Q3 2020 Everi Holdings Inc Earnings Call

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Greetings welcome to the every holdings Inc. third quarter 2012 earnings conference call. At this time all participants are in a was the only mode. A question and answer session will follow the presentation. If anyone should require operator during the conference. Please press star zero on your telephone keypad. Please note. This conference is being recorded.

Now I'll turn the conference over to your host no fun Vice President Investor Relations you may begin.

Thank you well.

Come every one of our team is working from multiple locations today and while I don't expect any grappling right ones I would ask your patience, if we experience any technical difficulties.

Let me remind everyone of our safe Harbor disclaimer. The covers today's call and webcast. Our call will contain forward looking statements and assumptions, which involve risks and uncertainties that could cause actual results to differ materially from those discussed during our call. These risks and uncertainties.

These include but are not limited to those contained in our earnings release today and in other SEC filings, which are posted in the investors section of our corporate website at <unk>.

Every dotcom, we do not intend and assume no obligation to update any forward looking statements. You are cautioned not to place undue reliance on forward looking statements, which are made only as of today November 2nd 2020.

We will also refer to certain non-GAAP financial measures measures such as adjusted EBITDA free cash flow total net debt total net debt leverage ratio and net cash position a description of each non-GAAP measure and a reconciliation to the most directly comparable GAAP measure can be found in our earnings.

Relief and related 8-K, as well as in the Investor section on our website. This call is being webcast and recorded a link to the webcast and replay of today's call can be found in the investors section of our web site.

Joining me on the call today are Mike Rumbolz, our Chief Executive Officer, Randy Taylor, Our President and Chief Operating Officer, Mark Lab, <unk> Executive Vice President and Chief Financial Officer, Dean <unk>, Our games business leader Darrin Simmons, our Fintech business leader at Harvard.

Oh, Chief legal officer, and General Counsel now, it's my pleasure to turn the call over to Mike Rumbolz.

Thank you Bill Hello, everyone and thank you for joining us today.

Before Randy and Mark share their insights into how our business performed during the quarter I'd like to share a few highlights and observations.

Overall, our third quarter results were significantly better than expected our revenues operating income adjusted EBITDA and free cash flow all meaningfully improved sequentially over the second quarter of this year.

This faster than expected recovery.

Driven by the strong performance of our large base of tribal and regional customers.

Clear evidence of the ongoing strength in our business.

In particular, the third quarter results highlight the resilience of the contributions from our recurring revenue streams, which comprised more than 75% of our third quarter revenue.

Our third quarter results also demonstrate that the focus on our long term strategies and investments across our product portfolio have positioned us to continue to grow both of our business segments going forward.

Furthermore, it's notable that our adjusted EBITDA as a percentage of revenues improved by 500 basis points from last year's third quarter, reflecting the actions that we've taken to reduce our overall cost structure and the benefit from a greater mix of our higher margin products.

In games.

The ongoing success of our portfolio of premium units in both tribal and commercial casinos.

Together with the overall growth in our installed base of operating units. Despite this pandemic, it's clearly reinforce the benefits of our strategic planning.

We have prioritized.

The execution of our game development and in preparing our road map for future development, we based it not only on the creative talent and experience of our studio teams, but also on data analysis, a player trends and feedback from operators.

I am proud of the great collaboration between our product management people and our game development Studios under the leadership of Diener like.

Together as a team they have driven positive performance for an extended period of time, both prior to the pandemic and following the reopening of casinos I have never felt more confident in our pipeline of new games, then I do today.

Likewise, the growth and recovery in our Fintech business under the leadership of Darrens Simmons reflects the strength of our execution and strategic focus on developing a comprehensive digital neighborhood for our casino customers.

Our digital neighborhood encompass is far more than the ATM cash access solutions and our fully integrated kiosks you.

It also extends into products like jackpot express and central credit as well as a whole array of compliance services.

Needed in the highly regulated gaming industry of today.

Furthermore, in 2019, we added a range of strategic player loyalty products that added to our comprehensive solution set and it was an important step for us in the path toward the convergence of loyalty and payments in the digital world.

Importantly, what sets us apart in the industry is that all of these products and services are fully integrated with each other.

This increase is both a standalone value of each service and due to the tremendous tremendous efficiencies that we realized through the use of these products. This significantly increases the total value that we bring to our customers. When these products are embedded into their casinos enterprise wide network.

Now one of the most important advancements in the development of our digital neighborhood is the introduction of our digital white labeled cash club wallet solution.

The cash club wallet is simply the next step in bringing value to both the player and the operator.

Offering convenience for players and significant cost efficiencies for operators. The cash club wallet is a convergence of our digital cash access funding capabilities with our digital player loyalty services.

It is a mobile app and a true digital wallet.

It can act as a hub for payments across the breadth of the casino operators resort enterprise from the gaming floor to food and beverage from retail hotel and resort amenities. It can even provide the funds for players to engage with an operator's online retail and entertainment channels such as.

I gaming and online sports books.

In addition to the cost efficiencies for the operators, our wallets has the ability to extend the relationship and the connection time between our casino customers and their players.

Another key feature of our digital wallet is its flexibility.

White labeled to carry the casinos branding the cash club wallet is fully customizable so that the operator can deploy it with a customer experience that is reflective of their brand and meaningful to their patrons.

Our digital wallet also meets the extensive needs of the various gaming regulators across multiple jurisdictions throughout the U.S. as well as banking and other financial regulations.

We expect to have the first operational uses up the wallet with two large well known tribal casino operators later this month.

The use of the cash club wallet will enable guests to access their funds and loyalty program benefits when they want how they want and where they want to use them all.

All the cross the casino financial ecosystem.

In addition, all of this will be seamlessly integrated for the convenience of the patron and will carry those increased cost efficiencies for the operator.

And with that let me turn the call over to Randy.

Thank you Mike.

Hello, everyone throughout the third quarter more casinos continued to reopen and despite limitations such as restrictions on capacity and social distancing requirements player attendance at casinos was good as you've heard from a number of public operators that have already reported.

With the majority of our revenues driven by recurring activities such as play levels on our gaming operations units transactional funding actions or subscription models per player loyalty and regulatory compliance services, our business recovery has occurred quicker and stronger than we originally expected.

Let me call out just a few notable metrics.

During the third quarter, many operators focused on optimizing their slot floors to enable a greater number of their gaming machines to remain active the combination of more active games, a greater mix of premium units and our games strong performance yielded a daily win per unit of $32 an 81 so.

Yes. This was well ahead at the second quarter and just below the average daily win per unit generated in the 2019 third quarter during which all of the games in our installed base we are active.

We estimate that the daily win for only those games actually active during the quarter exceeded $37 per unit.

Our total installed base of leased machines increased 7% over a year ago and by more than 300 units on a quarterly sequential basis from the end of the second quarter. This growth was largely due to our base a premium games, which increased both year over year and on a quarterly sequential basis.

Higher yielding premium units now represent just over 40% of our total installed base.

Recent additions to our game portfolio, such as our premium non Wap game evolved and the two new wide area Progressive games on our dual curbs screen DCIX cabinet, the mask and the karate Kid are continuing to perform well these.

These additions were the primary driver behind the increase in premium units in the third quarter.

Existing premium units with original same such a shark week and smoking hot stuff what could will also remain strong performers.

While the vault is our best ever performing game with a lot of runway for further placements in the quarters ahead.

Well you had sales of slot machines improved 29% over the second quarter. Most operators remain in capital Conservation mode. Our average sale price was up slightly year over year, partially reflecting a favorable mix of our new.

Premium flex cabinets and the overall mix of units sold.

We continue to expect that slot spend by casino operators or remain at reduced levels during the fourth quarter and at least through the first half of 2021.

However, we believe the broad strength of our Hyde Dean mechanical wheel offerings and the launch of our for sale Flex video cabinet at the beginning of the year positions us well to continue to gain the ship share.

18 of the top 25 top indexing high Denom mechanical reel games and the later in the latest Eilers and cried Jack game performance report our every the.

The initial performance at the flex with its combination of a differentiated cabinet and a new gate and new game themes with proven features and play mechanics provides further support for growing our ship share.

The Fintech segment cash access revenues improved dramatically over the second quarter.

The decline versus the 2019 third quarter reflects both the impact of casinos closed during the quarter and a modest decrease in transactional activity on a same store basis, while same store transactional activity did improve from the beginning of the quarter. It appears to have plateaued during recent weeks to a level modestly below pre told.

Good levels.

Reflecting ongoing operator interest in our player loyalty products.

Information services and other revenue grew 22% over the 2019 third quarter driven by the year over year increase and player loyalty subscription revenue.

Imply it services and self service oil products are becoming must have solutions for casino operators.

The operator interest in our self service player loyalty kiosks led to a 33% increase in loyalty equipment revenues. However, this was more than offset by a decline in the other equipment sales, reflecting operators cap capital conservation efforts.

A portion of the increase and loyalty shipments reflects the postponements associated with orders placed earlier in the year, having said that I'll highlight that our backlog for loyalty deliveries remain strong.

We have integrated our loyalty acquisition assets into a single platform, which is integrated into our digital neighborhood that Mike discussed and have rebranded all our player loyalty products and services under the trilogy, Brad what.

Are they significant installed base of existing products in the marketplace. We will continue to support all all our customers, but all future product developments will be under the trilogy Brad efforts.

I also want to bring attention to some of the terrific industry Acknowledgements, We've recently received relating to our products and our product road map.

As part of their 2020 gaming in Technology Awards Global gaming business. Once again recognized every for two notable awards.

The first was for our premium game theme, the vault, which received the gold medal for best slot product. This is the second consecutive year that one of our opinion slots was recognized as the casino Industrys gold medal for best slot product.

Winning the top spot last year was our smoking hot stuff Wicked wheel premium thing.

Our Fintech business is recognized for the third consecutive year by the gaming in Technology Awards.

This year, we received the silver medal for the best consumer technology for our digital cast club wallet solution last year quick ticket. Another cashless solution was awarded the silver medal.

Now I'd like to turn the call over to Mark to share his perspective on our performance and trends as we begin the fourth quarter and what that could mean for the remainder of the year Mark.

Hey, Thanks Randy.

Well the awards and recognition with the engine industry are always provide a great validation from our customers and peers of our product investment strategy and even better measure of our success is the improvement we are achieving in our financial results and free cash flow. So.

So with that let me focus on some of those highlights for the quarter.

Driven by the strong recovery in our recurring revenue streams and the margin enhancement, we achieved in part from our efforts to reduce our costs, our third quarter. Adjusted EBITDA was 59.8 million and our free cash flow was 22.8.

Our free cash flow more than doubled the amount we reported for the third quarter of 2019.

With this strong free cash flow generation and our improved liquidity, we were able to repay the entire 35 million outstanding on a revolving credit facility in the third quarter.

At current interest rates this will save us almost $500000 per quarter and future quarterly cash interest costs.

Reflecting that debt pay down the total principal face amount of our debt outstanding declined to 1.1 billion at September Thirtyth.

Our net cash position at the end of the quarter was 128 million as compared to 133 million at the end of the 2022nd quarter. However.

However, the second quarter net cash position was reflective of the cash on hand, and 35 million in revolver borrowings.

I'll finish up my debt discussions by pointing out that at the end of the third quarter. Despite the 125 million increase from our new incremental term loan that we borrowed in April.

The total outstanding principal face amount of our debt less our actual net cash position is more than $100 million less than it was at the end of the prior year period.

While we are currently maintaining our cash balances to preserve liquidity through these uncertain times. This overall decrease supports the progress that we have been making in our goal to de lever.

Moving onto our outlook.

As we look to the fourth quarter, there is still uncertainty and the current gaming environment.

This includes visibility for the portion of our gaming operations footprint that is currently installed but inactive.

However, because we expect our total premium.

Print will continue to grow.

More of the inactive units in our installed base will become activated.

And the units that are active will perform at levels consistent with our current performance.

We believe that our active units will continue to over index their performance relative to their prior year pre pandemic levels.

Our strong third quarter performance offers encouragement for continued momentum in the recovery of our business base.

Based on the levels of activity. We are currently experiencing our continued strong relative performance in both our games and Dynetek businesses.

The number of casinos open as well as their player visitation levels across the country.

We are guardedly optimistic that our fourth quarter adjusted EBITDA will be comparable to the third quarter performance.

This is despite the typical fourth quarter holiday declines, which has historically resulted in slower quarter for some of our revenue.

Recurring revenue streams.

In the fourth quarter and for next year, we expected adjusted EBITDA as a percentage of total revenues will remain stronger than a typical historical levels. This.

This reflects the current mix of our business as well as the ongoing benefits of the overall cost improvement initiatives taken in the second and third quarters.

On a quarterly sequential basis revenues are expected to increase slightly over the third quarter levels and we anticipate that adjusted EBITDA as a percentage of total revenues well can track slightly as we start to see increasing equipment sales.

The <unk> third quarter was exceptionally strong as the faster than anticipated recovery enable the revenues to ramp more quickly than our costs.

However, as I've suggested on previous calls, we expect fourth quarter, SGN, <unk> and R&D expense exclusive of non cash compensation to increase slightly from the third quarter levels in order to support the increasing business volumes as well as prepare us for future growth opportunities.

Having said that going forward, we still expect to have an overall cost structure that is lower when compared to pre pandemic run rates.

I want to remind you that on our last call. We stated our intention is to continue to evaluate and optimize our general office and warehouse facility needs to support a changing business climate and the more remote work environment.

In the fourth quarter, we expect to see further consolidation of warehouse and assembly operations as well as some other general office consolidation.

As a result in the fourth quarter, we expect to incur certain onetime nonrecurring charges of between 1 million and 2 million as we exit certain of these existing facilities.

But we believe these charges will position us to save future operating expense.

We expect the free cash flow remain positive in the fourth quarter, despite higher sequential cash interest costs.

As a reminder, in the fourth quarter we.

We will pay $10.7 million of semi annual interest on our 7.5% unsecured notes.

With adjusted EBITDA, and capital expenditures coming and comparable to the 2023rd quarter.

No additional placement fees and an immaterial amount of cash paid for taxes free cash flow is anticipated to exceed the 4.4 million generated in the fourth quarter of 2019.

That concludes my prepared remarks, but before I turn it over to the operator I would remind you all that we're responding to these questions from remote locations well I think we're getting pretty good at this I apologize in advance for still little clunky as we.

Handled the responses with that I'll turn it back over to the operator for questions.

Mhm.

And at this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad a confirmation told indicate your line is in the question queue. You May proceed started to people 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 starkey.

One moment, please while we pull for questions.

Our first question is from George Sutton with Craig Hallum. Please proceed with your question.

Thank you.

Just to be consistent Randy I wondered if we could walk through a the car type that you currently are seeing so in February.

You felt you were driving a Ferrari it's a throttle wide open on an open road. The stock was $13. In June you felt like you were a jeep on a rugged road. The stock was $6.50. So here Weve had a great third quarter and a good fourth quarter outlook I'm, just kind of curious what car and.

What road this would represent.

[laughter] well George you know I I get it didn't put a lot of thought into this but I you know I think that we're definitely off that rugged road and I'm I'm trying to upgrade I haven't quite got back to the Ferrari yet, but I feel like you know the road is smooth it smoothed out slightly and again can't see everything up.

Head of us, but he had Georgia, we had that we had a really good quarter in and we're you know we're very I would say yeah. As we said guardedly optimistic about a you know where we go from here. So how's that no no I'm not going to pick out a car just yet I got to think about it some more [laughter] [noise].

All right one question for Dean if I could the.

Congratulations on your second annual award of the top game and I'm, just curious with your very low share in an area like Vegas, if I was a buyer seeing you produce the top game each of the last two years. Just curious can you just give us a general interest level for that.

Those who haven't been working with.

With your game product in the past is that starting to change in your view.

Oh I think so George Thanks for the question I do believe that it is and it has been for a little while you know, it's a marathon you're not going to all of a sudden go get a 100% of the ship share. It takes a little bit at a time and we've been a gain in our fair share as we continue along is long.

As we continue to produce what we had with respect to Oh with respect to our mechanical.

Especially high denomination and now all of a sudden with our flex portrait cabinet coming out.

Doing extraordinarily well with 11 different games that are operators can choose on that brand new cabinet as of right now we feel.

Very good about it so I look forward to see how it plays out we're positioned very well.

All right if I could just thank whoever forced Randy in his script to say smoking hot stuff. We can wheel twice I. Appreciate it that's it for me [laughter] George look I love, the Georgia [laughter]. Thanks.

[laughter].

And our next question is from Barry Jonas would choose Securities. Please proceed with your question.

Hey, thanks, so much like obviously GE trees. This year, it's a little different than prior years I'm wondering if you could talk about what you've been doing there is you're speaking with customers what feedback ban on any new products or any indication around.

Around budgets for next year. Thanks.

Yeah that should probably be taken by gene in there and they did the the customer interactions on or both or virtual GTP, but also the we had we had some customers that actually made their way to our showroom. So gentlemen, you want to you want to take it first Dean and then Darren.

Okay.

I think the response has been great. Its you know the real challenge is trying to present habit or come across in a similar format is actually being able to see feel touched machine.

And just get a much more immersive experience in terms of understanding that.

But with that I mean, we're doing our best virtually ER and our customers are very receptive right there.

They believe that we are completely going in that in the right direction and our product strategy is sound and there's just a higher level of confidence that I've seen in four years that I've been here about our product strategy I mean with that said you know capital and you know obviously.

Owner, operator side things have got to.

Got you a sustained but continue to improve as we get through this pandemic right. So you know from a capital standpoint. There are you know if they get money available we feel very good about it but it's a big yes, you know, especially as we go through winter. We just you know.

Got to make sure we stay the course, but as far as the product side, but a very encouraging.

Darren Aaron.

Yes, similar I guess, you know absent the actual physical show we have then easily as busy as last year with lots of the virtual you know we're still using the same nomenclature kind of breed pre GTV meetings, and we've actually had some where we've been able to have a in person with all the social just dancing distance.

Seen in safety protocols, which have all been very well received I agree with Dean that you know from a product strategy standpoint, we.

We are very much resonating with our customers from the Fintech side, you know you heard in their prepared remarks, and we've been talking about the expansion of our digital neighborhood and all very well received by our customers a lot of enthusiasm I do believe that they're going to be constrained on budgets are from a capital standpoint, So you know that well.

As I think you indicated in the prepared remarks effect. Some of the you know some some capital purchases on hardware. You know good thing is is our loyalty a hardware has been has been doing very well and I think we'll just kind of being a wait and see as to as they plan their 2021 budgets, but I would say, it's going to be constraint for the foreseeable.

<unk>.

Great and then I had a.

I guess relating to those answers about budgets and capital purchases do you think more operators are moving to gaming operations or participation models.

Just just in response to that and then after I have a quick follow up on cashless. Thanks.

Oh, <unk> I mean, do you want to take that yeah.

Yeah, So Barry I think.

The answer is it depends right. It just depends on the operator in their particular situation.

I will say that if you have great a premium product it seems to find its way on the floor, but they're going to be a little bit more scrutinized as far as.

Product sales.

Definitely a wait and see you know it's a do I think it's going to migrate between one or the other I think it's just really honestly depends it's a tough one answer certain customers for sure are going to try and get product on as a suppliers get creative with Ah Ah with with trying to get.

New product introduced on their floor in terms of I don't know pricing models and so forth but.

It's it's once again, it's a really tricky question to answer that I think it's not a one size fits all.

Yeah, I would agree I would agree I think.

We're we're probably in a in a similar position you know what I will say, though is you know from the Fintech standpoint operated or certainly a willing to invest capital to look for you know products and services that do create operational efficiencies and can reduce our opex. So you know I would.

I'd say you know things like you know are the digital wallet that we're selling certainly it is an opportunity for them to to to to find some some operational efficiencies and cost savings and create some great guest experiences.

Things like our our Oh promotional loyalty mobile App you know again, you know again moving to a you know a more operationally efficient where people can self serve promotions on on a mobile phone app. So a lot of those types of things are going to be you know I guess, you know sort of a capital cost.

And questions that they can look for efficiencies and then they'll make the proper investments.

Great and I guess last one just following up on digital or cash less you know I know, it's sort of developing real time.

And many operators have already talked about it on earnings calls this season, but how are you thinking about how this could ultimately transform your business I guess to what extent should we think about it replacing current revenue streams versus being entirely additive.

Well remember right. So so the digital wallet is an extension of the services that we're providing today in terms of how people access their funds. So it provides opportunities for us to provide a new sort of form factor in terms of how people access their money. So we believe it added it from the standpoint.

Is it a new way to get money for people. So you know entertainment experience and then there is opportunities for us to introduce new transaction types, which again is going to be additive. So you know I think it's it's it's sort of multi multi threaded in terms of the opportunity and remember it's just how it connects with the rest of.

Our products and services in that digital neighborhood. So it adds value to everything that were doing because they are integrated they are interconnected and the digital neighborhood and you know as Randy indicated earlier, you know from from an email standpoint, and then loyalty standpoint, you know we've got kind of the must have products, which are all integrated with the with the digital wallet.

So does it transform it yes as people move towards cashless, but is it a <unk> so that that that's how it will transform and I think it'll be a evolutionary process.

Great. Thanks, a lot and great quarter.

Thanks.

Thanks, Barry Thank you.

And our next question is from David Katz with Jefferies. Please proceed with your question.

Hi afternoon, everyone congrats on the quarter after.

I have to say I'm I'm, certainly surprised by the magnitude of the number but but not a not the tone and direction for sure.

Can can we just talk about some of the commentary that you made it in the release around the fin Tech segment.

Where you referred to you know some 80% of one specific segment of it being recurring what I'm getting at is I'd love to know just within you know that the that segment, which portions you would consider to be sort of recurring fees so to speak.

Right and you know, which would be sort of recurring volume based obviously, we know you know some of those but help us break down that whole half for the business and understand what's what sticky and what's not so that should we have you know heaven forbid further shutdowns or et cetera, we know where the pressure points are.

Or not yeah sure David Darren Darren do you want to take that.

He might have might have a mark to mark will have more yeah. Yeah. That's good that's good.

Yeah, so none of its kind of each other [laughter] [laughter], David the cash access line is primarily the Oh recurring revenue from our long standing contracts that clearly is recurring in nature, what we would deem not necessarily recurring or the kiosk and loyalty sales in the us.

Clinton and sales line when you move on down into the information services, another which is not readily broken out.

His activity such as the new software sales for our compliance products or new software sales for our loyalty products, but beyond that in there is your kiosk maintenance and service.

What drives your loyalty support and your compliance support as well as your central credit subscriptions revenue service and so so I would tell you a small portion of the total revenue that we generate in that other information services and other line is probably what I would call a nonrecurring it as as we would look at it and it's probably.

Probably if I had to frame it out in terms of relative size, its maybe $5 million or so of that total number in Q3 would be.

Onetime sales the rest is pretty much weaker.

Okay, perfect and if we could switch over to the gaming side of things.

<unk>.

If you could just give us a a tad.

Tad bit more color on you know what you're thinking about in terms of unit sales.

In the fourth quarter, and what that looks like.

That would be helpful also.

I'll.

Mark Yeah go ahead, Matt.

You know in the quarter, a we were.

Just under 500 units in this quarter this quarter and we think there will be some sequential growth there I don't know how much more sequential or how much higher looking to be snap it it'll be slightly up on from that number.

Would be what I suggest is Q4, we suspect it's kind of a little sequential for the next quarters as customers start or loosely releasing some more capital, possibly as well.

Got it.

Okay. [laughter], you know I I don't have any more insightful questions nice quarter, I think I'm all set.

Sure. Thanks, David Thanks, Dan.

And our next question is from David Bain with Roth Capital. Please proceed with your question.

Great. Thank you and congrats on everything it's great to see I was hoping I could just briefly dive into your Fourq guidance first can you confirm for Q quarter over quarter historical game ops seasonality that you cited I mean that we're not going to feel that typically about 4% or so I'm just trying to go back and see that and then.

You mentioned, a slight increase of active units. This so far in Fourq you. If you can give us a sense I didn't hear the active units in Threeq I'm, sorry, if I missed it and if you're just using the kind of the live game run rate from here. So any significant increase in live games would be would be gravy or kind of just how you're looking at this.

For Q over three Q I'm, a little bit further it would be great yeah.

Yeah, I don't I don't think we did get a you didn't miss anything David I don't think we gave back actual numbers of what was active in Threeq you, but mark do you want to you want to address I'm sure I'll try to.

Break apart the pieces for you in terms of our kind of that I used the term seasonality just because you used it in terms of what you see in Q4, we usually do see a law all on a like for like unit basis in terms of Oh, you know if the same footprint. We're out this year Q4 versus Q3, the interesting thing about.

Our business is really where we've had some great success. If you look backwards to 2019, we actually grew that pretty substantially but there was a lot of growth happening in our premium units at around the same time as well. So you know I think youre framework of call it 5% or so is probably a reasonable way to think about how you see some a little bit of a.

Some of those holiday times, where the gaming ops volumes, maybe aren't as strong for a couple of those bigger holidays Thanksgiving Christmas for example, and a that we believe as we said in our guidance would kind of be more than offset by a continuing placements of total units primarily premium units in Q4, plus more units, becoming active again, we didn't really talk about.

What percentage of our our footprint is active but we are still seeing new properties that were previously either totally shut down or coming back on line growing. So we think that that that kinda lends itself to showing us. Some some growth in the from Q3 levels of gaming ops revenue for us as we kind of move forward into Q4, so instead of seeing a decline.

You'd probably see a flat to maybe even slightly up from Q3 levels.

Oh, okay. Okay.

Great and then if I could just one on cash club, it's kind of bifurcated as well, though you know it gave us a sense as to kind of the initial capabilities that the placements are going to have in the next couple.

A couple of weeks, but how does that augment our change you know a year from now and given you know this is going to increase the number of transactions is as you said it earlier on the call is there going to be a different surcharge to the end casino by our to the end customer by casinos have you have you discussed that with casinos and and just ways to have it.

Increasing awareness of the product when it launches.

Well as you can imagine David there have been tons of discussions ongoing with operators about the the launch of the wallet, but let me let me have there and take you through well what the bulk of those had been about.

Sure. So from a patron fee standpoint, I would say there is a lot of.

ER philosophies around you know the acceptance and whatnot are for the most part operators are looking at a consistent structure. There is potentially opportunities for there to be you know flex of fees to incentivize and or you know changing you know the the other fees other transaction fees.

To incentivize people to go more cashless. So I would say right now most are planning something consistent with where they are at today with opportunities to flex fees for for ways to motivate motivate patrons to adopt it and door incentivized them to to to convert off of of other transactions up the idea.

As you know ultimately you know we have the opportunity to to convert the existing physical cash transactions to digital but then also offer new transaction types, which allows people to actually move money outside of outside of their wallets and back into their bank account. So so we see velocity increases Ah you know money's coming.

And then in velocity potential opportunities from for money's going out where we'll have fees associated with that also so that's sort of where we're at with those.

Okay, and then product adoption like just how you're going to increase awareness when when it goes live.

Sure. So so this is this is significant for the operator and their marketing team that we work with in order to to to get the right marketing messages and a lot of the experience is really around you know the integration that we have with the system provider because that's really the technology that gets it down into the game.

And so from that standpoint, there's all sorts of opportunities on from the website incoming email communication text message communication on screen onscreen messaging with the applications themselves at the game itself, if its going directly into a slot machine. So so a lot of that is is being worked on with the operators for.

Communication to their player. So we believe that it's a fairly seamless user experience from the standpoint of they're not going to see anything that's that's really different than I think than other sort of mobile app experiences there and they are using today, but certainly the operators are very team from a marketing standpoint to get those that get those marketing messages right.

And of course, they're going to you know a minimum and tweak them and refine them you know as we launch.

Okay, great execution on the quarter. Thank you.

Thank you David.

Thanks, David.

And our next question is from Chad Beynon with Macquarie Group. Please proceed with your question I.

Hi, good afternoon. Thanks for taking my question Tonight.

Your installed base and premium growth is as we've talked about you know certainly a bright spot and I wanted to dive into this a little bit more maybe reverse engineering into Ah Ah.

I guess, what's left from an age third party unit standpoint, or older proprietary cabinets standpoint, I know you gave us some some figures on percentage of premium, but I was wondering if you could shine a light on that I believe it's pretty low and then related just on the Capex side how.

How are you thinking about an updated capex number to support your you're growing premium footprint. Thanks, yeah.

Yeah, Brent Randy do you want to you want to get into that.

I can't I think Mark probably has had a little more but I would say on the cap on the Capex I was going to use a boxes [laughter] you got it. So you know look we feel like.

The older Third party chat was I want to talk about <unk> I think we have and Mark can correct me somewhere around 200 units a very small that's the old wide bodies. So that is immaterial not even really an impact to us, but you know from there you know our core HD Acs has been out for a little while but but but you know relative.

He probably three to four years and then you know the the the mechanical which is a big which is a big part of this again fairly new product out there. So I you know I would say I don't think our you know are and then the flex. It is news yet the flex coming out and then you've got the premium games coming out. So you know I feel like our footprint is.

You know it is fairly it's fairly new but it's always when did you fight with right. So as we bring out. These these these newer cabinets were always going to be looking back at some at some of the older stuff and as you know sometimes than the older stuff just doesn't move until somebody makes you move it. So I think we feel pretty good where are.

Our our overall <unk> age of that footprint is and really you know where we want to grow and I talked about is really in the in the premium products, which is what we've done and those are you know relatively you know new you know between you know a hot stuff what can we all and now the vault, where we're really.

Growing our footprint is with newer product.

Yeah, and Randy I'll, just pile in a year the numbers really it is right around 300 units for the US those third party games, it's out there and again to your point they've been out there for a while and they're still generating returns. So we're happy to leave them out in the installed base at this point in terms of a capex a you know for the quarter a week we are still on.

Just the opposite working around where our customers are in terms of their desire to get new product on their floor. What we saw in the quarter was probably just under 13 million in terms of game refreshes and and new unit placements.

For for Q3, I think you'll kind of see us in that similar neighborhood in terms of where we think capex kind of looks like going forward into Q4 and as we start Q are it was you start 20, and 21, we havent come up with guidance, yet, but but again, maybe a a small little up tick up is it more casinos or more.

Casino customers are willing to take product in here from that call. It 13 million dollar ish game refresh level. So call. It 13 to 15 for the for the near term and maybe again, it's all a function of of of the level of interest in our customers and some of the new products. It's very successful. So what you saw last year at the same time period as we were growing the premium installed base.

Very rapidly that number was approaching $20 million plus a quarter. So I for spending that kind of level that means our installed base is growing pretty rapidly and I think in the near term, though I'd be planning on something a little less but still seeing growth in the installed base.

Okay, Thanks, Mark and Randy and then separately a high level, one or just given your.

Strong free cash flow and your guidance for for the fourth quarter. I think allows me I asked. This question is the time to kind of start thinking about more accretive tuck in acquisitions and go back on the offensive given how accretive or you know loyalty and some of the Fenton Ah ones, where or is it still too early to think about some of those items.

No no trend I think you're absolutely right I mean, I think we've been very successful with the with the small acquisitions. The tuck ins that weve acquired so far both on the compliance side and loyalty and we continue to be looking all the time and as you know given the current environment or some.

Developers of products that we find very interesting that may be interested in finding a new home and so we are continuing to look absolutely.

Thank you best of luck.

Thanks, Chad.

Our next question is from John D. Davis with Stifel. Please proceed with your question.

Hey, guys you channel falls won't change [laughter] I did not know.

Then all right. So mark maybe maybe start off margin was up 500 basis points year over year.

You alluded to your cost structure, saying, you know I guess reduced relative to prior Kodak numbers, but how should we think about that 500 basis points. So you know the 200 basis points of that do you give that back. So it's 300 basis points on a go forward basis, but anything you can kind of give us directionally.

For the margin as we kind of think about next year I'm going to be on.

Yeah, I think we're still you know, obviously looking ourselves, where we think forecasted before for revenues for a.

Overall, but I think you're thinking about it in the right way in terms of of how that number comes down just a little bit again, it because as we start selling more equipment on both the fintech and the the game side of the business. It's it's very reasonable to think that a couple to.

200, 300, 400 basis points starts coming out and I would tell you. The only reason that's going to fall more than that as equipment sales and as onetime sales that are that our hardware driven that have lower margins are making up more of our revenue number. So I'm, hoping it falls even faster because that means we're selling a lot of equipment a hardware out there, but but I think I think at least in the near term.

You should expect to kind of see see that kind of erosion in a little bit in the overall blended adjusted EBITDA margin as as we progress until quitting sales kind of start returning more to normal.

Okay. Thanks, and then you know Randy I think you gave US 37 dollar number per win per day on on active units, which is a.

Almost mind boggling at this point, but just some quick math off of that that would imply script I'm wrong about 80, 85% of your machines are currently being operated which would be kind of 90% or so oh, you know machines. The casinos that are open just wanted to check the math there to see if that if those numbers you know.

Sense and you know why you think that so many of your machines that opened properties that means close to 90% of machines up and properties. This is pretty staggering. So what's driving that is just performance as newer games, just just anything there would be helpful.

Sure John I mean look I think your your percentages or are in the ballpark I mean, even if some of this and the stuff you will see an eilers when they try to you know parse that out puts us in that that high percentage and we believe really it's the premium games, we have 40% of your.

Installed base now premium and you know between you know the fault the DCIX the dual screen that we that we came out with its done very well smoking hot stuff still does well shark week renegade, even still performs well so you.

You know when you look at that base and how many of those units are premium. It's you know it's it's to your point is very very strong and and I think that's a very reasonable number based on you know as we as we talked about you know Mark alluded to you know thinking that things will continue that way into.

The fourth quarter, if if the environment stays the way. It is we just feel like we have a fairly good hand with with the vault and some of the other themes that are coming out and those those are the games. They are leaving on and those are the games that are performing well and <unk>. We're very you know.

Very good where we're at right now going in the fourth quarter.

And John I mean, John real quick you've seen the ball I think I think I know I think Dan you're going to say the same thing I want to go ahead.

It also helps screening the carousel configuration, where they could have more games turned on because it promotes social distancing. So some of the strategies that were doing is is to either you know haven't banked in Ah carousel configuration or a different wedge strategy that meet the needs of our.

Customers and so forth those are the things that will help continue to do our part to have more games turned on than otherwise.

Okay.

Helpful. And then last one for me just on the fin Tech side, just cash access volumes, Yeah, I think they were down about 10% year over year, which is pretty impressive I think like an average of 85 or so for southern casinos were open so that would imply your your cash taxable access volumes were up modestly at properties that were open one just wanted to check and see if that was.

The case, and then also kind of what you're seeing so far.

So that would be helpful. Thanks, guys.

Yeah, I'll take one and just wanted to start a you know I think I think you know there's guys out there like Fanchini, who will love pull together all the commercial jurisdictions in the state level reporting of of revenues and volumes and again I think what we were very pleasantly surprised in the third quarter that we saw was a you know he reported that gross gaming revenue.

For the commercial jurisdictions are reported in July were down call. It 16, 17% for August it was down only 15% has it come out with September yet, but I think those are good data point showing that it progressively got a little better as we progressed through the quarter third quarter in terms of how revenues were tracking for the commercial guys are logical to assume.

Soon that the tribal and and regional guys that aren't in those reports probably transact similar kind of volumes, maybe a slightly better just because of regional guys seem to do very strongly in terms of what you're seeing from operators out. There you know what we've seen in October right now and it's still I would say relatively early and obviously, there's quite a bit of a other stuff going on in the Ma.

Macro environment right now, so, particularly with things like the election covert starting to come back a resurgence a little bit and making a fight as the weather's cooling off and we have seen a little bit of I'll say softening and October compared to that kind of run rate of where we were.

Exiting September core at September the monthly activity in the September quarter, but still it hasn't totally falling off the cliff by any stretch, it's just a little bit of a downtick on there you know.

All of our analysis or all of our measures that we've done in terms of forecasting or projecting as we move into Q4 assume that there's no backslide or material backsliding in this kind of data as you know what we have seen two or several.

Individual properties have had recent closures.

In terms of outbreaks Ur cobot outbreaks that they look to shut down for a day a couple of weeks just to to clean the property and make sure. It's covered so I think those little one offs are still happening and contributing to some of that overall slide in what we're seeing as we start Q4 and a little bit of the election noise. I think that's also starting to contribute a little bit, but but nothing.

Materially changed.

Hi, Thanks, guys.

Thanks, John Schoen.

And our next question is from David Katz with Jefferies. Please proceed with your question.

Hi, Thanks for letting me circle back Mike I, just wanted to get a quick sense or whomever you'd like to farm it out to which you are doing quite well.

Yeah, when we look at the cost savings right I mean, the the gross margin in total was up considerably.

The degree to which you're able to save costs across the two divisions.

Is it you know Justin aggressiveness within each division and you know given how well you're doing and cutting costs at the same time you know how did you sort of think about that and how should we think about that as an ongoing trend line.

Yeah, I will say that I think I think both businesses were aggressive and looked very carefully at all of their costs and I, but but I think mark really spoke to it going forward and I'll turn it back to him I mean, you shouldn't expect that we're going to be able to continue with that.

Kind of a rate oh or improvement rate going forward, but mark do you want to you want to set up to them.

Sure sure you know David I think I've been I've been trying to frame out on Q2 call I kind of said on this call that a you know when we look at R&D and operating excess DNA expense exclusive of noncash comp I've kind of been framing out look we think those are going to run about 35 40 million a quarter this quarter, probably near the middle to high end range and as we move into Q4 that that step.

It's up just a little bit as as again employees are back and we've ramped the business to the expenses match more of the the revenues that have come back onboard for for the entire quarter and there I think I think those kinda frameworks look good for us as we move forward you know you're thinking of it kind of it 40 million a little more than 40 million maybe in Q4, and then as you start.

Moving into next year is slowly ramping up from there throughout the progression of quarters throughout the quarter I'd remind you. When you look back to 2019 Q4, you have a lot of expense sitting in there related to our churn event of champions event and the G. Two we toss in there that are not going to be present in the current year, but.

But I'm talking in absolute saying, it's kind of around that 40 million plus range as we move into Q4, and then moving forward you should expect to see those cheech, we kind of level costs coming back in Q4 that would be a little bit of an outlier for that kind of progression of run rate from there.

Thank you.

Mhm.

Thank you David.

[noise] and we have reached the end of the question and answer session and I will now turn the call over to CEO, Randy Taylor for closing remarks.

Thank you for joining us on the call today with the actions we've taken the gaming industry's ongoing recovery.

And the business strength, we have in our games and Fintech segments. We believe we are well positioned to enhance the long term value of the company. We look forward to providing you an update on our next quarterly call. Thanks for joining us.

Thanks, everyone [laughter].

This concludes today's conference you may disconnect. Your line at this time. Thank you for your participation.