Q3 2022 Everi Holdings Inc Earnings Call
Hello, everyone and thank you for standing by welcome to the every Holdings' 2022 third 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 go ahead, Sir Thank you operator welcome everyone let.
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.
As discussed in our call. These potential 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 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 November eight 2022, we will refer to certain non-GAAP .
<unk> 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 industrial section on our.
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 <unk>, Chief Financial Officer, Kate low and higher Fisher General Counsel, Dinah Erlick games business leader and Darren Simmons, our Fintech business leader now.
Now I'm pleased to turn the call over to Randy.
Good morning, everyone and thank you for joining us.
Building on the strong results of last year and the momentum of this year, both our third quarter consolidated revenues and adjusted EBITDA reached all time quarterly highs.
The top line improvement reflects the wide ranging demand for our diverse product and service offerings.
It's driven by ongoing growth in our recurring revenue streams, and then even faster pickup in revenues from the sale of Fintech hardware and gaming machines.
Strength in revenues carried through to the bottom line is both net income and adjusted EBITDA increased over the prior year.
The third quarter increase in net income and the all time quarterly record and adjusted EBITDA is inclusive of our continued investments in R&D as we continue to fast track additional development of new games, and Fintech products to power growth next year and beyond.
A combination of topline growth and focus on operational excellence drive strong free cash flow, which is perhaps the most compelling evidence of the successful execution of our growth and capital allocation strategies.
So the $145 million of free cash flow generated year to date, we are on track to generate a 20% increase in free cash flow this year compared to last year.
Our strong free cash flow continues to benefit from the momentum in our core businesses. The launch of newly developed products and services. The successful integration of acquisitions and they are acquired products and the overall complementary nature of our games and Fintech portfolio.
With our solid balance sheet. This tremendous free cash flow provides the capital to drive future growth through investment in our own internal new product development initiatives and the acquisition of complementary businesses.
Same time, we are well positioned to return value to shareholders through share repurchases.
The positive customer feedback that we received at <unk> last month reinforces our confidence in our strategic focus on new games and products.
We unveiled our new dynasty view cabinet the first installment in the New next generation dynasty family of video cabinets.
The dynasty view cabinet is expected to launch in the second quarter of 2023 with four differentiated family of game content, the broadest offering of any cabinet launch we've done.
With its unique look and feel the dynasty view will complement our existing cabinet lineup and provide customers with an exciting optionality to expand and diversify their footprint of every products.
Feedback from our customers has been extremely positive as for some time many customers have been asking for a differentiated lower profile cabinet that contains all the feature rich functionality of the latest video cabinets.
This new for sale Cabinet is just one of the many tools in our Arsenal that we plan to leverage as we strive to grow toward our stated goal of a 15% ship share.
Each of our new cabinet launches is supported by our development team's ability to create original engaging content that will be available for distribution across class II class III central determination and historical horse racing markets.
At <unk>, we displayed a broad sampling of the nearly 90 new themes that are planned for launch in 2023.
This will be an almost 40% increase over 2022, it's not just about the number of games, but more importantly, the diversity of our content offering our commitment to the development of original and innovative games provides customers with the confidence to invest in average products, we protect their investment with a robust pipeline that support.
<unk>, both our new and existing cabinets.
<unk> expansive game pipeline also supports our rapidly growing digital I gaming business by providing an extensive library of proven land based game content from which we can curate the best performing games into new and existing I gaming markets.
Recently every every was recognized by others and project as the number one provider of new digital content with our latest game significantly outperforming the major competitors.
Turning to our Fintech segment, two major trends emerged at GTI.
Our continued interest in our expanding portfolio of products and services that offer productivity and cost efficiencies for casino operators and the expanding range of mobile capabilities.
Our digital class cash club wallet was again, a focal point for customers and investors.
<unk> for our cashless solutions remains high with inbound interest from tribal commercial and regional customers alike.
As cashless interest continues to evolve and grow within the gaming space, we are steadily pulling away from the competition.
We believe we are well positioned with our cashless options.
In view of our offerings is a natural seamless extension of our existing cash based financial access services.
Operators are taking note of multiple integrated cashless and cash based solutions not just our digital wallet, but also the advantages of partnering with the industry's gold standard for cash access.
A notable example of this was the recent opening of the Boyd managed Sky River Casino just outside of Sacramento, California.
Not only did we garner a 15% allocation of their slot floor, but the new property purchased a comprehensive suite of our Fintech products and services, we created for them a custom mobile loyalty app integrated with our cash club wallet technology.
Considering boy does not presently at financial access customer it is encouraging to know that when given the choice in today's competitive environment. We were selected by their management team to be Sky rivers comprehensive Fintech solution provider.
Another <unk> was the mobile first solutions on display from that utilize this.
This recent addition to the every family as an extension of every core mobile offering that expands our addressable market beyond casino gaming for the first time with an established customer base and several sports entertainment and hospitality venues.
This technology based customer focused acquisition aligns perfectly with our capital allocation strategy.
<unk> provides a complementary product portfolio that is extensible to our current customer base. It extends an enhanced guest experience beyond the casino floor, while offering significant opportunities to profitably scale and drive growth in new markets with the advancement of our loyalty and payments offerings.
As we integrate our two businesses every is at the very center of the convergence of sports business and sports betting with a consumer appealing mobile first solution that offers enhanced.
<unk> engagement and new revenue opportunities.
Our Booth also featured gaming voucher redemption kiosks from our E cash business in Australia.
The cash premium CRT and many CRT small footprint self service kiosks received a lot of attention from operators and distributed route and charitable gaming markets two verticals, where our current larger kiosks did not have a presence.
While these are just a few of the many products highlighted it's equally our team's passion and enthusiasm were on full display.
All of the excitement coming out of <unk> could not have been accomplished without the amazing team here at every <unk>.
To take a moment to thank the entire every team for their continued dedication to excellence and their relentless pursuit to lead the gaming industry with innovative and original products. It's their efforts and passion that have allowed our organization to be successful.
As we move forward with a strong balance sheet and ample liquidity, we will continue to pursue a capital allocation strategy focused on maximizing shareholder value and simultaneously solidifying our position as a premier provider of games and Fintech solutions to the gaming industry.
At its core our capital allocation strategy is aimed at creating shareholder value through high return internal investment accretive bolt on acquisitions and returning capital to our shareholders.
Internally, we look to leverage our best in class development teams to expand and improve our existing product offerings.
While we look externally to evaluate opportunities that will enable us to acquire and scale up new products and expand into new jurisdictions.
Finally, with our strong cash flow, we will continue to invest in every and opportunistically repurchase our shares through our share repurchase program.
Now, let me turn the call over to Mark to provide a bit more insight into our operational successes.
Randy I'd like to begin my financial overview by noting that we had another strong quarter.
On a consolidated basis, we set all time quarterly records in total revenues recurring revenues and adjusted EBITDA.
Our operating momentum from the first half of the year has continued in the third quarter with incremental placements of our highly profitable gaming machines as well as same store increases and financial access volumes.
Our total revenues were up 21% to $204 million driven by record recurring revenues and nonrecurring sales.
We generated growth in every category.
Each of our business segments.
Our core businesses continue to perform well and we are benefiting from our recent accretive acquisitions as well as our early stage growth operations.
Nonrecurring revenues, which primarily include the sale of gaming machines, and Fintech hardware were up 64% year over year.
As Randy noted our year to date free cash flow is running nicely ahead of the record amount we generated in 2021.
Although free cash flow was down compared to the third quarter of 2021 I'll note that this was the result of the refinancing we completed last summer.
The timing of our semiannual interest payments on our unsecured notes shifted to the first and third quarters as compared to the second and fourth quarters.
This means that the third quarter of 2022 included $10 million of cash interest payments on our unsecured notes while the prior year third quarter did not have a similar payment.
To further put things into perspective.
Year to date free cash flow is up only 4% over the prior year, we expect to surpass the amounts of free cash flow generated in 2021 by 20% in 2022.
A key contributor to our strong cash flow generation is the consistent strength of our core recurring revenue operations.
With growth in both business segments third quarter recurring revenues grew 9% over the third quarter of 2021 and were up 43% over the 2019 third quarter.
Within our games segment drivers behind the growth in our recurring revenues include the expansion of our installed base.
The growth of our digital gaming operations and our entrance into this historical horseracing market.
I would note that our domestic installed base has increased every quarter for more than three years.
We ended the third quarter with 17735 units, which is up over 1300 units year over year and is up 271 units sequentially.
Further contributing to our gaming operations growth was the $1 3 million or 34% increase in digital gaming revenues.
Through our spark remote game server, we have been successful in leveraging the development investments of our land based content.
Our ability to quickly take our proven content and add enhanced features such as progressive jackpots.
It generated consistent growth in this high margin recurring revenue base.
Gaming machine sales also continued to improve as we sold 841 units in the third quarter.
This is 665 units or 57% more compared to last year.
Over the last 12 months, we have sold more than 7100 units.
This represents the highest number of unit sales for any 12 month period in our history.
And individually each of the last four quarters represents our four highest quarters of unit sales.
Although visibility into longer term operator capital spending remains limited our backlog of orders for the remainder of the year and into early 2023 remains solid.
And we are on track to continue our unit sales momentum.
Within the game segment the percentage of adjusted EBITDA to revenue was unfavorably impacted by the changes in revenue mix as well as an increase in direct product costs associated with the game sales and increased investment in R&D.
The rapid growth of our game sales far exceeded the 5% growth in our higher margin gaming operations.
The gross margin percentage on sales of gaming equipment declined by over 400 basis points year over year.
Merrily due to rising component and freight costs.
In addition, as Randy noted we place great emphasis on our internal investments and remain laser focused on the development of original content to drive future placements and defend our existing share.
Our stepped up investment in game development resources to support our future growth initiatives is the primary driver of increased gains R&D expense and this investment includes the resources, we acquired through our recent acquisitions.
Our Fintech segment had a phenomenal quarter with revenues up 27% year over year, leading to all time quarterly record adjusted EBITDA of $39 million.
Excluding the $4 million of revenue contribution from our acquisition of E. S.
<unk> revenues were up 21% year over year.
34% over the 2019 third quarter.
Driven by constant share gains and increased activity on a same store basis. This was the third consecutive quarter in which our core recurring financial access business delivered more than $10 billion in funds to customers' floors.
This recurring high return business is a key contributor to every as foundational strength.
Is it provides consistent performance and drive significant free cash flow to fuel future growth.
But <unk> access services revenues increased 15% over the prior year to $53 million.
With same store transactional volume mid to high single digits throughout the quarter on a 2% year over year increase in total transactions completed.
Helping to drive this performance has been the return of international players to U S casinos.
Although it is important to note that this international transaction volume is not yet back to the activity levels for pre pandemic periods.
Contributing to the financial access services growth is the ongoing success of customer and Patriot adoption of our cashless alternatives to Bud and gaming experiences.
Currently these cashless alternatives represent less than 5% of our overall financial access transaction.
And as adoption increases, we expect a smaller base of cashless to grow more quickly that our cash basis same store transaction volume.
Even though we remain exceedingly early in its deployment our cash club wallet continues to receive significant interest from new and existing customers today.
Today, we are alive or in deployment with seven customers at 38 sites in 2014 jurisdictions, which is twice as many locations as we had at the end of our second quarter.
With each new location, we deepen our expertise in the further established every as the gaming industry's leader in mobile funding.
Our software and other revenues grew 30% year over year, driven by the continued success of our subscription based services and the benefit from one time Brexit loyalty sales to new casino openings.
Our recurring subscription based loyalty products remain a key contributor to this growth as we execute on improving and scaling this acquired technology into our digital neighborhood.
Our software solutions have a large recurring revenue component, which for the third quarter represents 69% of software and other revenues.
I'd like to remind everyone that generally accompanies the new one time sales and software we typically see a corresponding increase in future recurring revenues as these customers later engaged in subscription based support and maintenance services. After investing in every <unk> Tec and loyalty solutions.
Our fintech hardware revenues benefited from new casino openings as well as sales growth with existing customers, increasing 81% to $16 million.
This growth includes $2 8 million in sales a voucher redemption kiosks from our recent acquisition of Australia based E cash organically, we grew almost 50% compared to the prior year.
The all time quarterly record operating income and adjusted EBITDA for the Fintech segment benefited from our strong topline revenue growth.
And while total Fintech adjusted EBITDA grew more than 20% the percentage of adjusted EBITDA for Fintech revenues declined slightly due to the change in revenue mix, coupled with higher equipment cost of revenues and higher R&D expense.
Supporting our increased investment in our internal new product development Fintech R&D expense as a percentage of Fintech revenues in the third quarter increased to just over 6%.
Updating you on our share repurchase program.
During the third quarter repurchased just under 1 million shares of our common stock for $16 million and since the inception of our buyback program in May we've now repurchased two 9 million shares.
As of September 30th this leaves us with approximately $100 million of available buying power under our existing share repurchase authorization.
Moving forward.
We expect to continue to balance capital allocation between internal investments attractive tuck in acquisitions and opportunistic share repurchases.
Based upon our year to date results and the steady momentum expected in the fourth quarter, we narrowed our full year guidance. This morning.
Notably our adjusted EBITDA has been tightened to the middle of the previous range, while free cash flow has been narrowed towards the high end of the prior range.
As we enter the fourth quarter I'd also like to remind you that our net income for the fourth quarter of 2021 was positively impacted by the reversal of valuation allowances on certain deferred tax assets that resulted in a $63 5 million of quarterly tax benefit.
While this will create a comparison difficulty with reported net income for Q4 of 2021.
The impact on cash taxes has remain minimal as a result of our ability to utilize our extensive net operating loss carryforward.
With that I'll turn the call back to the operator for questions.
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To replace in the question queue. Please press star one on your telephone keypad, a confirmation tone will indicate your line is another question queue. You May press star two if <unk> like to remove your question from the queue for participants using speaker equipment may be necessary to pick up your handset before pressing the star one one moment.
While we pull for questions.
Our first question today is coming from Jeff Central from Stifel. Your line is now live.
Great. Thanks, Good morning, everyone and thanks for taking our questions.
Maybe just starting at the changes to the guide tightening a bit at the midpoint looks like it implies about a $3 million step down and adjusted EBITDA for Q4 relative to Q3 looking back historically it looked like seasonality typically more like $2 million that gap just conservatism around the macro or is there something else.
Here when one thinks about Q3 to Q4 seasonality.
So Jeff Thanks for thanks for the question.
I think I'll, let mark go into it a little bit deeper, but don't forget that <unk> hit all in Q4 of this year and so depending on what Youre looking at there may have been a split with <unk> in a prior period. So again, we think its fairly seasonally for our business, but I'll, let mark go into little more if he wants I think Randy.
You hit it on the head that there is a little bit of <unk>.
Usually in Q4 some of the recurring revenue streams like cash access to have a little bit of a.
Step down just because of the natural flows of about.
The holidays work and Hal gaining more into that quarter and as Randy mentioned <unk> is in there.
Some of the older years past with things like turn of events and other stuff in there. There's some allocation of the splitting of costs to where with turning that totally gone LNG to meet kind of returning back to more normal. This year Q4, you'll see a couple of million dollars.
Pure cost for them.
Okay. Great. That's helpful. Thank you both and then move into R&D. So you were vocal throughout the prepared remarks leaning in to R&D reinvestment, both gaming and Fintech drive greater breadth and depth of titles and continue the cadence of kind of internal product launches that we've seen on the Fintech side look we all saw.
This is on full display at <unk>, so not a huge surprise I guess my question is more should we expect kind of that it looks like touch over 8% of revenues expense in the quarter is that a new baseline moving forward or should we think about things kind of going back more to that seven to seven 5% range.
Mark mentioned back on the Q1 call just how should we think about.
Right level of reinvestment moving forward. Thanks.
Sure Jeff.
What I'd say is not completed budgets for next year is that I really want to get into how that will that will translate next year, but I think for fourth quarter, it's probably going to be in that in that range is going to be probably fairly consistent with what we've seen in the third quarter.
But again as Mark said some of the revenues come down so it may look a little bit higher, but I think dollar wise it'll be consistent with where we were in Q3.
Okay, Great very helpful. Thank you both I'll pass it on.
Thanks, Jeff.
Thank you next question is coming from Barry Jonas from Truest, who runs our life.
Great Hey, guys how is it.
And I wanted to just start on the game side could you maybe give us some color on the daily win per unit.
What youre seeing there I think is down year on year. So just curious if that's mix or if youre seeing any change in consumer behavior. Thanks.
So I'll start with consumer behavior, and I'll turn it over to Dean we're not again based on our cash access volumes, what we've seen through third quarter and starting into Q4, we're still seeing.
Year over year growth there again.
Much smaller growth I know there was obviously in 'twenty, one over 'twenty, but again seeing growth 22 over 'twenty, one and that that single to mid single digit growth area, but all that being kind of go more of it into the daily win per unit.
Pacific, but hey.
Barry.
If you take a look at Wynn per unit.
It's been relatively I would say consistent through 2022, and I think on a couple of calls back we talked about a pretty substantial increase of longer lease type revenues that will also have an impact that if you were to look at it year over year and whatnot forget about that.
<unk> and everything else in 2021 straight looking at the complexion of the footprint.
Sure.
If you add those if you were to take those units out.
I'd say, we've been fairly consistent.
Got it Okay. That's really helpful. And then I guess just a follow up on the games side. A recent Supreme Court ruling may have paved the way for expanded cost of gaming in Texas could you talk about how you're positioned there and any potential upside forever.
Just make sure I'm understanding this is just the two tribes in Texas.
Texas that Youre speaking towards.
Yeah.
I think some other players in the space have talked about potential upside and just just curious.
Look we are traveling.
But we have a great class II footprint, we have a great relationship with our travel customers and so we.
We expect there to be some upside with regard to.
Our operations at those at those locations.
Got it if I could just sneak one more in you mentioned 5% of transactions are.
Funding transactions or cashless right now I'm curious how that Scott is that the properties that are actually enabled with cashless.
Yes, they're all weigh in and just say first and foremost the comment was it was less than 5%. So it wasn't 5% just for clarity there in terms of the actual number and let Darren I think Karen has got a little bit better setup, you're saying, where we actually have the wallet doing.
Transactions on top of our other cashless options that we provide to customers.
Yes.
Are you asking for total number of properties as a percentage of our base.
I think you would just say in bulk transactions.
Yes.
So right now, we're probably trending of sort.
Sort of averages across the enterprise were rolled out.
Why would I would say, it's sort of the traditional ways people access funds.
Between 5% and 10% have converted over depending on sort of the.
The maturity of the rollout with that particular customer and sort of timing so.
It's gone very well.
We continue to see more customers at those properties opt into utilizing wallet and so the trend is very good and sort of as we expected.
Great Great alright, thanks, so much guys.
Thank you Barry.
Thank you next question is from David Bain from B Riley. Your line is now live.
Great. Thank you I guess first maybe to just follow up on the R&D question. It sounds like the absolute dollars could be flat in <unk> and if we look at R&D as an absolute dollar increase for 'twenty. Two is obviously up pretty significantly and you said that the free cash flow of the beat it we get the benefits.
Of that R&D next year, how do we look at and I know youre, not giving guidance, but how should we expect.
The R&D from an absolute dollar basis.
Pulling forward is it going to be any kind of increase like we saw in 'twenty two or was this more of a real investment year.
From that perspective.
Yes, David look I think.
Yes, I mean look we're not giving we're not giving guidance, but I don't expect R&D to increase in 2003 the way it has in 'twenty two.
And remember, we really catching up in 'twenty two.
<unk> to 'twenty, one right I mean, we had an outstanding year in 'twenty. One we've just come off of 'twenty, where we had we have reduced staffing and then our building up towards that but I think in general and kind of how youre looking at Youre not going to see the same kind of increases in R&D and in 'twenty. Three is that you have in 'twenty two.
Got it and finalize the budget, it's hard for us to give you a.
Solid.
Guidance of what that'll be.
No, but that's helpful. Okay and then.
Secondly.
You were active on the M&A front throughout the year.
Can you give us a sense to what it contributed to EBITDA. This year was it more close to flat and if so if we look at and again I'm not asking for guidance, but if we look at next year do.
Did they contribute to EBITDA.
Just any kind of broad contacts or data points with with regard to M&A, either specifically or as a group. If we look at next year versus this year that'd be that'd be helpful as well.
Sure I'll have mark kind of talk about.
The range for this year, but I would say look.
You know you got integration costs, you've got other things that take place. When you first acquired so we should see a lift from these acquisitions next year, one because of when they were acquired so we should see additional lift in 'twenty, three but again not done with the budgets haven't really.
Lined in what that will be but they will be there will be left there in 'twenty three and then for 'twenty two mark Yeah look we've talked about them as we've acquired them that we felt like <unk>.
Both the cash and integrate with both the contributing about $1 million a quarter.
It was being pretty much the pure the assets, we acquired there being kind of more development studio not revenue generating was a little bit of a negative overall and we think really venue types at least for Q4 and 2022 will probably be a net push for us in terms of what we actually generate from there and they are all performing within.
What we expected if not a little better than we expected and we expect growth out of those business units as we go into 2023.
Great and just to clarify your EBITDA growth as well as revenue growth.
Yes, yes awesome, okay. Thanks, so much.
Thank you next question is coming from David Katz from Jefferies. Your line is not a lot.
Hi, good morning, everyone.
Excuse me I wanted to just go back to the gaming portion of the business.
I think mark in your commentary you said visibility obviously is is tough, but what scenarios have you sort of thought through or laid out that youre able to discuss around what happens you know what what everyone's world looks like.
In 2023 should.
We have more of an economic downturn.
Are there any sort of qualitative points you can share with us.
I'll throw in a few David and then go because it's just really hard right now David because I would say look we still have a fairly.
Solid pipeline.
Fourth quarter.
But we have a very good recurring revenue base that generates a lot of revenue. So that there is some pullback in the in the sales.
We think our balance sheet is in the best place that it's ever been so we feel like that it shouldnt have a material impact just you just don't know what youre talking about what a pullback would be so I don't know Mark do you have any of that now look I think you've kind of hit on that and then where they are.
Certainty is certainly about what could be we don't know yet we look at where we're trending about if we're seeing any impacts in our day to day recurring volumes or cash access volumes that we process on a daily basis, and we havent seen much creep into the into our numbers yet on this one so while a lot of the other industries and space into the macro it seem to be getting hit.
A little sooner, we certainly haven't seen it yet so it's harder for us to frame out, but we're going through the budgeting process and doing some of that sensitivities and we certainly can probably be a better spot to talk about it.
When we talk about our year end results and our forecast for 2023.
Understood and if I can just follow up.
Apologies for kind of a negative line of questioning but it's just been so pervasive for us with respect to your tuck ins like venues.
On your ties.
What sense do we have about how they would respond.
Hum.
Or are they are they purely economically tied I suppose is really what my question is.
Or are there other dynamics within it where it could be potentially countercyclical.
Yeah.
Obviously, they're early growth, but I think they are outside of the verticals that we're in and the.
The venues of sports or hospitality.
It's hard to say, how there'll be impacted I'm I I think it could be it could be an offset but it's just hard to say I really can't I mean, I would say that.
If everything goes the way we think it will go there'll be additive in both bulk will go in the right direction.
There is some type of a macro pullback.
I don't know if you look at what's going on in Vegas on F.
F one and things like that that sports is still very.
Important.
Part of the economy, So I think it's.
It's just.
Too early to tell David to be honest until we get our arms around it completely bare and you're getting at.
Yes look I think if there is some kind of a pullback I think one of the interesting things about again, our digital strategy around mobile and loyalty and whatnot is is that engagement is actually fairly inexpensive for any kind of bit of business right. So if you can gauge engage your customers your patrons via mobile our mobile channel.
And that's.
Thats generally a fairly inexpensive so I would say that there is opportunity that somebody might look at that and say hey, we want to be able to increase engagement and.
By the way to.
It hit a lot of people fairly simply through the.
The mobile channel. So I think there is certainly upside opportunity for that if there happens to be some kind of pulled out.
Understood. Thank you very much.
Thank you next question is coming from Chad Beynon from Macquarie. Your line is now live.
Good morning, Thanks for taking my question Mark just back on the guidance understanding that you or your free cash flow comments were very positive, but on net income, which you obviously don't bring it to the bank looked.
It looks like depreciation stepped up meaningfully since the last guidance on the second quarter I think by around $10 million is this a change in accounting or is this just because of.
The acquisitions and then as we think going forward is this kind of a good quarterly dip.
Depreciation number to use past Q4. Thanks.
I think you kind of.
As we've continued out of the pandemic and some of the depressed capital spending levels. We've had there are capex has slowly been ryzen comparatively and some of the I'll say zero fixed assets or lower value fixed assets are being lapped by higher priced up we've also had acquisitions and the accounting related to some of the acquisitions that we have is that in.
Depreciation costs as well as just the normal business that we've had going on here fundamentally I think youre, probably right in the neighborhood with how to think about depreciation and amortization for the quarter as it probably continues to have a little step up from quarter to quarter again, as we kind of have more capex than we did say in 2020.
In 2021 as those.
Lower value spin kind of roll off if you will but it shouldn't be.
I think the Q3 run rate.
This is probably a reasonable rate with a little uptick.
Perfect. Thanks for that and then on the.
The games business unit sales. So can you just kind of remind us where you are.
Your HHR success journey I believe you just started selling units into those markets. Maybe how did you guys do in the quarter is this something that we should think about over the next couple of quarters. Because I think there are some nice growth opportunities nationwide in this segment and obviously from an existing.
<unk>.
Your your your ship share is pretty low at this point thanks.
Sure Chad I think you I think you hit it on the head, but I'll, let dean kind of walk you through kind of where we are and and and.
Again, we believe there is opportunity here.
Going forward.
I'll tell you on the <unk> side.
As there is expansions that gets directly positively impacted but even from an every content cabinets side of it we.
We will start shipping into those particular markets in Q1.
2023, so I'm very encouraged about that but I, even just more broadly what mind, taking a step back because we've heard a lot about.
Auctions in R&D, but we talk about building for the future.
We've got three new cabinets coming out in 2023, one of them is dynasty view that Randy talked about two others at the end of the year, we're doing 40% more themes. If you look at it over on a year to year basis in our same store and we're also getting into not only aging char, but international Andrew.
Distributed gaming side by the end of 2024, so I just felt obviously you've asked about HHR, but I'm sure. Those other questions are front of mind, you as well.
I guess, we just say look we're very pleased where we're at right now and feel very good about the future.
Thanks, Randy Thanks, Dan appreciate it.
Thank you. Your next question today is coming from George Sutton from Craig Hallum. Your line is now live.
Thank you.
The very positive feedback you got at <unk>, we saw that front and center I am curious for Dean and Darin as they've made follow up calls since then has there been anything incremental positive or negative.
That would have been reflected in guidance potentially.
Or not.
I'll make sure I'll turn it over to Dana Darren I would say from my standpoint.
Nothing from customers that would change how they are viewing our products or what we're launching or what we're doing to continue to make sure that we're there for them and then if they invest in US we have products coming out as I talked in being conducted that we're increasing our theme.
<unk>.
For our customers and the addition of venue tied I think gets Darren a lot of opportunity on his side. So there's nothing that I'm aware of alternatives that we've heard that customers have any concern with how we are.
Executing right now.
So I would say customers are encouraged they like they definitely like what they see we're at record levels on both sides of the business and they feel like they wanted to continue along the journey with us as we continue to bring out more and more product.
So I couldnt be more encouraged based on the feedback that we received over not only just the <unk>, but we've had many many many customers into our showroom at the office that provided the same amount of feedback say they love the new cabinet that we're putting out are honestly you can't get a quick enough.
But that will come into the second quarter of next year and appreciate not only the.
The new development from a cabinet side, but the extra support on the existing cabinets that are still being distributed as well.
Yes.
Being ready, we had a great quarter, a great G. <unk>, a tremendous amount of enthusiasm from customers and I guess the other thing to comment on is.
Our team members Super enthusiastic about what we've been doing what we've been building the investments that we've made and from the Fintech side look we continue to execute on our long term strategy. We've been successful. So far we could we will continue to be successful, we think about the expansion and the extension of this digital neighborhood concept that we've been building.
Round.
Our real gold standard of core products and services and I think.
That resonates with customers and.
The opportunities that we now have.
On the sort of the mobile digital side with the <unk> acquisition and all of the sort of mobile first initiatives.
It really is I think separating ourselves in this space and again like I say very much resonating with our customers how everything is integrated together and.
And obviously.
Couple of questions around here, what if there is a pullback look we still are focused on building out those products and services around self service and operator efficiency products, So which again those also resonate with customers. So.
It was a great <unk> great feedback great meetings.
Post <unk> and.
We still drive forward in.
Look to continue to build on a great quarter.
That's what I figured one other quick question for Mark relative to the cost of components in that.
<unk> cost that impacted your margins on the sale of games can you talk about any pricing initiatives or anything that is in front of us potentially to improve those dynamics. Thanks.
George Good question I would just say it feels like some of it in the supply chain I'll kind of essentially a little more broadly in terms of supply chain, we seem to see more stability in terms of delivery.
Delivery and commitments to delivery from suppliers.
Don't want to say we're out of the woods are well beyond this but things are certainly getting better on that front and thats certainly helping us to mitigate some of the.
Acceleration costs that we might need to do to get components here in a more timely fashion if things are delayed and so that is helping the coughs, we've kind of been talking in the last several calls about our views on whether the cost and the pricing challenges. We've been facing are more short term in nature longer term and look we evaluate the.
But these torsion components, meaning to us in terms of the value of the underlying inventory and look at all possible levers that includes possible price increases that also includes maybe buying more and trying to store a little more inventory on hand, and evaluating all the possibilities that we haven't made any final decisions yet we'll talk probably more about that on our.
Year end call as we talk about the forecasting for 'twenty three and give you an idea of how we look at the margins going forward, but I think we're doing the right things right now to try to mitigate the exposure to short term.
Thank you. Our next question is coming from John Davis from Raymond James Your line is now live.
Hey, good morning, guys.
I just wanted to mark start on.
Free cash flow growth or how we should think about it going into next year, let's leave EBITDA aside for a second and talk about some more of the things that you probably have a better handle on that.
At least at this point so yeah. My math suggests maybe $15 million of incremental interest expense next year, how should we think about capex either on a percentage of revenue is kind of this a good 16% a good kind of way to think about it kind of going into next year, just trying to understand.
As we think about specifically interest expense and Capex in regards to free cash flow of 23.
Yeah, Youre pretty creative question to ask about guidance for next year, even though you qualify that that you're not thinking about that and felt like it.
I'll help you out a little bit as best I can I think you're thinking about interest rates. The same way that we are yet I have.
No Crystal ball, what the fed ultimately does and it seems one day, it's they're doubling down on other days or slow it down, but I think having the same kind of neighborhood as youre thinking in terms of of how rates rise and what that does to us in terms of our variable debt that's out there.
Capex.
We've been the last several years and we've tried to manage our capex to the level of the revenues, we generate and how how we.
We're able to turn that into revenue generating assets and so obviously the COVID-19 periods of 2020, we were significantly lower in Capex that we've been starting to call kind of come back our equipment is getting a little older in the field some of the larger footprint that we have and we've been having a little more spend per customer equipment. This year I think as we start moving into next year, you'll see that capex.
And the same relative neighborhood is where we are maybe a little bit of uptick and then there could be some discrete projects in there that we're solving for as well, but again, we'll give you better clarity.
That on the on the year end call as we talk about our Capex forecast for 2023.
Alright fair enough.
So as we think about maybe mark or Randy just any kind of thing how is cash before trended. So far in October for the fourth quarter. It seems like some headlines out there that October is a pretty good months.
Just curious kind of what Youre seeing there and then also maybe directionally help us think about game sales in <unk> you, obviously, there's usually a dip in <unk> because of <unk>.
Q2, it went well, but you put up a monster third quarter growth number in game sales. So just trying to help us how to think about for two there.
Sure. So I'll take it I think I've got it but if not they can anyone can chime in so first of all on the on the cash access transactions dollar. So the floor right. John October was was again.
A nice growth in transactions year over year, so and even into the start of November .
And we're still seeing I would say single digit growth probably in that single to low to mid single digit growth. So it's been pretty consistent its up and down one week it it might not be as much but the next week. It comes back so to date, we still feel very strong.
Very good about how.
The transactions in Florida.
Florida running so from a from a game sales standpoint remember.
Fourth quarter of last year, when we really kind of hit our stride and started to sell.
I will say closer to 1900.
Unit.
So we'd never never had before and a little bit of that was they had some we believe they had some capital that they needed to spend before year end. So we've got a we've got a difficult year.
<unk> against but we feel like we've got a good pipeline and so.
What will we hit we did last year in Q4 don't know yet theres still a lot of puts and pulls and pushes some things.
We will think somebody's going to be in that quarter and then the outbreak of pushes it out for a number of reasons. Some of it may be an expansion or new property and we're just not ready.
But the pipeline still looks pretty good for Q4 I just don't know if it will match what we did in Q4 last year.
Anything else being there.
I think we're right in the ballpark.
Okay perfect I appreciate it guys. Thanks.
Thanks, John .
Thank you next question is coming from Edward Engel from Roth Capital. Your line is L. A.
Hi, Thanks for taking my question I know, it's a bit tough to tell but when you talk to your customers does it feel like the replacement cycle has kind of stalled out at where we've kind of been in the past two quarters are you kind of still see some more momentum left.
You'll have a full recovery versus 2019 next year whats kind of imply 2023, it could be even better than 2022 at least from a industry demand perspective.
I'll, let I'll, let dean.
Give some color on that is what are you seeing with your customers see this is a this is one of the challenges we feel great about what we see in the replacement cycle. We don't we don't see it slowing down whether it's going to be more or less in 'twenty. Three versus 2022 is very hard to tell just based on whats happening out there, but if you were to snap.
The chalk right now.
Replacement cycle is very very positive.
Perfect. Thanks, and then I guess, one more thing gaming on the digital side. It looks like revenues did dip a bit sequentially was kind of in the first sequential depths we've seen a while.
This related to seasonality or was it timing of game launches or anything kind of worth calling out here.
Sure I think the major thing was.
<unk> the launching of a.
Our jackpots.
<unk> in.
Digital we were hoping to get that out a little bit earlier.
And it didnt, so thats a little bit.
The pullback that we think will recover in the fourth quarter. So it was really more of a game launch issue than anything else.
Related to the to the game and we still think that that.
Revenue source and that product will continue to grow.
<unk>.
A lot of.
Thank you.
Rgs server.
Great. Thanks for the color.
Sure.
Thank you next question today is a follow up from Jeff Central from Stifel. Your line is not a lot.
Hey, great. Thanks for squeezing me back in I, just have one quick follow up it looks like in guidance Capex, you're planning to spend a bit less than the guidance implied Q2.
Can you just walk through kind of the Delta there.
Yes look I think.
Is that kind of said.
And the last time, we talked about Capex here that we're kind of managing the capital expenditure spending and making sure we're maximizing value and.
We're letting some of the refreshes, we did work themselves in and not.
Not many people that would be on it. So we kind of manage that number to be down a little bit again, just prudent business more than anything else, yeah, and look we lean hard into Q2.
On some refreshed the same thing in Q3, so I think we felt like Hey, you know Q4 is a little harder to get your product on their floor. They kind of work their floors down in December after they don't have a lot of movement going on so I don't think its any anything major it just may have been the timing of when we had laid out but.
Pretty good about where capex should come into the year.
Increase okay, great. Thank you. Thanks for letting me squeeze one more in.
No problem Sir.
Thank you we reached end of our question and answer session I'd like to turn the floor back over to Mr. Taylor for any further or closing comments.
Thank you for joining us on the call. This morning, we look forward to providing an update on our next quarterly call.
Carey.
Thank you that does conclude today's teleconference and webcast you may disconnect. Your lines at this time and have a <unk>.
Wonderful day, we thank you for your participation today.