Q2 2021 Everi Holdings Inc Earnings Call
Yeah.
[music].
Hello, everyone. Thank you for standing by and welcome to the every home at Holdings 2021 second quarter earnings Conference call.
During todays presentation, all parties will be in a listen only mode. Following the prepared remarks, the call will open for questions and answer session. As a reminder, this call is being recorded now let me turn the call over to Bill Pfund Senior Vice President Investor Relations. Please go ahead Sir.
Thank you operator welcome everyone.
Let me remind everyone of our safe Harbor disclaimer that covers today's call and webcast. Our call will contain forward looking statements, which involve risks and uncertainties that could cause actual results to differ materially from those discussed in our call. These risks and uncertainties include but are not limited.
To those contained in our earnings release today and in other SEC filings, which are posted in the industrial section of our corporate website at every dot com, we do not intend and assume no obligation to update any forward looking statements, which are made only as of today.
August 4th 2021.
We're also cautioned not to place undue reliance on such forward looking statements, we will refer to certain non-GAAP financial measures such as adjusted EBITDA free cash flow and net cash position.
A description of each non-GAAP measure and a reconciliation to the most directly comparable GAAP measure can be found in our earnings release and related 8-K as well as in the investors section on our website. This call is being webcast and recorded.
A link to the webcast and a replay of today's call can be found in the investors section of our website.
On our call today are Mike Wamboldt, Chairman and Chief Executive Officer, Randy Taylor, President and Chief Operating Officer, Mark <unk>, Chief Financial Officer, Kate low end higher Fisher General counsel being Erlick games business leader and Darren Simmons, our Fintech business.
Peter.
Now I will turn the call over to Mike Rahm bowls.
Thank you Bill and good morning, everyone and thank you for joining us.
I'd like to begin by sharing a few highlights and observations from the second quarter.
Our outstanding results and strong growth relative to 2019 are clear evidence of the success of our organic growth initiatives as well as the sustained recovery in the gaming industry.
All of our key financial and operating metrics are up impressively compared to the pre pandemic 2019 second quarter and we significantly exceeded our results for the second quarter of 2020.
On a consolidated financial basis.
Set all time quarterly records in revenue net income earnings per share and adjusted EBITDA.
Financial performance free cash flow generated in the first half of 2021 exceeded the free cash flow we generated over the prior 2 years combined.
Our results were even slightly ahead of the expected range that we announced in June in conjunction with our refinancing activity.
Operationally, our excellent performance clearly demonstrates that the complementary nature of our games and Fintech segments has never been stronger.
In games the investments that we made to expand our game development studios and broadening our portfolio of differentiated cabinets continued to drive sustained growth in both our ship share for sale units.
And in our gaming operations installed base.
Each cabinet style that we produce is supported by a strong pipeline of original content that is available for distribution in both class II and class III markets.
And that's why Berry continues to expand.
Its content pipeline is also supporting our growth in the digital gaming space.
In Fintech, we have successfully expanded our product offerings through investments in both internally developed products as well as through St.
Dziedzic accretive acquisitions of complementary products and technologies.
As a result today, we offer the most comprehensive portfolio of integrated financial loyalty and Reg Tech solutions for the casino industry.
Furthermore.
Since we have the vision several years ago to create a digital neighborhood with a focus on cash was technology or products are integrated with 1 another.
This provides casino operators additional value and ensuring the seamless operation of these mission critical solutions, while at the same time, providing casino patrons with player friendly offerings.
As a result of our operating progress the successful refinancing of our debt and our substantial free cash flow every has never been in better shape.
As we shift our focus from deleveraging our disciplined capital allocation practice will remain the same to stay the steady course, a return focused investments.
Our investments will be made with an eye toward expanding our range of complementary products to drive further share gains in our core games businesses as well as to broaden the capabilities of our digital neighborhood in our Fintech business.
You can think of our integrated digital neighborhood as a broad platform.
Non which we can lay our new products that will continue to grow our business by increasing the value that we offer to casino operators and their patrons.
We will also remain focused on investments in newer technologies that leverage our core strength.
Our digital cash club wallet solution is just 1 example of this.
Today, we are live with our cash flows wallet solution at <unk> casino properties that have more than 24000 gaming machines and 700 table games.
These casinos encompass both tribal and commercial operators and we are facilitating cashless transactions for thousands of casino patrons in multiple states.
Our cash flows wallet technology places us squarely at the forefront of the dawn of an exciting new long term growth opportunity in the casino industry.
Our competitive advantage draw strength from our substantial experience and expertise in funding transactions across the gaming industry.
This strength is combined with our unique banking as a service solution focused on the cash club wallet and strategically integrated with all of the products on our digital neighborhood platform.
This creates a seamless experience for casino guests and enables significant cost efficiencies in the back of house operational side of the casino.
We also have several new loyalty and Reg Tech related products that are under development and are continuing to expand our range of products in these categories.
Another example of our returns focused investment strategy is our remote game server.
Our creation of a state of the art technology infrastructure Leverages, the strength of our successful game development.
This is favorably positioned us to become a leading content provider for the rapidly expanding gaming world.
As our track record demonstrates our search for new technologies geographies and interesting products can provide further sustainable growth across our fintech and games portfolio.
We will invest in both internal development and strategic acquisitions that can combine with our core strengths to provide accretive growth.
Now, let me turn the call over to Randy. So he can provide you some more insight into our operational successes.
Thank you, Mike and Hello, everyone Hope you are all safe and doing well.
And our focus on technologies and products that Mike just mentioned.
We also have strengthened and broadened the depth of our management team over the last several years. It's enhanced leadership is evident across our product development sales management and production execution teams, we have never been stronger or had a more aligned workforce worldwide. As a result, we are executing.
At a high level, which in turn is delivering financial growth.
Our track record also reflects the emphasis we placed on striving to build a corporate culture focused on people and collaboration.
This includes intangible but important elements to foster mines that will accept the prudent risk taking needed to create new products.
Also driving home the disciplines needed for consistent execution and operating processes.
We believe the strength of the worldwide every team the culture of collaboration and innovation, we continue to posture and having the right people in the right positions are key factors in why we have so quickly regain the momentum that our business is demonstrating just prior to the onset for the pandemic.
The heart of our success is our core recurring business operations, which represented approximately 77% of second quarter revenue.
These operations are performing beyond our initial expectations and are providing exceptional growth in today's environment.
While the casino industry has rebounded solidly from the depths of the pandemic.
Our performance reflects our growth focus and consistent operating execution.
The success of our premium games remained the primary growth driver of our installed base unit count and the higher average daily win per unit.
These in turn drive significant gaming operations revenue growth our base of premium has increased every quarter for the past 3 years and now it's 43% of our total installed base.
This is a leading contributor contributor to the 61% growth in gaming operations revenue that we achieve relative to the 2019 second quarter.
In the second quarter, we had initial installations of the new monster verse wide area Progressive games on our Empire Dcfs dual curved cabinet.
While it is very early in its rollout the initial performance is highly encouraging.
Following regulatory approval in April we also made the first placements of our wide area Progressive games in Nevada. This opens up a substantial commercial marketplace for future growth.
Also contributing to the gaming operations growth was the 139% year over year increase in revenue from our digital operations compared to the 2022nd quarter.
Our digital revenue was also up 50% on a quarterly sequential basis as during the quarter. We went live at customer sites and the additional jurisdictions of West, Virginia, British Columbia to Manitoba.
We firmly believe that our proprietary content positions us very well for long term growth.
Alongside our success in gaming operations product sales rose compared to the 2019 second quarter.
Both replacement sales and total shipments which include several 100 units for new casino openings and expansions.
Also increased sequentially over the 2021 first quarter.
And the new casino openings, we garnered strong relative floor shares and our ship share of unit replacement sales increase compared to our typical historical share.
This was partially driven by the success of our Empire Flex cabinet and its library of what has quickly become player popular video content.
Turning to our Fintech business total segment revenues increased 21% over the 2019 second quarter, reflecting growth in each of our 3 line item categories.
Our financial access services revenues, formerly cash access services, which includes our cash and cash was financial service Solutions, Inc.
<unk> over the 2019 second quarter by 13%.
This growth was largely driven by higher same store transactional activity.
Which was up at a mid teens rate consistently throughout the quarter I would note that this is a much higher rate compared to the mid single digit percentage growth rate that we typically.
Experienced in recent years pre pandemic.
Contributing to this growth were incremental revenues from new customer wins and customer expansions during the period compared to 2019, partially offset by a few customer sites that are still closed or operating with limitations as well as an almost non existent international player in the U S. Due to the ongoing travel restrictions.
From foreign countries.
Another quarter of growth was also achieved in our software and other formerly our information services and other which includes gross from our loyalty software sales and subscriptions and from a Reg Tech software for regulatory compliance.
<unk> financial access services revenue from software Reg Tech solutions, and annual maintenance and support services.
Large recurring revenue component.
Recurring revenue portion represented 80% of software and other revenues in the second quarter, while initial or other 1 time sales accounted for 20% of Q2 revenue.
Revenue from hardware sales, formerly called equipment increased 63% over the 2019 second quarter.
Gross over both the 2021 first quarter and the 2019 second quarter reflect a meaningful contribution from our sale of loyalty and financial access kiosk cage and other equipment for new casino openings expansion and new customer wins.
After being delayed due to the pandemic. We believe there was also a slight pickup in replacement sales of financial access kiosks.
Now I'd like to turn the call over to Mark to share his perspective on our free cash flow and outlook Mark.
Thanks Randy.
Today's call I'm first going to focus on the significant increase in net free cash flow, then I'll turn to the improvement in our capital structure.
And I'll finish with our outlook for the remainder of 2021.
As Mike noted, our second quarter free cash flow increased substantially over 2019 in the prior years.
This growth represents a more significant flow through from the increased adjusted EBITDA.
Along with a more modest level of capital expenditures in the quarter as measured as a percentage of total revenue.
We believe the Capex run rate in the first half of the year reflects how we have managed our capital spending to match our customers' recovery.
With continued improvement in our customers' operations.
And as we look to restart of certain capital projects that were deferred during the height of the pandemic.
We expect the second half capex spend to be modestly higher than the first half of 2021.
Looking forward, we expect our free cash flow will also continue to increase as a result of lower cash interest.
This will come from both the lower effective interest rates.
And the lower debt levels, we have achieved following our recent refinancing.
Compared to the balances outstanding at June 30 of this year, our annualized cash interest costs are expected to decrease by more than $23 million based on current run rates.
It's also important to note that through this refinancing we have extended maturities on our borrowings with our term loans now due in 2028 and our notes due in 2029.
Needless to say this decrease in cash interest will flow directly through to future free cash flow.
As a result of our enhanced cash flow profile.
The very significant portion of our top line that is derived from recurring revenue streams.
And our expectation for continued growth of adjusted EBITDA.
We are now comfortable with the long term net leverage ratio target.
2.5 times to 3 times adjusted EBITDA.
We believe this level maintains a healthy and a reasonable balance of debt given our size and provides the flexibility for us to pursue high return accretive organic and acquisition related growth opportunities.
With the cash balances, we have on hand, and the additional capacity of our new Undrawn $125 million revolver. We believe we have adequate liquidity and flexibility to support our ongoing business needs, including any short term setbacks.
Turning to our outlook.
For the full year inclusive of the expected early debt extinguishment costs associated with our refinancing.
We expect net income to be in a range of $87 million to $95 million and adjusted EBITDA to be in a range of $332 million to $342 million.
Let me share some other variables that shape these views.
First as a result of the recent refinancing transactions, we expect to incur approximately $32 million to $35 million of pre tax charges in the third quarter related to the extinguishment of debt and the write off of prior financing discounts and fees.
Approximately $21 million of these charges related to the redemption premium and make whole interest in the former borrowings while the rest are largely non cash charges that will impact net income, but not adjusted EBITDA.
At a macro level, we believe the first half of 2021 benefited from pent up demand improved vaccination rates and.
And the easing of limitations that our casino capacity.
Government stimulus also likely played a role.
For every as Randy noted the growth in our financial access transaction activity as compared to 2019.
Was well above historical levels.
This strength also likely benefited the daily win per unit of our gaming operations.
Therefore, while we believe much of this increase is sustainable we are taking what we believe is an appropriately conservative view on the back half of the year due to receipt of government stimulus benefits and.
An increase in pressure on consumer discretionary spending.
And the more recent and renewed overhang of Covid and the delta of areas.
As you review your models in the third quarter, we expect to see a temporary 1 quarter only pause in the growth of our installed base.
So as we started the third quarter, a large customer converted a couple of hundred units from leased to purchase units as they transition their floor away from a lease model.
This will result in an initial reduction of our leased footprint of games.
And while we continue to see growth outside of it beyond this single customer we expect the total installed gaming operations base to be down slightly to perhaps flattish for the third quarter before again resuming growth in the fourth quarter.
Contributing to our expectations for the resumption of growth in the fourth quarter is the expected opening of a travel customers New class II casino facility.
In conjunction with this casino opening we expect to incur between 2 and $3 million of new placement fees that will lock in a footprint of approximately 200 units until mid 2028.
We expect to have the majority of the initial total footprint on gains at this facility.
Moving onto equipment and hardware sales.
In the second quarter, we generated strong units for both our games and Fintech segments as a result of new casino openings and expansions.
While new openings and expansions are always part of our quarterly results for second quarter had a larger quantity than we normally would expect.
Accordingly, because of fewer new casino openings and expansions in the second half of 2021.
Do not accept anticipate the same level of expansion sales of both games and Fintech hardware in the third or fourth quarters as we had reported for the second quarter.
Therefore without that second quarter bump, we expect to see shipments of <unk>.
Shipment and game sales at levels more closely aligned with the first quarter of 2021, rather than the second quarter.
I do want to take a moment to highlight how our second quarter results.
Have reinforced the evidence of the gains we are achieving in ship share for unit sales.
While our customers purchase decision horizon remains focused on only the next 60 to 90 days.
And they appear to be waiting until <unk> to see what is in the pipeline.
We are seeing clear evidence of improved spending in conjunction with the success of their slot floors.
We believe we are capturing a higher percentage of the spend compared to our historical levels.
There are also still opportunities for continued growth primarily from our international operations.
Certain customers like those in Canada, and other international markets, where the casinos have remained closed are only now starting to reopen.
These locations begin to see their gaming revenues returned this could lead to further revenue.
Revenue growth opportunities for both our games and Fintech segments.
We expect free cash flow will remain strong in the back half of 2021.
The fourth quarter will also benefit from a onetime change in the timing of the semiannual interest payments on our new unsecured notes.
Our new notes were issued on July 15th and now have semiannual interest payments that will occur in January and July as compared to the previous payments, we made in December and June.
Our former comparable December interest payments will now be made in January.
With that I'll now turn the call back to the operator for questions.
Thank you ladies and gentlemen at this time, we'll be conducting a question and answer session. If you'd like to ask a question you May press star 1 on your telephone keypad, a confirmation tone will indicate your line is you're in the question queue.
You May press Star 2 if you would like to remove your question from the Q4 participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.
Our first question comes from the line of David <unk> with B Riley. Please proceed with your question.
Great. Thank you and congratulations on the results again, an improved capital structure.
The first question I had was on the cashless digital wallet side, maybe you could provide any broad based initial thoughts on <unk> adoption and frequency rates as you have noticed the learning curve or if it's proven super intuitive and any kind of.
Commonalities developing that may give us a sense too and user of cadence or adoption.
Sure David Thanks.
Thanks for the thanks for the question, that's going to make it difficult to answer.
Before I turn it over to Darren to give you to give you some color.
We're not in a point debt, where I think we want to drill down into.
For the level that youre seeking right now.
As I said in the prepared remarks, we're really at the beginning.
The age of cashless and as we work with our customers on this we're trying to.
Nail down those those numbers that you're interested in ourselves and as we gather those from our customers, we're trying to make our own decisions as to.
How do we think the product is not just working now, but how we might tweak it in the future.
But if you wanted to give some high level color Darren.
Sure Yeah, David So I think.
We are certainly encouraged by.
The user experience that we've worked.
With our customers on delivering.
To their patrons so.
In General I think what we've done is something that is going to make this a again we've looked at this long term. It's a it's a marathon not a sprint in terms of.
Rolling this out and so again, our customers are being very measured in terms of the pace of how they're rolling out and I think.
As we look through the second half of the year I think we'll be able to have more data points as we expand.
Customers.
For the second half of the year and so I expect again, I think I said last call even.
I would say the results will debt we have in terms of.
Run rates and all that kind of stuff, we'll have a much better picture for that I think.
After after sort of the second half of 'twenty 1.
But I was wondering I wasn't sure if not earlier.
Yeah, David the 1 thing I would share with you is we're seeing.
More than more than half of the wallet share being signed up for our customers that are over the age of 50.
Alright, that's great.
That's great Okay.
For the intuitive sexual thanks, so that's great.
So I guess my next question because I only have 1 more mark.
You gave a net.
Some of that leverage thoughts, which I thought were really helpful. And I was just hoping to follow up looking out 12 months to 18 months leverage should be below the lower end of that range.
Given there's no M&A.
I guess my question is.
Rather than going under Levered, if there is no M&A.
Are there thoughts on return of capital and anything along those lines or if you are targeting potential M&A any kind of strategic thoughts size segment.
Would be helpful.
Sure.
Look I think we certainly are in the best position we've ever been in terms of the capital structure right now our leverage profile is.
Right.
Where we wanted it to be if you take the midpoint of our year end guidance for adjusted EBITDA and assume we pay nothing down on the on the debt will be right.
Right around 3 times total leverage by year end, so so kind of right in that sweet spot for us where we think from a leverage profile I think we're now in a different view of our capital allocation and we can look to.
Grow this business both organically.
Talk about in my prepared remarks, and looking at the M&A side of things I think we we believe there's opportunities to take those smaller tuck ins that we've been doing and maybe even look at some more.
Strategic kind of additions that might be a little bit larger and continue to keep the growth profile going into the business going forward. So I think that's how we're looking at this as opposed to us.
Focusing more on thinking about returning capital in the form of dividends or other means but we would evaluate all those options as we move forward.
Nothing's off the table.
Okay, great. Thanks, so much.
Thanks, David.
Our next question comes from the line of David Katz with Jefferies. Please proceed with your question.
Good morning, everyone. Thanks for taking my question.
Okay.
Im just taking in all of the commentary in the context of <unk>.
For strong quarter.
I think it might be.
Helpful or constructive.
Speak a little bit longer term.
My sense is just from the stock reaction.
There may be concerns about what the growth trajectory ultimately is.
To the degree that you are comfortable if you can talk about sort of the 22 and onward.
Rejecters from where we sit.
Sit here and looked at the.
Consensus estimates and so for us.
Any anything around kind of what the longer term growth trajectory here I think it might be helpful.
Sure David Let me, let me take.
First shot at that and I'll turn it over to Mark and maybe Randy and our business leaders.
We're in a position right now where we have we have been continuously growing for the last several years and we've been doing it in a combination of both organic as well as <unk>.
Acquisition related.
Product sets.
1 other things that we continue to look at as additional products that may have been developed outside of our country. Our company rather than we're not invented here that would fit well with our digital platform as I indicated.
In the prepared remarks, our platform really is designed to bring other products onto it and have it fits seamlessly and then and then speak to the existing products that are currently in the digital neighborhood.
And so we're going to we're going to continue to pursue that both internally as well as look at external product sets. In addition to that I mean, we're not we are not bound by.
Simply the casino industry. When we look at this I think we have a very broad horizon is available to us we can look into the entirety of the hospitality and entertainment sector. When we look at the products that we've already developed.
That would have application in other industries or other verticals.
So I'm not concerned about our ability to grow there and in our games segment. We're just we're just kicking off from the gaming side.
Had a couple of years under our belt now we've just finished building the rgs and getting it up and running and integrating it with the websites.
Casino operators and we are now proving out that our content is working both in bricks and mortar as well as in the digital space.
And we're in.
I think we're on the verge of additional growth that will be equal to or potentially larger as we go forward in the next several years than we've had in the past so.
I'm very optimistic about the future.
Despite the headwinds that we have with Covid and what's going on in the macro environment.
I'm very bullish on it but I'm happy to have Randy mark or anyone else weigh in on that.
I would say David that this management team.
Is not satisfied with a single digit growth. So we are going to be looking at all things that are out there.
To continue to grow.
With that we've seen to date, so as Mike said, we think Theres a number of avenues that we can grow in.
And in other areas, we haven't touched so I would say.
<unk>.
We're only at really at a 10% ship share right now on the game side.
And so we still think there is room, there as Mike talked about gaming and I think on the Fintech side digital neighborhood that we're working we can as Mike said, there's areas to grow so it's both organically and we believe we can do it inorganically.
Okay, and if I can just circle back on 1 of mikes comments around the digital stuff.
Yes.
Just want to make sure I heard correctly were you suggesting that.
Digital opportunity could be as big as <unk>.
The land based gaming opportunity that you have or just the gross.
Could be as big as well you have elsewhere.
Yes, I was really speaking to the growth of it David because as you know the gaming.
Gaming the actual casino space with smaller right now than even sports book So.
I wouldn't compare to the land base, but I think what I was really trying to say the growth could be very similar if not if not even bigger.
Because it's a smaller space and that our content is working extremely well there.
Just as it has in the land based from those and as you know the content on the gaming side is.
Is king and so I think we've got growth opportunities in both land based standard IBM, Inc.
Okay. Thank you very much.
Thank you.
Our next question comes from the line of Barry Jonas with Truest. Please proceed with your question.
Thanks, just following up on that theme can you talk a little bit you mentioned international before I was just curious how you see international to grow.
And going forward.
Well Barry the 1 thing I will tell you is that we're always looking at other markets outside of the United States. As you know we are in Canada, where in the United Kingdom.
We even have a very tiny footprint in Macau. So we're always looking for for a market that we think would be.
Not just good markets for our games products, but also good markets for our Fintech products and so as we look at both sides of our businesses. We think there are international locations that could be valuable to us to enter.
We look at a lot of.
Aspects of those markets to make sure that.
But theyre going to be able to.
We will be able to enter those as easily as we have the markets that we're in today.
We think we've identified a number and we will continue to look at those and look at M&A opportunities.
As we go forward I don't think we've put emphasis on 1 over the other at this point in time I think we're looking at both.
That's great and then.
Scientific games, just announced this parts of their business I know we've discussed this before but maybe worth revisiting kind of the level of inbound kind of as it relates to average so I guess, 1 can you talk about how many.
Across games, and Fintech and 2 would you still be open to selling anything for the right price.
I'm not sure I heard the first the first question Barry look we're always willing to sell 1 or the other at the right price, but I would say we believe that these 2 segments are continuing to operate very well together they are complementary they really.
<unk> feed off of 1 another so I think a lot of our success recently has been part of that so.
We will entertain anything that is.
At the right price.
But I think right now we're focused on operating the company as it stands.
Yes, very well.
I would say that is.
I mean, Randy is absolutely right when he says the right price.
Can you just have to understand that because they are working so well together that price will be.
Higher than perhaps people have thought they could purchase 1 or the other of our businesses in the past.
Great great for here. Thanks, so much appreciate it.
Thanks Barry.
Question comes from the line of John Davis with revenue.
Please proceed with your question.
Yes.
Hey, good morning, guys.
Hey.
Just wanted to start off Mark on your comments around the <unk> install base.
I think being impacted by some some lease to sale. So I think you said a couple of hundred units, maybe just help us what is it what's the normal quarter leased to sale like how much of it.
Much of a headwind is it.
And just kind of contextualize the commentary there would be helpful.
I would say at least for sale is always a normal recurring part of our business operations. So what we tried to call out or I called out and this was the really 1 time large that's I'll say a major casino shift in how they are progressing or how they view the lease model. So so I would tell you. This is additive to the normal cadence of what we normally see.
So usually we have been kind of growing 152 loans 250 units a quarter on average historically per quarter in <unk>.
That includes those leads to sales conversion so.
But in the normal recurring piece of it. So this was added to them again and Thats why we think it kind of puts us kind of flattish to maybe slightly down in Q3, when we ended the quarter, but we'll still have that normal kind of growth in there plus the key for going forward, we expect to see growth with a new.
New casino that we expect to have the initial the largest portion of the initial opening floor of it that we should be able to grow from there nicely in Q4.
Okay. So said another way, there's kind of an additional couple of hundred units relative to normal.
Correct.
Any issues getting back in for Q2 growth.
No.
And then maybe another 1 for you Mark just free cash flow conversion here thinking to kind of adjust the timing of interest payments you get something a little north of 50% of EBITDA into free cash flow I assume that extra kind of drift higher as we go forward because EBITDA.
Any EBITDA growth should more or less fall, mostly to the bottom line, maybe a little bit increase in capex, but just help us think about how you're thinking about free cash flow conversion kind of on a go forward basis at least as a percentage of EBITDA.
Yes look I think you hit the nail on the head I think it should be going higher or do you view. The first half of the year, we had the old debt structure in place our cash interest was much higher so second half will benefit from that and that kind of gets you a full year up from about 50% won't be talking about.
Kind of always felt the capex for the business supporting this business is fairly consistent from year to year call. It $110.115 million a year of Capex, we don't see that changing materially with the core operations today. So as we're able to grow that installed base grow the unit sales grow the fintech business, we should get a little better flow through as you move for.
Yeah.
Okay. That's all for you guys see kind of creeping towards 60% or even higher do you guys have kind of any sort of internal targets on what you guys think of free cash flow conversion can look like in the future.
I think it can start creeping up a little bit higher towards 60% I don't know if it gets to 60% at least early on.
But again it should be creeping up towards that I think with what we've done on the debt side.
<unk> got a really nice.
Interest cash interest component going forward youll save quite a bit of dollars. They are probably closer to 40 on just the debt a year and then.
For cash interest down there Youre mid 40, so I think you are in.
It's really been good spot the 1 piece.
We don't pay cash taxes today.
So that is not looking to change we had quite a bit of Nols on the books today. So that won't change. So I think I think that's what's getting volume getting closer and closer to that 60% number you threw out there doing the only thing I would add to that John is looking at as we as we increase the EBITDA I think that's also going to be more development cost, which can be capitalized so whether it.
We can hold the.
Capex the debt.
Remarks talking about I think your bigger EBITDA will require us or a little bit more either an installed base capex or just development cost because that's.
That's really how we're how we're driving the.
The EBITDA increase.
I think that's why I think I would like Mark hesitate about getting to 60% just yet.
Okay, and then 2 very quick ones for wrap up here, 1 fintech margins I think versus 19 were down about 300 basis points.
I'm assuming.
Anything there.
Some of it maybe maybe call it incentive related given given the performance of the company, but any comments there and then quickly just any comments on July trends.
It starts to wane or are you guys seeing like how should we think about July versus June and kind of the trajectory from here. Thanks, guys. Yeah, Yeah, remember, we kind of called out in the call to the prepared remarks that day.
Q2 was extremely strong quarter for us in light of the pandemic from an equipment and hardware sales perspective, and that obviously has a much lower margin profile on there that's contributing in this quarter to some of your.
EBITDA margin declined that Youre looking at our gross margin decline because we have so much more volume in terms of.
Hardware sales in the back moving forward you should be looking for Q3 and Q4 to be more like Q1 not necessarily.
Like Q2.
Does he had this inordinate amount of new new location openings and expansions that were going on in the quarter.
And then I would say from for.
A july standpoint, John.
No.
We continue to perform very well so.
July was.
Was in.
In line with what we had expected and probably gets a little bit better so.
I know, we gave some guidance there that takes into consideration whether things.
I guess normalize a little bit, but so far July fairly strong for us when we see how the rest of the quarter ends up.
Okay I appreciate it guys. Thanks for all color.
Got it.
Our next question comes from the line of George Sutton with Craig Hallum. Please proceed with your questions.
Thank you I wondered if we could just dial in a little bit more on a buy versus build thought process. You mentioned on the build side that you were looking at developing some loyalty and regulatory tax.
Elements I just wondered how.
How narrow or potentially how significant some of those might be and then on the buy side you mentioned a.
Focus on getting high returns I'm, just curious if you could share hurdle rates or kind of how youre thinking of that buy side of the equation.
Well, yes, Jordan, let me, let me speak I'll, let I'll, let mark speak to the hurdle rates that we have for acquisitions, but.
When we look at it at spending R&D on our on our Fintech side or even on our cabinets and games side.
We look we look for particular IRR is that we think we.
B.
It will be additional to what we already expect to glean from the existing product set but.
We also look to see what it would be if it was someone else's product and we were purchasing it and what would we expect from them. So we try and do the analysis that that it makes sense for us whether we acquired it or whether we built it ourselves.
When we do that R&D spend and the products that we're looking at quite frankly, as you embed loyalty and rentech into digital neighborhood.
Which means you brought it into your cash access functioning.
Across your various products.
You are providing something that casino that they have not had abilities to use before were used in the manner in which we're bringing it in before and.
And we find that extremely valuable for the casino operators certainly as we speak to them, but we think it's also going to be helpful to the patrons.
To be able for example to get your W. Twos at the end of the year was the push for robust.
And have them all sent to your to your email those are the kinds of things that patrons I've never seen before and so so as we embed all of those together I think.
We're going to see a greater return on the products that we've developed internally and as we look externally. We're always looking at anything we think that would benefit from our ability to distribute it widely.
Throughout the casino industry.
We will use not just our sales channel, but our existing locations.
And if anything looks extremely good we'll put it into our digital neighborhood.
But we're always looking at accretive acquisitions.
It is going to continue no matter, what day and look George mindset on lot of the key points I would hit on as well there I'll tell you we're not going to talk about specific hurdle rates, but we're looking to make sure. These deals that we do.
Are accretive to us and are additive to our growth in both our revenue and our bottom line in terms of net income and adjusted EBITDA for the long haul. We're finally in a great position from a capital structure perspective, and the free cash flow, we generate debt to allow us to make some more choices and I think we've proven our track record of successful acquisitions, and making sure were making <unk>.
Our choices with respect to how we buy and acquire things to leverage the growth going forward and we look to continue doing that moving forward, but we do do an analysis to make sure they make sense to us from the spreadsheet math perspective, but I think Mike covered all the other intangible assets how does it enhance our product set how does it strengthen our position with our customers how does it for.
More value and return to patrons over the long haul those are the things we look for that position.
Great guys. Thanks for the perspective.
Sure.
Our next question comes from the line of Jeff Standard All with Stifel. Please proceed with your question.
Great. Good morning, everyone and thanks for thanks for squeezing me in here and congrats on yet another excellent quarter I wanted to drill into the forward guidance, specifically the cost side of the equation EBITDA margins again coming in over 50% during the quarter. It looks like the guidance suggests sequential stability on margins for the back half of the year, we have heard the peers highlight the central cost hit.
<unk> towards the back half of the year, just given from supply chain issues can you comment on this trend.
It relates to your business and then more broadly can you help us think about the sequential puts and takes that are baked into your margin guidance for for the back half here.
Yeah, when I look at where we've kind of been running from an operating expense perspective that kind of always talked about operating expense exclusive of non cash comp non cash comp runs roughly $4 million a quarter.
Quarter, usually when we do our grants maybe it creeps up about 1 million $2 million, just because of how some of the exploration work in the accounting treatment, but but excluding those are operating expenses kind of been running around.
25% ish, or so plus or minus a little bit in terms of total consolidated revenues and R&D expenses kind of debt closer to say, 6% to those consolidated revenues. So the good news is we continue to grow the business, we expect to keep similar leverage but to some of your pointed question, we do see impact from the cost structure related to.
Things like just rising wage rates as we're looking to fill positions, it's costing us a little more to fill some of those positions, but specific to us as we come out of the pandemic. We have also had increases in cost like things like travel as our field techs are getting being able to travel more customers more do more with our customers that those costs are kind of rising and we've been folk.
Just on advertising and marketing shows gaming shows are coming back. So we just had an idea. We just completed a very successful <unk> conference and we'll have <unk> in the fourth quarter and again when you think of that percentage as I gave you got to add a couple of million dollars probably in Q4 to cover the cost of GCU, either opex forecast, but but those kind of things are arising on the debt.
Half of EBITDA, but we think the revenue is also going to be rising for us and that will help offset some of that cost, but again, there will be a little bit of a convergence. If you will on that EBITDA. So we probably won't be at the second level EBITDA debt 90, plus.
Million dollar EBITDA level that we just suggested for Q2 in the second half as a result of some of those rising costs.
Some of the pullback in the equipment.
Got it helpful. Thanks, and then switching.
Can you share you talked for success with some of your back gains it looks like another 16 or so units placed during the quarter, including the first commercial installs in New Jersey, and Nevada can you talk a bit more on the strategy moving forward on the commercial side.
Our near term priorities to expand until you and how quickly should we expect you to expand geographically speaking.
Sure sure Jeff actually let me Dean's online with US for me, let me turn that to him.
Okay, Hey, Jeff. This is dean so from a lab strategy I mean, obviously, we look for grilling.
Not only are.
New markets.
Just a ton of runway in Nevada, we're just really getting started there, but even our existing.
Both class II and class III.
Native American markets as well so to me, it's predicated on product.
The 1 thing I would mention that.
A couple of questions.
Earlier on the call as far as.
The product pipeline.
Where we just have.
Just a tremendous amount of new product that's coming out between now and we ended the year between.
Call. It 8 premium bank concepts on the premium side and for most of them would be in the wide area progressive category.
And also even for sales side, where we have upwards to.
<unk> different for.
For our sales teams. So they are going to cover both our video and mechanical products. So.
Yeah.
<unk>.
Poised and ready to grow.
On all fronts.
Obviously, we look to expand the wide area progressive installed base as much as possible.
That 1 takes a little bit more time, but as you can see throughout the quarters. We always comes in we'll have always for this point continued to trend up.
Sure.
And that's what we're looking forward to doing.
Great. Thanks for your very helpful and thoughtful as always I appreciate the color and looking forward to seeing you all other <unk>.
Alright, Thanks, Jeff.
As a reminder, it is star 1 to ask a question. Our next question comes from the line of Chad Beynon.
Staying on with Macquarie Group. Please proceed with your question.
Hi, good morning, Thanks for taking my question.
Just wanted to ask a high level 1 on the cashless cashless adoption or the digital neighborhood adoption given some of the results that we've seen from your clients from the operators in the space. Most are up 20% sequentially, putting up some really strong margins do you think the conversation for them to move.
For cashless adoption has actually accelerated just in the past couple of months because of the performance that they are there.
They are generating and the leverage reduction that they're able to see just any any changes in your conversations with with some of the operators in the past couple months. Thanks.
Yes, absolutely Chad thank you.
Actually I don't I don't.
Don't think that that is in fact, what's occurring I think what you would see with with our customers as they are they're going through a very strong period of demand.
And they've been able to reopen their their operations.
Getting both.
The bank for the book in terms of not having to move cash.
Cash equivalents all over the floor they can do it with digital.
And the adoption by patrons, especially those that a lot of people thought werent going to be able to do it.
<unk>.
Those over 50 people thought Oh gosh, they will never use technology has been extremely strong and so I think that's been driving a lot of it and I think you'll see over the course of the next 6 to 12 months youre going to see a lot more of them, but the 1 thing I would I would remind everyone is that ticket in ticket out took.
Well over 5 years to really penetrate the industry.
2.8% to 90% or greater level and so as we rolled the wallet out we think.
Some casinos are comparing different offerings.
Others are dealing directly with us.
And it's still sort of a sorting period, that's going on right now.
Jared you cannot cut off a little bit or maybe just kind of add onto that the cash.
Discussions I guess just to remind you. These are not new and we've been talking about this now for several years, we actually if I think back even net debt.
<unk> 2018, we talked about the digital journey, we talked about cash flow as we talked about delivering.
Contactless cashless technologies to customers and what that customer journeys like and so that's what we've been focusing on the last.
Several years and I think look we've talked about this last year right the discussions of cashless.
I actually increased rates. So I don't think there's been anything necessarily new in terms of their performance and their desire to low Capex. I think this is part of their strategy and and I think look we are we are in deep with with many customers in these discussions and in projects. So I don't think theres anything.
Special about what's gone on in the last couple of months. This is this has been ongoing discussions for a couple of years now I think in earnest last year they accelerated.
And so now it's just the operators articulating internally, what they want that digital journey and cashless journey to be in terms of their enterprise and as I think what we've stated many times in terms of what we've delivered in terms of our digital wallet technology.
Embedded into what we describe as our digital neighborhood.
The features and the attributes.
Ours ticks a lot of the boxes in terms of what the operators.
Want and need at the end of the day and.
I think when we talk about again the opportunities with it in terms of non.
Not only the gaming side right connecting into slots and tables, but into the gaming space for sports base space, but as we mentioned earlier on this call getting into the non gaming space, where we certainly have opportunities.
Across what we call our digital neighborhood in terms of the products and services that we have so I think the discussions are I would just say as strong as ever that they've been in the last several months.
From from last year, and so we have lots and lots of projects in the pipeline with customers. So I don't think theres anything.
Especially aggressive on it right now but.
But I think again, we're at a pace, where we expect to be.
Great. Thanks for answering my own I appreciate it.
Yes, Chad.
Yeah.
This does conclude our question and answer session I would like to hand, the call back to management for closing remarks.
We'd like to thank you all for your interest in every and in closing I would like to remind everyone that our focus is clearly on maintaining sustainable growth and building long term shareholder value. We look forward to providing you with an update on our next quarterly call. Thank you.
Yeah.
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.