wanted to hit on the payments margins here for a second how much of the year over year decline is driven by.

It was potentially a lower margin acquisition and investments made there versus if you kind of looked at organic basis, maybe just to remind us of.

Puts and takes on the margin as we head into the fourth quarter.

Payments business.

I would say John that look.

On the on the acquisition is still got out a lot of recurring revenues. So it's really been the fact that we sold more more equipment sales than we have in the past so with the kiosk sales and with their promo and enrollment kiosks. It. It's a it's it's a lower margin even though we've got a nice.

Recurring revenue stream so.

It's hard to say I think I think we we looked as we look into the fourth quarter. We still think that equipment sales will be strong so it's going to impact our overall margin but.

I don't think it'll be changed dramatically from what you've seen here I think.

It's more Ben it's very complementary and margin to our business because it's got a nice recurring revenue.

Source as well as the as the kiosk and they're smaller and we actually have little bit better margin probably on them.

Okay.

And then I think last quarter on the call you made a comment that Threeq and Fourq you adjusted EBITDA would be more similar.

Sequentially then.

In previous years is that I think if that holds you are kind of looking towards the high end of.

The guidance range any change to that or is that still would you expect going forward.

So I have to go back and check to check the notes, but I think what I would say is I think we believe that fourth quarter will be better than has traditionally been John probably not as much down I don't know that will be.

The same but I don't think it would be your normal your your normal decline as much as we've seen in the fourth quarter. So.

Yes, because remember you are going to have some some bought some cost that hit like equally all hits in the fourth quarter. This year.

So there are some.

Some other asked DNA SDMA cost, but I think we'll hit in the quarter that Mike pulled that down a little bit.

Okay and last one for me as we kind of look out to next year.

I think you said you expect free cash flow to double or so which would kind of be at the low end of the prior 90 to 100 million targets as you guys had laid out.

How should we think about the incremental capex dollars by my math rate I think you guys said, yes.

While our increase in win per day is $5 million.

Revenue in almost 5 million to EBITDA. So how should we think about what the incremental Capex I think you raised capex guidance. This year, obviously, you're getting investments, but I think the EBITDA upside should offset any incremental capex. So is it fair to think that there should be no real change to to the 2020 free cash flow got.

Okay.

Look I, it's all E jets are present.

Based on will they stay out there and perform they've done great. So I don't think Theres right now any indication from our standpoint that these won't stay out and continue to perform that well.

On the flip side, if we continue to get the demand we may use more capex in 2020, if the demand Stan strong so.

Look as you know Mike My normal.

Stance is I'm not going to over.

Over promise right now so I think that you're thinking about it right because it should drive more revenue if those things stand out there, which we expect they will but again just not done with our forecasting just yet so I'm not really.

Apparently going deeper than that.

Alright, thanks, guys.

Thanks, John .

Next we'll hear from Brad Blair with Stifel.

Yes, thanks for taking the questions guys and congrats on a solid quarter.

First question is just around the the premium participation increasing the installed base close to 1000 units quarter over quarter.

That was pretty impressive just curious.

I mean, I assume given the size there that that those units were pretty well spread out.

Across the operator base, but could you just give us a sense of sort of if there was any skew there to tribal non tribal.

That would be helpful in sort of how that broke out.

I would say it's across the board.

Not skewed to one particular area, one way or another.

Yes, Brad It was it was as its two and three its commercial and tribal I mean, we're out as as far as we can get in terms of trying to allocate throughout the markets.

Okay helpful and then.

We talked about this a little bit with with John there, but.

Yes.

The second consecutive quarter here.

The product sales element of the Fintech business came in ahead of what I was looking for I was pretty solid you guys talked a little bit about a kiosk replacement cycle, obviously atria it's in there.

Yeah, I guess as we kind of look ahead.

What type of tail.

Do you think youre coming out at Gtwoe, we say in conversations you had around Atrion combined with sort of your expectations for this kiosk replacement cycle, what kind of tail do you think we should have for some of this accelerated.

Revenue growth, we've seen in the in the product sales segment of Fintech.

Yes, it's.

I would say like it continues to be very strong and.

Atrium.

Great.

But at Gtwoe Lee So I think its lining up very well for us.

And so I know, it's going to drive growth.

Growth in the fourth quarter and I still expected to grow next year, so thats hard to determine how much how far you are under replacement cycle, but I think with with the atria loyalty kiosks and it's what we're seeing in.

Customers, replacing their older kiosks, it is going to be a driver going forward.

Yes, Brad as Darren I would just add that I think I think there were again as Red indicated we're really early in the replacement cycle for kiosks loyalty is still performing well, we expect that to continue into 2020, and then I think just on that on the regular kiosk sales. We've had new business. That's contributed to that growth. So I think all of those.

Things combined are really what youre seeing as far as what happened in Q3, and what that what we expect to have in Q4 hundred 21.

Okay, and then last one for me is just around product sales.

Obviously, you had some of the the comp.

Headwinds there from the onetime but at least to sale conversion and some international units, but if I look at it sort of.

For the full year based on some of the commentary you you provided around your Fourq you expectations. I mean, we're looking at growth. That's that's going to be slightly slightly below some of the metrics that you threw out at the at the analyst day last year and and then.

You, obviously had some accelerating growth factored into your projections at that time for 20, I guess, given kind of where we are today, how should we be thinking about product sales growth kind of going forward and I mean do you guys still view.

I would have teens plus number is as realistic or where do you think there needs to be some adjustment in the way, we think about that and thats. It for me. Thanks.

Sure Brad well I think we're I think we're going to come in probably for the full year. Our expectation is still be mid single digit growth in our and our sales on that side.

But one of the ways I would look at it and one of the ways that I personally do look at it is.

I'm much more interested in putting a premium purchase a patient unit out.

And have that units stay out 345 years in terms of the amount of recurring revenue and profit that I'll make from that.

That particular machine as opposed to selling the machine to someone now sales are still important and there's still going to be an important part of us in the future.

They may not be quite as robust as we had originally planned partly because of the hit sort of our premium units that we can put out and in part of our installed base on placements.

So for modeling purposes, you may want to bring it down a little but it also means that you need to bring up your your installed base profitability.

Perfect. Thanks, Mike.

Next we'll hear from David Katz with Jefferies.

Hi, good evening, everyone afternoon, everyone.

Where you are.

Okay.

At the risk of being a bit repetitive I want to go back to one of the earlier points. It was a number of quarters ago that we first started talking about.

Free cash flow doubling this year.

And so with last year at 27.

We sit here today, and we have two potential variables in that one which is.

Capex budget went up a little bit for for good reasons.

And secondarily.

Performance may have edge forward, just a little bit.

How would you can I just be a bit more direct how would you have I should think about those two variables in the context of that 27 million, becoming 54 this year.

So I would say it was 25 not to naturally.

20, 482 is 25 to always backtracking to try to get that you get to fair value.

Absolutely that's right Thats rebate rise, we got to free up if we're going to call me to 27, and I would say.

Really what's happened is we pulled some of that capex into this year, we felt like David pulling.

An extra five probably more than five probably closer to 10 million into this year.

That we could have pushed to next year could have we got into.

I would have exceeded it could have easily exceed a terrible work flow, but more importantly.

As Randy was saying, we allocated that capex to very high producing.

Products that we're placing al and expect to have out for years, we usually think it sets us up well next year, David and so on that could we have gotten there I think we could have a but it really was based on really the backlog that we were seeing and the demand that we we opened the capex.

Gates.

And David Joe is game day brokerage, it's really going to add to that our backlog was still is still the same as what we even started Q3 at so we're real real challenging decision either extend the lead times out which he never really want to do.

Or fulfill this.

Seriously extensive backlog that we had right that did not go down when you look at place in an extra 982 units quarter over quarter in premium you would think that you would flush out most of your backlog not the case in the situation.

Right, Okay bite my point being you know that that.

We're not taking dollar for dollar of the Capex increase out of a double and and free cash flow year over year. There has been some.

Operating improvement to offset some of that along the way.

Yes, absolutely most definitely David yes, absolutely.

The second part of that question.

Rolling into 2020, I think we had talked about.

I'm.

Having a pretty substantial increase again.

I think.

Not that you guided to these numbers in any specific way, but I think notionally, we were getting north of $100 million a free cash flow.

And the hit the hoping obviously you could stay there awhile.

That's still.

A reasonable way tab I, just think about it and qualitative terms.

Yes look I think thats still our goal to get to 100 million David I think as you know I'm going to come out with we believe we can double next year, so depending on where we end up this year I think.

90 to 100 is still a number that we feel comfortable with and hopefully we'll exceed that if these units that's always with a unit stay out and will they continue to perform the way. They are if they do I think we're going to get there. If if we have we have to do other things to them or or refresh them with different title.

And they don't continue to perform the same way, it's a different story, but I would say look I don't want to put a number out there that I don't think we can reach and that's why you're 90. My my top end is 90, if you're at a 100 I don't think thats outside the realm of possibilities.

Last question for me if I may.

When we were together last at Gtwoe, we there was discussion about.

Pursuing.

The rating agencies.

To see about maybe some refinancing opportunities.

Forgive me, we have a couple of calls and a lot going on the savings. So if you commented on it I apologize, but is there any update there.

When we didn't comment on it and there's a slight update we are going to bill and I will be out in December of trying to we're going to meet with all three rating agencies I don't really have any update other than.

They know we're coming out they've been very receptive to discussions.

Add but thats, what they have and they understand that we're improving.

It's just as you know David they have these formulas that in some cases.

They are very formula driven and says until you get to a level of leverage on our calculation, we most likely will not change but.

We're going to do our best to go out there and put our case in front of as to why we believe.

An improvement is a rating improvement is is.

Necessary, but yeah I can't guarantee anything at this point.

I know, you're coming and I know where you're coming for.

That's.

That's exactly right. Okay. Thank you very much.

Hi, David.

As a reminder press star one if you have a question.

Here from Chad Beynon with Macquarie.

Hi, good afternoon, thanks for taking my questions.

Sure.

Wanted to ask about the gaming operations win per day.

Certainly better than I think most expected, particularly after we've seen some results from some of the domestic operators.

Who showed you know relatively benign growth on the slot side so clearly.

Your legacy units are either doing better than they were on a year over year basis or just the shift with the new premium games is kind of.

Bridging up.

The difference there so not sure if you're willing to get to specific here, but can you just kind of talk about either notionally or percentage wise.

What is really driving this increase because I believe on a year over year basis. The win per day was up over $4 and last quarter. It was under $3 I'm just trying to get a better sense of how the legacy units are doing and if that means theres still a lot of life left for them to stay on the floor or if this is really just a.

Factor of the new premium games, just absolutely knocking it out of the park. Thanks.

Yes, no not a problem Chad.

First of all it's really it's a it's both the premium units. There's no question are doing extremely well and they've become obviously as you see we had 900 just in the quarter, they're becoming a larger and as I mentioned in my prepared remarks, a larger portion of our installed base, but our standard machines, our non premium games are.

We're also doing better our content is being better received by the player and and as a result those games are also growing up on their win per unit per day. So it is it is a combination of both I mean, a hard to put a percentage on it I mean, clearly I think the premiums are on a dollar basis, earning more but as a percentage basis.

They're probably it skews toward them, but I wouldn't I wouldn't say skews completely to them.

Okay. Thanks, Mike.

And then on the New York Central Determinants system contract renewal can you just remind us.

Where we are in that process your expectations and if renewed roughly what this would mean from a capex standpoint. Thank you.

So the current contract ends at the end of this year and I would say as this that we went to this before I think we've had these questions before we.

It's just a it's a new York, it's a state agency and it's just bureaucratic and takes time for that to be finalized we feel good about where we're at.

Got signed its not signed and so.

We we expect.

To continue to update people once we know, but I don't have an answer for you now, but it really effectively would be ending at the end of this year I don't from our standpoint, I don't see a significant amount of Capex involved. There is some we do have to do upgrade some things, but it's not going to be a huge capex.

Issue for us.

We just want to get that the contract signed if we were selected so thats where were at and you should anticipate that that our bid included the understanding that there would be some things that we had to.

Spend money on two to bring up to standards of today.

Okay. Thank you very much best of luck.

Thanks, Ed.

Next we'll hear from George Sutton with Craig Hallum.

Mike at the end of your prepared comments, you said you could envision loyalty, becoming a third item driving your growth almost like it would be a separate line item I'm curious what exactly you meant by that.

Well the one the one thing I should first say because otherwise Randy will kill me as I don't view it as a separate business segment that requires separate reporting.

Because it is clearly in the fin tech space, but having said that what I mean is that the uptake in the things that we can do with.

Loyalty in the digital World.

Including attaching it to other digital products that there were coming out with and that we've talked about previously.

Could become a and extremely important growth driver for us going forward as it is it's still a great growth driver just just in the space. It's in today, but if we can if we can take it into the digital realm I think it becomes even bigger.

Okay, I understand and.

Last for me the.

The incremental Capex spend that you pulled forward is there a way for us to think of an ROI on that spend or what incrementally you're actually getting for that spend.

George the best way, we tried to lay it out as you know these premium units.

If they performed the way we expect them to two two we.

Get our cash back within less than 12 months and the expectation is those units should stay out there you know two to three years with very little cautious.

He we we met to refresh the game theme. That's why we had a strong pipeline behind that Thats why were were that bulk coming out and we have another dragon dragon behind that the knows exactly where it is.

And so its they cost a little bit more but as Mike talked about in the daily win per unit kind of how that percentage works, there, making up a a higher percentage of that daily win per unit. So we just think it's a very good investment and the and the challenge.

And beans team and what they're doing is the development side is to keep them out there as long as you can because the that the cabinet is going to be fine. It's just keeping the theme on it.

I understand thanks, guys.

Thanks George.

Barry Jonas with Suntrust has our next question.

Hey, Thanks, So I wanted to start with Oklahoma last quarter, a competitor cited what sounded like company specific issues in that market. Just curious if their issues had any impact on your current installed base or maybe your outlook for the market. Thanks.

Not at all.

I can't comment on what they're experiencing but.

We're not experiencing that.

I'm very liquid it's still continues to be a very strong market for us.

And as Mike talked about.

Our our both our our standard and our premium are doing well and continue to be improved by the new content, we put out there so.

We still are very favorable in the Oklahoma market.

And I would just add to that.

Im sorry, I would just add to that is as as Mike had commented earlier, which is is it's not only in Oklahoma. It's a club that's across our entire class two and class three base.

Understood and then just maybe a follow up on the environment for product sales I just want to be clear on this as consolidation or cost cuts weighed on customer budgets or is that really left the factor relative to some sales.

Shifting to placements I guess net net has there been any noticeable change in tone from your customers.

I'm not so no there hasn't really been a noticeable change in tone and I don't know that that to the extent people expect that.

To come about.

Good anybody is in a position to data to indicate whether or not it's going to happen on what I would say those is GTV was it was towards the end of the third quarter and what happens inevitably every year is in lead up to Gtwoe we.

Slot managers and buyers in casino markets tend to slow the role until they see what the new products are that are coming out at.

At Gtwoe, we and how quickly those will be in the marketplace. So I don't think it was I don't think it was I wouldn't attributed to anything to do with.

Operators consolidating or or cutting back at this point.

And Barry I don't want to bear Barry I don't want to bearish, Tony either on product sales because in 2020, whether introduction of flex all the original content that we have going on there were very very excited about it can we predict from our customer side whats going to happen no having a league.

We things kind to play itself a little bit later, but from our standpoint take all the noise out of it we're introducing a brand new cabinet.

For 2020 with a lot of original content, we're extremely excited about it and we've got to see without Lance.

Okay.

Great just a quick one hopefully a quick one the on the Fintech side between some of your competitors were pushing mobile wallet.

Products, maybe just talk about where every stats from a competitive positioning on on that product.

Yes, there is there yes, we're right there I mean, we've got.

I have a large travel customers as one large one that were.

We're going into production with.

Shortly and we expect us to be right there with our customers as they are prepared to consume the technology into their gaming floors. A lot of customers are very strategic and how they're looking at this and our view is the way.

We set ourselves up with with our loyalty platform and be able to use that as a as as a key entry for player acceptance then we're in a good spot to deliver on it.

Okay.

Great. Thanks, so much guys.

Thanks Barry.

Our final question will come from Ricardo Chinchilla with Deutsche Bank.

Hey, guys.

My question has been have been asked and answered. Thank you.

Oh, Thank you again.

Thank you for your questions I'd like to turn the conference over to Mr. Taylor for closing remarks.

Thank you for joining us on the call. This afternoon, we look forward to discussing our 2019 fourth quarter and full year results with you in early March thanks for joining us.

That does conclude today's conference call. Thank you for your participation you may now disconnect.