Q2 2022 Everi Holdings Inc Earnings Call

Hello, everyone. Thank you for standing by and welcome to the every holdings 2022 second quarter earnings conference call. During today's presentation, all parties will be in a listen only mode.

Following the prepared remarks, the call will be opened for a question 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.

Please go ahead Sir.

Thank you operator welcome everyone.

Let me begin with a reminder of our safe Harbor disclaimer, which covers today's call and webcast. Our discussion will contain forward looking statements that involve risks and uncertainties, which could cause actual results to differ materially from those discussed in our call. These risks and uncertainties.

Lou 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 every dot com because of the potential risks you are cautioned not to place undue reliance on forward looking statements we do not.

Intend and assume no obligation to update any forward looking statements, which are made only as of today August 3rd 2022.

We will refer to certain non-GAAP financial measures.

Such as adjusted EBITDA free cash flow and net cash position a description of each non-GAAP measure and a reconciliation to the most directly comparable GAAP measure can be found in our earnings release and related 8-K today and in the investors 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 website.

On our call today are Randy Taylor, Chief Executive Officer, Mark Labay, Chief Financial Officer, Kate lowering higher Fisher General Counsel, Dinah Erlick games business leader and Darren Simmons, our Fintech business leader now I'm pleased to turn the call over to Randy Taylor.

Sure.

Thank you Bill good morning, everyone and thank you for joining us.

I'd like to begin by sharing a few highlights of our second quarter financial results.

Recurring revenue increased 7% in total for both our games and Fintech segments, each reporting record recurring revenue.

Revenue from sales of gaming machines, and Fintech hardware performed even better growing 37% year over year.

Also reaching a record revenue level in both segments.

This strong revenue growth drove an increase in operating income pre tax income adjusted EBITDA and free cash flow, even with higher supply chain related costs and increased costs for internal product development, which is focused on ensuring that our pathway to consistent long term growth remains.

Within our control.

Our record results are even more impressive when you consider the tough comparison against last year's record second quarter results.

Those results included the benefit from government stimulus payments together with pent up demand as players reengage that their favorite casinos. Following the reopening up most properties and the acceleration in backstage and vaccination rates.

These record results reflect the foundational strength in our core businesses and our attention to operational execution on a daily basis.

I want to highlight my appreciation for all of our team members for their dedication they bring to the job each day.

They are collaborating to take care of customers needs, developing and enhancing our product portfolios or addressing the many opportunities or challenges across our operations.

Their efforts result can be successful execution of our long term growth priorities initiatives that are focused on high return investments in new products and technologies custom.

Customer satisfaction, and new geographies for our games and Fintech business units.

The strongest proof point.

The success of our investments has been the growth in our free cash flow.

We generated $49 5 million in the second quarter and $101 1 million of free cash flow for the first six months up 2022, driven by increased contributions from both business segments.

Even as we like all of our peers and most other industries address the fluid nature of the macro economy I firmly believe we are well positioned to continue to succeed based on our significant free cash flow, we generate on a quarterly basis.

This enables us to look beyond servicing debt to place our focus on our capital allocation strategy and how we position ourselves in the future.

This strategy is aimed at optimizing shareholder value through both further investment in our growth initiatives as well as in returning capital to our shareholders through opportunistic repurchases of our stock.

A key driver behind our sustainable performance is the high margin contribution from our core recurring revenue operations.

Presenting more than 70% of total consolidated revenues in the second quarter. Our recurring revenue operations provides stability and also serve as the foundation to integrate and scale newly developed products and acquired operations.

Mark will review, our financial and operating performance in more detail in a few minutes.

But first let me share several key operating accomplishments.

In the second quarter, our games business sold a record 1957 gaming machines.

For perspective, the last three quarters games sales had been the best three quarters in our history.

I believe this is evidence that we are achieving increased ship share in the product categories in which we compete today.

And benefiting from an improving industry wide replacement sales trend.

The success of our recent sales activity has been driven by our industry, leading high performing mechanical reel games, along with the ongoing success of our games library on our flex cabinet add.

Adding to this increase was the recent launch of our newly released mechanical real cabinet our player classic signature.

Supporting these cabinets as our growing library of innovative content, and which we continually invest to ensure a robust pipeline of new original content.

This enables us to support and maintain performance of our existing installed units and fuel further growth as we continue to March towards our latest target at 15% ship share.

With industry unit sales strong for the first half of the year, we expect to see continued strength over the second half of the year as operators remain comfortable with releasing additional capital for machine purchases.

We also look for opportunities to expand our capabilities and addressable markets through our recent acquisitions have been to code and Australia and game development assets, we increased our capacity to develop more games by adding two teams of talented gaming people in additional design studios.

This strategically positions us to address to address two incremental market categories that will further channel and leverage our gaming content.

A great example of our ability to leverage our content to generate growth in new markets is the success of our digital gaming business, which has proven to be a key driver of our growth.

We're able to leverage the success of our current and historical library of games that have proven popular with gamers and land based casinos to be repurposed to the online gaming space.

Our digital gaming revenue grew 61% year over year and was up 5% on a quarterly sequential basis.

This growth reflects the quality and ongoing growth of our proven land based content library.

We leveraged to add more titles with our existing customer platforms combined with our ability to enter new markets as they open and to increase the number of operators to whom we supply games too in our existing markets.

Following our successful watch with six operators in Ontario as that market opened at the beginning of the second quarter.

We are now featured on nine operator sites in Ontario.

Another driver of our growth is the success being achieved with the launch of Progressive jackpot linked games. We recently added some of our linked progressive games to six new customer sites and created four additional bespoke progressive games for customers.

And our Fintech segment, we had another record quarter with gains across all parts of the business.

This was the second consecutive quarter in which our core recurring financial access business delivered more than 10 billion of bonds to our customers' casino floors. These results are being driven by consistent share gains as well as increased activity on a same store basis.

We expect this trend to continue at levels similar to our pre pandemic levels of historic growth.

Generally a low to mid single digit percentage increase over the prior year period.

Our fintech hardware sales reached a record $15 million in the quarter.

Driven by the ongoing demand for a fully integrated self service kiosks and the sales contribution from the recent acquisition of EE cash a leading provider of self service voucher redemption kiosks in Australia.

We are still in the early stages of realizing the growth potential from the cash acquisition, but the opportunities for product integration and cross selling amongst our respective markets I'm pleased to see <unk> be the accretive contributor to our business that we expected.

As a leader in providing financial access loyalty in Reg Tech solutions, we expect to generate continued growth through our relentless focus on internal innovation to develop new features and services that improve a patient's experience, while also providing greater cost efficiencies for casino operators.

The recognition of our innovation and the value we bring to operators continues to grow as evidenced with the SBC award as payment solution of the year for our digital wallet.

In addition to our internal focus we also review and evaluate opportunities that will enable us to acquire and scale new products and expand into new geographic jurisdictions.

The addition of our loyalty assets in 2019, and our ongoing focus to provide an integrated digital platform of loyalty.

Implants, and mobile solutions has expanded the total addressable market for our Fintech business.

To support the continued organic introduction of new technologies and products to capture this growth.

Have ramped our efforts and investment in internal research and development over the last two years.

On a year to year basis on a year to date basis R&D expense within the Fintech segment.

Running at nearly 6% of revenues compared to only minimal amounts of pre cope.

While we are clearly seeing the value and benefit of these investments and our record results. We are also making prudent investments to sustain a strong longer term future.

Our track record clearly demonstrates.

Our search for new technologies geographies and interesting products can provide further sustainable growth across both our fintech and games portfolios our priority for capital allocation will continue to be first ensure that we are successfully investing in high value internal opportunities second.

Evaluating and acting on strategic acquisitions that can combine with our core strengths to provide.

Accretive growth and third Opportunistically investing in our own stock when we feel its valuation is not fully reflected in the market relative to our future growth prospects.

Now, let me turn the call over to Mark to provide more insight into our operational successes.

Thanks, Randy are strong operating momentum continued throughout the second quarter with sequential growth in both segments.

We recorded 32, and a half million of net income for the quarter and we had our highest ever quarterly pre tax income of $42 3 million and adjusted EBITDA of $94 4 million.

For comparability purposes. It is important to note that our effective income tax rate for the quarter was 23% of pretax income versus a low single digit effective tax rate throughout most of 2021.

The difference is due to the valuation allowance reversal that occurred in the fourth quarter of the prior year.

And will negatively impact the quarterly and full year comparisons of net income on a year over year basis.

As Randy noted a key driver of our continuing strength is our core high value recurring revenue operations.

These revenue streams accounted for 71% of the second quarter revenue and 74% of the year to date revenue.

In total recurring revenues were up 7% year over year against a very tough comp and grew 4% on a quarterly sequential basis.

And the gaming operations business. The most important driver of our sustainable revenue performance is the growth of units in our installed base.

We ended the quarter up more than 500 units from the beginning of the year and over 200 units from the end of the second quarter in 2021.

Our premium unit count continues to grow at a faster pace overall and this is the 16th consecutive quarter of sequential growth in our premium unit installed base.

In the coming quarters, we expect to see further increases in both premium and total units installed.

On our last call. We noted we were one of only two major suppliers to grow their total installed base since 2019.

And I'd like to reiterate that point, while also adding that since 2019 the growth rate of our domestic installed base on a relative percentage basis has been the highest of any major supplier.

We continue to invest in the development of original content to support our current footprint and drive future placements.

For those of you who are newer to the every story our steady long term increase of both core and premium games reflects the benefit from the cumulative investment we've made to expand our game development studios and broadened our portfolio of differentiated cabinets as well as the high priority.

On managing this space for optimal performance.

We're also continuing to expand and broaden the number of casinos and which are premium products are placed.

We always look to maximize total revenues and cash flows this.

And this considers both the longevity of an individual placement as well as its total earnings potential.

Our overarching goal is the sustained profitable growth of our total installed base.

It is important to note that we can generate high quality returns on capital placements.

And accelerate our revenue growth by adding new units, even daily win per unit levels, well below our existing average.

The daily win per unit is a blended metric influenced by the size and volumes of the individual customer locations as well as other macroeconomic influences.

It is highly profitable to expand our placements at lower yielding locations.

For the quarter, our daily win per unit at nearly $40 is up 20% from pre Covid 2019 levels.

As expected we saw a decline in our daily win per unit on a year over year basis, but on a quarterly sequential basis, our daily win per unit increased from $39 76.

I would remind you that last year's second quarter reflect the benefit of a perfect storm of pent up player demand various governmental stimulus monies and limited alternative entertainment options available to consumers.

In addition to our continued success in gaming operations, we achieved a record level of gaming machine sales.

Gaming equipment sales reached 19, 157 units, an increase of 555 units or 40% over the prior year.

In the prior year benefited from an above average number of units shipped for new casino openings and expansions.

This increase was driven by what we believe is our growing ship share combined with the normalization of the industry replacement cycle.

Although long term visibility into operator spending remains limited as we enter the third quarter. We currently have a strong backlog of orders.

Turning to our Fintech business.

Quarterly record segment revenues increased 16% year over year, resulting in record quarterly adjusted EBITDA of $35 7 million.

And this total is inclusive of the significant year over year increase in R&D expense that Randy highlighted earlier.

In the second quarter <unk> contributed $4 2 million of revenue with growth in organic revenue up 10% year over year.

Our financial access service revenues increased 14% over the prior year, driven primarily by higher same store transactional activity.

This resulted in the second consecutive quarter of delivering more than 10 billion of funding to customers' casino floors, which is an 11% increase over the prior year period.

These trends have carried into and throughout July including an all time record volume achieved over the fourth of July holiday weekend.

During those three days, we delivered on average more than six and a half million dollars every hour to customers gaming force for a total of $468 million over that three day period.

This is not only exceeded last year's results for the same holiday, but any other holiday periods, including the new year and Presidents' day weekend.

We continue to see great interest in our digital cash club wallet solution, which is a prime extension of our financial access services.

Our cash club wallet enables casino operators to offer their patrons easy to use funding features across multiple properties in multiple jurisdictions and across the entirety of the casino resort both on premise as well as online.

We continue to work closely with regulators and additional jurisdictions to rollout this new technology.

We are currently live in 19 casinos across six jurisdictions, which is an increase from 16 casinos in four jurisdictions at the beginning of the year.

While the visibility to specific timing remains uncertain due to necessary regulatory approvals.

We believe that we could double that lives number of properties in the coming months with an additional 20, new casinos and eight additional jurisdictions going live by the time of <unk> in early October .

Software and other revenue increased 22% year over year.

The success of our loyalty software sales and subscriptions Reg Tech software for regulatory compliance and equipment maintenance services continues to drive strong performance.

The demand for our loyalty products has been a key contributor to this growth while helping maintain the profile of our company's overall stable recurring revenue composition.

The recurring revenue portion represented 78%.

Of the total software and other revenues in the second quarter of 2022.

Our fintech hardware sale revenue that had a tough comp a year ago, including significant benefit from equipment sales to new casino opening and expansions increased 17% year over year.

This growth includes sales of voucher redemption kiosks from our recent acquisition of Australia based E cash holdings.

Through our focus on operational excellence in the execution of our long term strategies. We have continued to strengthen our core business, while simultaneously growing with new products and entering into new markets.

This disciplined approach has led us to reaching an inflection point in our free cash flow generation last year.

This year our guidance suggests we will generate full year free cash flow that is greater than the consolidated adjusted EBITDA. We generated just a few short years ago.

In the second quarter alone, we generated free cash flow of 49, and a half million before amounts expended for acquisitions and share repurchases.

The higher free cash flow, we are generating provides substantial flexibility to invest in high value internal opportunities.

Pursue strategic acquisitions.

The repurchase of our own common shares.

During the quarter, we deployed $22 million for the purchase of acquisitions, including the initial payment and working capital true up for intuitive gaming.

The software license from jewelry as well as the working capital true up free cash holdings.

We also purchased 2 million shares of our common stock during the second quarter for approximately $33 million.

Which leaves just under $117 million of available buying power as of June 30th under our $150 million share repurchase authorization.

I would remind everyone that we aim to continue to balance capital allocation between attractive tuck in acquisitions and opportunistic share repurchases.

We remain comfortable with our balance sheet and our total net debt leverage target being two and a half to three times trailing 12 month adjusted EBITDA.

Moving onto our outlook today, we reiterated our guidance for net income of 125 million to $132 million and for adjusted EBITDA to be within a range of $368 million to $378 million.

On last quarter's earnings call, we raised the high end of our EBITDA guidance, while leaving the low end intact.

This accounted for our strong operating performance in Q1, and the opportunities presented by our recent acquisitions.

While still acknowledging the uncertainties in the macro environment.

We're just past the halfway Mark for 2022, and we continue to have confidence in our operational success and continued growth even as we carefully monitor the macro environment and consider the potential impact from any headwinds envisioned including revenue mix shifts and higher R&D and operating costs with that.

Now I'll turn the call back over to the operator for questions.

Thank you we will now be conducting a question and answer session.

I would like to ask a question. Please press star one on your telephone keypad.

A confirmation tone will indicate your line is in the question queue you.

You May press star two if he would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the sarkis.

A moment, please while we poll for questions.

Yeah.

Thank you. Our first question is from Barry Jonas with Truth Securities. Please proceed with your question.

Hey, guys.

I hope everybody's doing well I wanted to start off asking about the supply chain.

You sold a record number of units in the quarter and I believe you noted a margin hit from supply chain, but can you maybe talk about weather.

Hi chain issues have impacted your ability.

Any more units and I guess is it possible maybe to quantify the impact that you are seeing.

<unk>.

Sure Barry.

Randy.

Ill give some thoughts on it and then pass it over to Dean and Darren in case, they have anything to add.

I don't think we have.

Had any material impact in our sales for the quarter related to supply chain, we've been able to manage it very well.

And that we won't have a potential impact in the second half, but we're continuing to manage it. So I don't expect it right now.

I'd say from a lot of different areas that we look at.

We've made changes in our designs if some of our games to offset that we've looked for other products. We have taken some costs related to having to shipping ship parts in but I don't look at this quarter with a record number that we put up that there was really anything.

That didn't get delivered that we wanted to deliver some things pushed and that was probably more from a from a operator standpoint than us. So right now it is a in my view, it's a day to day week to week Battle is weak.

Take a look at what.

Our vendors or suppliers can supply to us and how we can we can meet the demand of our customers. So I'll, let dean Darren add anything if it had anything to say the only thing I would add is that we are resilient.

Figure out how to work through this we all understand the challenges that are out there and whether it's to redesigns or whatnot.

We've been very resilient and figuring out how to get product out the door and into our customers' hands.

Yes, I'd just reiterate that.

I think Barry we've been managing this now for several quarters.

As the pandemic I think.

The.

The different teams.

Are doing everything they can to continue to meet the demand of our customers and that's the only impact in the second quarter for US and you will obviously, we are looking at the second half of the year, we don't anticipate anything for the second half of the year being impacted by supply chain.

Great great.

And just a follow up question on on cashless I'm curious to get your perspective sort of what are the next steps towards maybe hitting.

Longer term adoption goals, I know youre, making progress with Pan but curious are there further regulatory roadblocks are the CMS providers doing enough or anything else that you guys need to do to sort of hit the next.

Next targets to get to the longer term.

Well I think it's really just about the uptake of our customers and the timing of our of how they want to implement and go with the digital strategy. So.

We continue to roll this out with existing customers, obviously, we've mentioned.

A large customer that we have that's expanding in the jurisdictions that do business in we've got new customers coming on.

And what I would just say is that.

As our existing customers have implemented this.

Usage grows every day, so I would say we are on track with what we expected in terms of how it would grow and the performance of it and it's just now just a matter of now penetrating the marketplace and look.

We've always said and I've always said that.

What we're doing here with this is is really revolutionary but the timing of this is evolutionary so it's just timing of operators, taking up the technology, making the investments that they need to make and in long term again I believe that what we've built.

In terms of our strategy will continue to lead.

Yes, Barry I would just add look we're I think we're we're happy where we're at right now I mean, I would say happy being that we've provided.

The products of it to the customer the customers.

When they are ready to deploy and as Darren said, we have a number that are in the pipeline. We think we're hopeful that some of these will get out in the public in the next in the second half of this year. So I.

I think we're ready and as customers are ready I think we can meet that demand.

Great. Thanks, guys I appreciate all the color.

Yeah.

Thank you. Our next question comes from David Bain with B Riley Securities. Please proceed with your question.

Great. Thank you and great quarter guys.

I guess my first question would be on guidance.

Understanding the reiteration doesn't contemplate any significant impact from the macro but does it also acknowledged some macro risks, meaning would you have looked at.

More favorably and raising the bottom or top end of guidance given everything youre seeing on on the ground play levels in Fintech relative to what you hear out there on potential macro degradation.

Well I make sure I understand your question David its Randy I think what you are saying if we had had some of the some of the strong numbers, we had coming into it into Q2, what we have.

Been a little bit a little bit maybe look more at our at our estimates and whether we might change them.

We definitely said, okay, but let's keep in mind that you know there is there.

There is you know who knows what's going to happen in the second half. So I think it was a balanced right. We're comfortable with what we're seeing what we're seeing in July as far as.

As far as transactions go on our Fintech business. So it gives us a lot of confidence that we're still right in line with our guidance, but you know it had you know we'd be in a different and more.

Macro environment, we may have done something different but I think we're very comfortable where we sit and what we're seeing says we should be we should be right in there on our guidance. So I would say.

You might've done something different but right now we think this is the best approach to be prudent and that is to stay with our guidance based on what we're seeing.

Perfect. Okay. Thank you and then my second one is on the Fintech side just bigger.

Bigger picture, we're sort of seeing a multi quarter trend, where the average transaction fee and finding value in bps per transaction as it was trending higher and I understand the mix of type of transaction is a big piece of that but at least a small amount of that trend can that be attributed to the higher take rate from digital.

<unk> and digital volumes increase.

I would say David that it reflects I think a bit of the strength of the consumer.

When I kind of look back at historical average transaction size, you know from 2019 and to now I mean, it's up I think probably close to 20% on average. So you know that's significant I think that shows strength of the consumer we have talked about in the past sort of mix mix of transactions that you did mentioned and Devon has grown right. So as it relates to some of the <unk>.

I can tell you that we offer things like quick ticket and now no longer term, obviously, we expect on the on the digital wallet side to have to have those impacts because it's introducing.

New ways for people to access their entertainment dollars. So I think a lot of it does it does reflect the strength of the consumer and the other thing that I talked about.

Okay, great. Thank you so much.

Thanks, David.

Thank you. Our next question is from John Davis with Raymond James. Please proceed with your question.

Hey, good morning, guys.

Maybe just start on the games segment first on kind of the daily win and how we should think about that in the back half of the year or do you still think we can get the <unk> 40 for the full year I know, we're kind of knocking on the door there, but just curious on updated expectations there and then.

Also on the game sales side Asps.

Margins got squeezed a little bit there, but asps were up about 5% first time in a while we've seen asps grow like that so are you able basically to pass on some of the incremental supply chain.

Cost if you will but just any thoughts there too on how we should think about second half game sales coming off a record second quarter.

Sure John look I'll I'll hit the daily win and then Dan can add some as well so you'll talk a little bit about the ASP, because I think there's a little bit of a <unk>.

Some other items in there that just to keep in mind that look at R. R.

Expectation is that we will still hit 40.

For the full year.

We get.

Second half to make up some of that groundwork very close obviously, we can only came in at 39 94, I would round up to 40, but I know that's not the right answer but.

That's where we're headed to and yeah, I think we're still fairly confident.

You know that.

The offset to that is you know if we can grow our our installed base into a place where it's not a $40 unit.

Per day, but it is still a great return on capital, we're not going to pass those up so we're going to continue with our strategy, which is I'm you know I'm very pleased with the the increase in our installed base.

And I think we've got a lot of things in the in the in the in the Hopper for improving that daily win, but so I wouldn't say, we changed our mind its still our our goal and our target and I still think we can we can reach that and on the S. P. L. It Dean.

Dean can give you some color on that.

John I mean, the reality is our turn event films are significantly up.

Not only quarter over sequentially, but year over year, as well where year over year, we've doubled basically the amount of turnover and installations. So I presume that we kept our.

Our cabinet as pretty pretty similar you start, adding that and on a blended basis, and thats, where youre going to get the majority of that 5%.

Okay, and then just any commentary on how we should think about game sales in the back half and then maybe I'll go ahead and throw.

My last one here at the same time, historically four accused little bit weaker from an EBITDA perspective.

Any reason why that would be different this year as we think about <unk>, but I think any any color on second half game sales would be helpful.

Yeah, I'll, let mark kind of he's he's got most of the forecast that we pulled together and he'll give you a little bit of a color on that but.

I think on how Youre thinking about it is probably in the right direction, Jon but I think obviously the biggest cadence piece in between Q3 and Q4 is usually the tightening of G to me that happens in Q4, usually has.

Million million in change of impact to us at an EBITDA loss of a couple of million dollars more of opex in the corner hitting in there.

Look we as we said in our prepared remarks that we see a strong pipeline for for unit sales in the second half of the year.

Seems.

Pretty confident in our ability to fulfill the demand that's coming in for us in the current year as well. So we feel really good about that Q3 started out strong for us.

Yeah on both sides of the business the cash access volumes in July have exited the quarter, a little stronger than we than we ended the quarter. So so we're optimistic that we'll start seeing July reports coming out of people talking about how strong July was for them overall and we're hoping that carries forward, but I think usually in terms of cadence you're right Q4 ends up being a little bit softer or less.

There is a kind of pushed by the operators like last year, where it seemed like there was a lot of sale opportunities on the equipment side.

I think that Q3 is probably generally a little bit stronger than Q4 in terms of how we think about the cadence of EBITDA the rest of the way.

Okay I appreciate all the color thanks, guys.

Thanks, Sean.

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

Thank you.

Good to hear you talk about.

On the Fintech side, starting to increase the R&D and I was just curious how to look at that relative to M&A, obviously, you've grown fintech nicely through M&A is that suggestive of less M&A opportunities or is that suggestive of some unique things that you can build more internally.

Yeah, John I mean.

George sorry.

Okay.

I would say no I think it's both in other words, we believe theres still M&A activity out there on the Fintech side, and we will use our free cash flow for that but we also believe that with some of the acquisitions we've made.

Zoo the.

Metres express.

And E cash that there aren't other opportunities both here in Australia, and so that will take some R&D dollars and I think you know Darrin is really focused on both growing it organically.

Through what we've already acquired but I think there's still.

There are still opportunities out there on the on the M&A side, it's just as always.

Trying to.

Get those at the right price.

And then really turn to.

A lot of focus on the on mobile expansion. So Darren you want to add anything else, but I think I would say.

We still can do both and that's what we're gonna do yeah, No I think that's 100% we're.

Prudent with capital allocation and that includes internal development.

Both on the Fintech into games titled speak Ladin, There and it's certainly the tuck in acquisitions.

Again, we have indicated previously that we continue to look for opportunities and there are opportunities out there and I think as we look at that we'll find the best ones that fit for US We've got a great track record with those and then as far as the internal development again, I think Randy said it best at is it is internal.

The.

The remarks at the beginning you know this relentless focus on internal innovation. So we continue to invest and Randy mentioned mobile so that's become a obviously a big part of the whole digital strategy is is the move that operators have towards mobile solutions.

Provide opportunities for deeper engagement with their players.

Gotcha.

Just to clarify Randy on the buyback, which encouraging to see you active this past quarter, but you discussed it as an investment in in the stock meaning will buy at prices that we find favorable is is that how the program will work exclusively it will be only at times you.

The stock is opportunistic and not necessarily a regular program just just wanted to clarify that.

Yeah, George I think our view is we're going to use our capital first to internal.

To M&A that will help us grow and then third to really buyback our stock and opportunistic levels. So we're going to continue to do at two five times and places, where we think it makes sense and deploy our capital that way, but that is that is correct. That's our current strategy.

Great. Thanks, guys.

Thank you George.

Thank you. Our next question is from David Katz with Jefferies. Please proceed with your question.

Hi afternoon, everyone or morning, everyone.

I guess, it's good morning everywhere.

[laughter] just depends it depends what time we started.

So.

Within your guidance, which in and some of the color you've given.

More of it is bottom line focused if you could give us just a little bit more insight into what we think.

Now what will happen in the EBIT to EBITDA margins.

You know as we roll forward, because there's obviously a lot of discussion about investment.

Our commitment to growth and I totally get why you're doing that we we just want to try and get our margins dialed in in the right place for each of the segments.

Sure David.

The tough part on dialing in your margins is.

What is there a mix going to be between.

Sale of hardware, which has a obviously you had a gross margin and then that does have a pressure on our overall EBITDA margin versus our recurring revenue and in the last few quarters. We've had just terrific game sales and hardware on the Fintech side. So.

Trying to give you and giving you an exact margin.

It's clearly has come down slightly.

Because of that mix and as well as the.

The investment side and R&D R&D in those expenses, yes. They are there, but that's not driving it as much as.

As really the hardware sales so.

Look we still think we have a fairly robust.

Yeah.

Backlog going into the second half of the year for those type of sales. So I think the margins will be.

Closer to what <unk> seen now than what they were let's say a year ago. When we had so much recurring revenue and.

I think we're still planning on the back half.

David being.

A double digit revenue growth side, and a mid to high <unk>.

EBITDA growth and so again the mix of that is just hard for for us to totally give you you know.

Insight into just because if we if we get we get a chance to do a lot of sales we're going we're gonna take I mean, we're not going to take we're not going to back off of them because they may impact our margin.

As you showed but but let me just follow it up and make sure I'm getting the right takeaway, which is embedded in the outlook that you've given us for the guidance and some of the other qualitative commentary.

The assumption is that we're a little bit closer to the margins you just reported.

Rather than what they were kind of 1% to five quarters going backwards.

And that that would make it their own segments, sorry, yeah, and I would look at that more of a like on the on the <unk>.

First half of the year I think that that's probably more more what you should look at in just this quarter because of the high amount of <unk>.

Maybe mark can give a little bit.

Additional commentary I would just also remind you that in our.

Equipment sales number for the second quarter, we had.

Just over $3 million from the acquisition of <unk> and of course, so attitude, helping our total overall sales I think that's going to continue on that absolutely wasn't in the first quarter for us again lower margin of equipment sales compared to where they were high margin recurring revenue. So that has the impact of bringing down the overall number I think youll see.

Q3, probably rise up a little bit in terms of EBITDA margins compared to Q2, but again remember we had in Q4 with G. Two week you have the natural increase of operating expenses and a couple of million Bucks. There that'll bring your EBITDA margin down in Q4, probably a little below where we ended this quarter just because of that discrete item that hits in the quarter, but I think we kind of.

Returning to Youre thinking farther out to that you're kind of getting to that higher level of.

That closer to 50, maybe not above it again, because we're expecting to see strong unit sales continue and as we go into next year right now as we sit here. So so I think it's probably creeps closer to 50 as opposed to being you know.

So 47% 48, right now that we are right now.

Okay. All Super helpful. Thank you.

Okay.

Thanks, David.

Thank you. Our next question comes from Chad Beynon with Macquarie. Please proceed with your question Hi.

Afternoon. Thanks for taking my question Nice result.

Wanted to ask about the Fintech hardware result, you've kind of loosely mentioned, there's a couple of times that you know you've had some nice sales there I'm wondering if you're starting to finally see.

More of a consistent replacement.

The replacement from your partners you know it seems like replacement sales on the game side we've.

We've seen a nice recovery there and that trend is looking up but I'm wondering on the fintech kind of the kiosk side or is this more of kind of a one timer or first half.

Benefit thanks.

Sure Chad.

Look I think I'll, let mark give you a little bit more color, but I think we've also had some nice new wins in the first half of the year. So that always helps because in those cases, we generally get a chance to replace hardware that they have but I do think that.

We've seen some nice uptick on on the Fintech sales and I'll, let Mark give you a little more color on it yeah look I think Randy spot on that the new new new casino wins for us.

We're good in the second quarter, helping us out this quarter as well and last year in the second quarter, but moving forward you know we talked pretty Covid is right. When COVID-19 hit that we felt we were in that kind of equipment replacement cycle than that are the age of the kiosks average kiosk out in the field was getting you know just a little bit north of three years at that point in and we've seen kind of.

I'll say spotty replacement over the last couple of years from from operators kind of implies that the kiosks and generally getting a little older. So so we think that that replacement cycle as long as operators, you're still comfortable spending and they seem to be comfortable in the current environment spending that we do see some more of that refreshes in and then we see them coming in to the challenge with the key.

Side of the business as it does get very lumpy. You know you have a large customer will do all of the refresh in one single quarter and then the next quarter you don't have any really large ones. So it kind of bounces around a little bit, but I think in general you should expect to see some relative strength on a full year basis in our in our kiosk sales moving forward for the next year or two.

Perfect. Thanks, and then Mark a follow up on your free cash flow guide. Thank you for that just one.

Kind of dial in a little bit on taxes, just making sure that the tax rate will be pretty consistent going forward and then also just wanted to ask about the capex input into your free cash flow guidance. Thank you.

So when we talk about the taxes really there's two pieces on the P&L. We certainly have returned to what I would call a more normal looking tax expense call it 23% little over 23% for the full year kind of effective rate, but what that doesn't take into account is the large amount of the net operating loss carryforwards that we had to keep us.

Being a relatively low cash taxpayer, we had well over 300 $350 million of NN.

Since the end of the last year or so so from a cash tax perspective, we don't expect to be paying cash taxes for for quite some time. So you should still kind of be expecting on a free cash flow guidance see something relatively light in terms of cash taxes paid from us until we exhaust those nols.

Early this year, probably through most of next year and possibly into 24 before we kind of exhausted. So so you're probably talking just a couple of million Bucks for the full year on average.

And then on top of that.

Yeah, you know look we you saw in the second quarter, some kind of strengthen our strong number in our capex, we've been refreshing the installed base.

The supply chain challenges in Q1, we prioritized unit sales and so.

On a full year to date basis, we're kind of on track with where we projected I think we're probably on the lower end of our initial range probably closer to the 125 range of Capex for the full year, what are kind of all shakes out plus or minus depending on what we can do in terms of new placements in growing the installed base.

Thank you very much I appreciate it.

Yep.

Thanks.

Thank you. Our next question comes from Jeff substantial with Stifel. Please proceed with your question.

Hey, good morning, everyone. Thanks for taking our questions.

For my first question I.

I wanted to drill in a bit more on one of Mark's comments way at the end regarding opex and R&D, perhaps picking up a bit as a percentage of revenues into the back half of the year.

No I think for for specific drivers that you talked about pushing the 15% ship share refreshing the installed base, keeping a fintech pipeline going among a couple others, but focusing in a bit more I guess, what's changed since we last spoke at Q1 earnings I would imagine those were initiatives.

Initiatives are kind of in place well before then like if you just think about now versus three or four months back kind of what's changed to lead you to think that that may be the right reinvestment rate I'm thinking more on the R&D side in Canada, the non R&D opex side, but what's changed to make you think maybe.

Maybe a higher reinvestment rate is.

Better kind of profile for this business.

Quarters trying to make sure I can address your your question Jeff are moving.

Moving along but to mark but.

I don't think we changed I think it's taken us a while to kind of build up the teams and acquire the talent that we need to do some of the things that both Dean and Darren you want to do and.

I think sometimes we.

When you look back at what happened in 'twenty one.

Yeah.

The revenue in and in a lot of our operations.

We did a lot with less people and so we knew we were going to be investing in some people.

This year and that plan has to be for the future. So we're trying to make sure that we're at the right level.

With both R&D and Opex and obviously, there's some wage.

Pressure in there as well, but I'm I'm I'm also looking forward to 23, and 'twenty four and making sure that we have the teams that we need to make sure. We can capitalize on HHR, we can capitalize on B L. T's we.

We can capitalize on the acquisition in any cash to both use them here in the U S and take our products to Australia. So.

I'm I'm comfortable where we're.

Where were at and you know if you don't get the Tam.

Talent when you can it may not be there and so that's.

That's kind of what we've been doing over the last couple of quarters and maybe it just hasn't been we haven't been as have been highlighted as much but that's our that's what we're working towards hey, Randy can add so I'm sure go ahead.

So just to put it in perspective, Jeff you know you talk about building for the future youre going to see through to the end of 2023, four new cabinets. So the hiring process as Randy has talked about yeah. We're trying to move as quick as we possibly can but it takes a little bit to bring in the resources. So not only the new cabinet.

But to put into perspective, the number of themes from 2023 to 2022 is an increase of about 50% and total number of things out there to cover new jurisdictions, new adjacent markets.

Additional content for the existing market. So it's all of that so the buildup you're starting to see it in the numbers, but it has taken a little bit of time for us to get there.

Okay understood. That's helpful. Thanks, and maybe switching gears here and just taking a step back and thinking about broadly the health of the consumer and maybe asking in a way that's a bit more unique to your business. If you look at the financial access business and look at the mix of debit card withdrawals versus versus credit card and kind of where does that mix stand today.

Relative to call it 2019 and kind of at the more recent rate of sequential changes I would assume theres still some normalization in place.

Folks unwind, there's still elevated savings rate.

If you kind of run rate the sequential rate of change that <unk> seen in recent quarters kind of what does that imply they get back to 2019 or do you think it stabilizes at Hyatt right. So let me know if that makes sense.

No I get your chip, but I think all you mean.

Darren a little bit deeper in the actual transactions in dollars. So I think I'll push that on on to Darren to give you. Some some color yeah look I think as we talked about I think the strength of the consumers there.

And.

The mix shift over the last.

A few years has has shown that you know again the debit transactions that have increased I think that is part of around the strength of the consumer. That's also just how we've.

Focused our business on ways to introduce a new transaction types again, we've talked about some of the.

Some of the things around stimulus that have contributed to that.

But look we continue to to to deliver new ways for the way people can access.

They're entertainment dollars, including the digital wallet, so as we expect growth there and new ways to fund into that digital wallet that we want to introduce into the second half of the year.

Again, I think that mix is has been fairly consistent over the last 12 months just in terms of we've seen debit.

Debit continue to grow.

So nothing really has changed other than again, we see that growth across our same store sales and obviously with the new wins we.

We feel good about.

Again, the second half of the year and long term with the with how those transactions are growing.

Alright, that's very helpful. Thank you all.

Thanks, Jeff.

Thank you. Our next question comes from Edward Engel with Roth Capital. Please proceed with your question.

Hi, Thank you for taking my question and congrats on another good quarter on.

On the gross cost side relative to the E. G M sales.

I guess, firstly is that pushing up your capex spend as well on some of those placements.

Then I guess kind of bigger picture I guess, how sticky do you think a lot of these lower gross margins or do you think margins can maybe normalized when supply chain issues start to ease or do you think some of these higher input costs are all going to be a bit more sticky and kind of hard to shake off.

I don't have it a little bit from catching it all so maybe if you could you could you could repeat the first question because I want to make sure I get questions. Randy is the higher as the higher gross cost.

Related to the AGM sales is that also impacting your your capex.

Well, so youre, saying it.

We will have some impact because to your point on our installed base as we put it out there the supply chain. When if we have to we have to up freight in certain parts and just the delivery of the.

We're hoping that we'll start to the E, but just freighting.

A new unit out into out into a casino operator cost is more so yes I think.

That is impacting the capex piece, but I don't think materially, but I'll have mark give a little bit of color. Yeah look I think Randy you kind of hit on the pieces that we really when you look at what's going on in the cost of revenues on the equipment sales side and how it would also then translates into the the installed base side of things certainly we've seen a little bit of pricing pressure on some.

The component pieces, so obviously that impacts the overall cost of the unit Randy hit on the logistics and handling actually phrasing stopped in freighting stuff with a customer putting it creates for example gas prices of the freight carriers all of that has gone up in recent periods were.

I'll say hopeful that Thats more short term in nature of mid term in nature and starts easing up soon and we're already starting to see a little bit easing on gas prices. So hopefully that will translate into a little bit better freight cost for us, but but that does all impact our margins that youre seeing for the equipment sales side of thing it does roll right into the to the lease side and again, we're optimistic that that's more shorter.

Term in nature, and those gross margins start returning more back to normal levels.

In the coming quarters.

All right.

So I'm sorry.

Your second question, let me make sure I had that one right.

You just answered it so that was perfect. Thank you.

Okay Alright.

Thanks.

Thank you there are no further questions at this time I would like to turn the floor back over to Randy Taylor for any closing comments.

Yeah.

Thank you for joining us on the call. This afternoon, we look forward to seeing many of you at <unk> in October and also to discussing our 2022 third quarter results with you.

In November I, thank for joining us.

Yes.

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

Yeah.