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Edited Transcript of EVRI earnings conference call or presentation 6-Aug-19 9:00pm GMT

Q2 2019 Everi Holdings Inc Earnings Call

LAS VEGAS Sep 3, 2019 (Thomson StreetEvents) -- Edited Transcript of Everi Holdings Inc earnings conference call or presentation Tuesday, August 6, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Darren D. A. Simmons

Everi Holdings Inc. - Executive VP & FinTech Business Leader

* Dean A. Ehrlich

Everi Holdings Inc. - Executive VP & Games Business Leader

* Mark F. Labay

Everi Holdings Inc. - SVP of Finance & IR

* Michael David Rumbolz

Everi Holdings Inc. - President, CEO & Director

* Randy L. Taylor

Everi Holdings Inc. - Executive VP & CFO

* William H. Pfund

Everi Holdings Inc. - VP of IR

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Conference Call Participants

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* Barry Jonathan Jonas

SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst

* Brad J. Boyer

Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst

* Brian McGill;Telsey Advisory Group LLC;Managing Director and Senior Research Analyst

* David Brian Katz

Jefferies LLC, Research Division - MD and Senior Equity Analyst of Gaming, Lodging & Leisure

* George Frederick Sutton

Craig-Hallum Capital Group LLC, Research Division - Partner, Co-Director of Research & Senior Research Analyst

* John Kimbrough Davis

Raymond James & Associates, Inc., Research Division - Research Analyst

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Presentation

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Operator [1]

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Good day, everyone, and welcome to the Everi Holdings Inc. Second Quarter 2019 Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn things over to Mark Labay, Senior Vice President of Finance and Investor Relations. Please go ahead, sir.

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Mark F. Labay, Everi Holdings Inc. - SVP of Finance & IR [2]

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Thank you, Kelly, and welcome to the call. Joining me today are Mike Rumbolz, our President and Chief Executive Officer; Randy Taylor, our Chief Financial Officer; Dean Ehrlich, our Games Business Leader; Darren Simmons, our FinTech Business Leader; and Harper Ko, our General Counsel. Also joining us on the call today is Bill Pfund, who recently joined Everi as Vice President of Investor Relations. Bill brings a tremendous amount of experience in Investor Relations, including most recently in the gaming equipment supplier space. I'm sure he is already familiar to many of you. And during the coming weeks, he will fully assume our day-to-day IR activities. Mike, Randy and I will continue to be involved moving forward, while Rich Land and Jim Leahy at JCIR also continue to work closely with Bill.

At the end of today's earnings release, you can find the contact information for both Bill and the JCIR team. With that, I'd like to officially welcome Bill to the team and let everyone know just how pleased we are to have him here with us at Everi.

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William H. Pfund, Everi Holdings Inc. - VP of IR [3]

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Thanks, Mark. I'm very excited to join the talented team at Everi as we continue to focus on driving increased shareholder value, including the expansion of our interaction with the investment community. Let me begin the transition by reminding everyone of the safe harbor disclaimer in our public filings that covers this call and our webcast. Some of the comments to be made during this call contain forward-looking statements and assumptions that are subject to risks and uncertainties, including but not limited to, those contained in our SEC filings, all of which are posted within the Investor Relations section of our corporate website at everi.com. These events could cause actual results to differ materially from those described in our forward-looking statements, and they should not be considered an indication of future performance. We do not intend and assume no obligation to update any forward-looking statements. You are cautioned not to place undue reliance on forward-looking statements, which speak only as of today.

In addition, this call may refer to certain non-GAAP measures such as adjusted EBITDA, adjusted EBITDA margin and free cash flow. We reference these non-GAAP measures because management uses them in part to manage the business and to enhance investor understanding of the underlying trends in our business. Management also believes these measures provide better comparability between periods in different years. For a full reconciliation of our non-GAAP measures to GAAP results, please see our earnings press release and related 8-K, both of which have been filed with the SEC and are available on our corporate website within the section captioned, Investors.

This call is also being webcast. A link to the webcast has been included within the Investor Relations section of our corporate website, and a replay of the call will be archived.

With that, I am pleased to introduce our President and Chief Executive Officer, Mike Rumbolz.

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Michael David Rumbolz, Everi Holdings Inc. - President, CEO & Director [4]

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Well, thank you, and welcome, Bill. It's good to have you onboard. Good afternoon, everyone, and thank you for joining us today. This afternoon, we reported our 12th consecutive quarter of year-over-year growth in both revenue and adjusted EBITDA and our sixth consecutive quarter of profitability.

Our second quarter revenue increased 9.3% to a record $129.7 million, and adjusted EBITDA rose 7.7% to a record $64.1 million. Second quarter net income was $5.5 million or $0.07 per diluted share. Of note, both revenue and adjusted EBITDA for our Games and FinTech businesses were also quarterly records. Randy will review the financial results and performance metrics in more detail with you in a few moments, but I would first like to focus on some of the key drivers of our business.

In our Games business, adjusted EBITDA of $34.7 million reflects continued growth across the majority of our key performance indicators. We sold a record 1,270 gaming machines in the second quarter, and our average sales price at $17,338 was essentially flat on a quarterly sequential basis and consistent with our expectations. The 2019 second quarter was both our sixth consecutive quarterly record of unit sales and the seventh consecutive quarter of sequential quarterly growth. This sales growth was achieved by the strong demand for our mechanical reel games in our popular Player Classic cabinet as well as our video games in our E43 cabinet. Driving the success of the E43 are the new games developed specifically for this cabinet such as MoneyBall, which we debut at G2E last year; and Dragon Surge, which is a follow-up to our popular Fu Xuan game. We also continue to release new games for our Core HDX and Player Classic cabinets, which we expect will continue to drive healthy unit sales for these platforms. Reinforcing our strength in high denom and mechanical reel games, I would note that players and readers selected our Black Diamond mechanical reel game as the #1 Best Dollar Slot for 2019 in the Reader's Choice Awards in the Southern California Gaming Guide.

Our progress in gaming operations is equally noteworthy as we achieved record revenue of $46 million in the second quarter. As in recent quarters, the key driver of our revenue growth was the increase in our daily win per unit, which rose 9% to $32.26, our highest-ever level in quarterly daily win per unit. Also of note, we returned to quarterly sequential growth in our installed base during the quarter, and we expect to see a similar trend in second half of this year.

Premium units at June 30 comprised approximately 25% of our total installed base compared with about 20% a year ago. An important element in expanding our premium base has been the success that we've achieved in refreshing older legacy-style premium cabinets. At the end of 2017, legacy cabinets with only limited new content support represented 53% of our premium footprint. Today, these older cabinets represent only 17% of the premium installed base. Our initiative to replace these older units is a significant improvement in positioning our footprint to benefit from the new content and the strong demand for our new Empire 5527 cabinet. With the base of older units becoming stabilized and the strong demand exhibited for our player popular game titles on our E5527 cabinet, we see an opportunity for continuing growth in our premium installed base. At the end of the second quarter, we had E5527 placements at only 228 customer locations. These locations represent less than half of our present market of leased customers. With the strong current performance of our new titles, the demand for these units and the development of additional new themes, we expect to see double-digit annualized growth in E5527 placements over at least the next several quarters.

The highest-performing units within our premium segment are our wide-area progressive units or WAPs. At June 30, our installed WAP base was 800 units, which is up 77 units or above 11% from March of this year. Today, WAP units comprised just over 6% of our total installed base. With our existing level of casino penetration and our pipeline of new games, we believe there's an opportunity for further growth. However, expanding the WAP footprint is a historically challenging process with casino operators, and therefore, our expectations are for a modest level of WAP unit growth in the second half of the year.

A couple of our more noteworthy games currently performing very well on our Empire 5527 cabinet are Smokin' Hot Stuff Wicked Wheel and Shark Week. At the end of the second quarter, we had about 700 Smokin' Hot Stuff Wicked Wheel games installed, which is up more than 300 units for March 31st of this year. We continue to see strong demand building for this game theme among our leased customers. At quarter end, we had 250 Shark Week units installed, and that is up 168 units from the first quarter end. The game performance of Shark Week, which takes advantage of our Arena technology, continues to exceed the best-performing games in our portfolio. Given the continuing strong demand, we expect to double the installed base of Shark Week units by the end of the third quarter.

While our current cabinets are performing very well for us, we remain focused on R&D efforts that we expect will continue to expand our product lines, create more opportunities to grow our ship share and support continued growth. I believe our teams of both cabinet and game designers have done a fantastic job in the last few years, dramatically expanding and improving the slot players' experience that's offered by Everi.

This year's G2E will be our most exciting G2E ever. We will be showcasing our development team's efforts with the introduction of innovative new games. In addition, these games will have significant product category depth, and importantly, be primarily field ready by next summer. At G2E, we will also demonstrate a brand-new cabinet that we expect to be released in the first half of 2020. We hope to see many of you there so that we can share these exciting new Everi game offerings with you.

Turning to Interactive. Our Interactive initiative also continues to progress nicely. And while this venture is still a small part of our business, our first half 2019 revenue increased about $1.7 million over the first half of 2018. On the B2B side of Interactive, our new Remote Game Server, or RGS for short, has been live in New Jersey for real-money gaming for about 3 months and is performing above our expectations. We anticipate going live in Pennsylvania in the coming weeks, and we're exploring additional go-live opportunities in several other markets. Now while we had expected to see some of these revenue opportunities materialize earlier in 2019, jurisdictional approvals have taken longer than we'd initially anticipated.

In our B2C direct-to-customer social gaming business, we continued to invest in patron acquisition efforts for both our Super Jackpot Slots and High Rollin' Vegas digital offerings. The early metrics are showing very promising results. In fact, we were excited to learn that our Super Jackpot Slots social casino was rated the #1 Best Slot Mobile App in an extensive player voting poll for the Reader's Choice Awards for 2019 in the Southern California Gaming Guide. We expect our growth in digital revenue to improve as a result of the continued investment that we are making to enhance our RGS architecture.

A significant advantage of our flexible design is the capability to quickly add new game themes from our land-based content library, thereby taking advantage of successful new themes quickly. The launch of our Cash Money game is a great example. We launched this theme in May into our social slot casinos channel, almost simultaneous with the launch into our land-based casinos on our Core HDX cabinet.

Turning now to our FinTech business. The 2019 second quarter was a record 10th consecutive quarter for both year-over-year revenue and adjusted EBITDA growth. Transaction volumes and total dollars processed in the second quarter continued to increase, and we grew our market share. Record second quarter FinTech adjusted EBITDA of $29.4 million was up nearly 14% over the prior year, inclusive of the contributions from our acquired player loyalty technology.

In our cash access business, both total face amount processed and total number of transactions increased for the 19th consecutive quarter. This achievement also reflects continued growth in same-store locations. Now revenues were flat overall, reflecting a challenging time regarding the timing of an increase in certain interchange costs that are related to our ATM transactions and our ability to pass a portion of these costs onto our customer base. It also was challenged by recently renewed agreements with several of our large customers, and Randy will walk you through the specifics of these in a few minutes.

On the equipment side, FinTech equipment sales revenues in the quarter were up more than 62% or $7.8 million over the prior year quarter, and that's inclusive of $1.1 million from the player loyalty business.

Now we'd previously highlighted for you our belief that we're in the early stages of a refresh cycle for our kiosk equipment. At the beginning of 2019, we estimated that approximately 70% of the installed kiosks were more than 3 years old. Now given the high transaction volume of these productive self-service kiosks, it's crucial for casino operators to keep this equipment well maintained. This need for state-of-the-art cash access equipment is spurring both the refresh cycle and driving increased service revenues related to maintenance agreements. As the overall base continues to expand and products grow older, we expect FinTech revenue growth to benefit this year and in the coming years. We believe customers will continue to replace existing units and enter into service contracts for maintenance of their older units.

Revenue from information and other services increased 56% or $4.6 million, including $3.8 million from the acquired player loyalty and marketing business. This revenue is comprised of our kiosk service and maintenance revenues that I just discussed. It also includes the revenue from new software license sales and recurring software maintenance and support associated with our credit information, compliance and player loyalty products. Now as anticipated, revenue from compliance solutions rebounded nicely from its slow start in the first quarter and is now reporting a slight increase in revenue on a year-to-date basis.

Now moving into our annual guidance. As noted in this afternoon's press release, we are reaffirming our outlook for 2019. This includes year-over-year revenue growth and adjusted EBITDA in a range of $252 million to $255 million. Additionally, we expect free cash flow to double this year, and our priority is to deploy this free cash flow to pay down debt. To that end, we paid down $15.7 million on our term loan in the second quarter. And with that, I'd like to turn the call over to Randy.

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Randy L. Taylor, Everi Holdings Inc. - Executive VP & CFO [5]

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Thank you, Mike, and good afternoon, everyone. For the second quarter of 2019, total revenues were a record $129.7 million, reflecting a 5% year-over-year increase in Games revenue and a 14% increase in FinTech revenue. Our player loyalty and marketing business generated $4.9 million of revenue in the quarter.

Adjusted EBITDA for the second quarter of 2019 increased by $4.6 million or 7.7% to $64.1 million, reflecting record adjusted EBITDA in both our Games and FinTech segments. In our Games segment, gaming operations revenue increased $2.3 million or 5.3% year-over-year to a quarterly record $46 million, inclusive of $4.9 million from our New York lottery operations and $1.3 million from our Interactive business. While our quarter end installed base was smaller year-over-year, the base increased on a quarterly sequential basis. The year-over-year decline primarily reflected the previously discussed nonpremium unit removals that had occurred in the second half of 2018 and early this year. The quarterly sequential increase of 50 units primarily reflects the growth in our premium unit installed base. We expect our total installed base to grow in both the third and fourth quarters primarily due to the strong demand for our premium E5527 cabinet.

The year-over-year increase in our daily win per unit of $2.77 more than offset the impact from the lower installed base. Although this is our highest ever daily win per unit, we expect to achieve further growth in the second half of 2019. This expected growth will be fueled by our new premium games as well as the higher percentage of premium units in our installed base.

Our Interactive business continues to gain traction, and we expect Interactive revenue to be higher in the second half of 2019 as compared to prior periods. Driving this growth are expected expansions of our B2B real money and social gaming offerings, along with our B2C social gaming platforms of Super Jackpot Slots and High Rollin' Vegas.

Revenues from game machine sales were $23.4 million for the second quarter of 2019 compared to $22.3 million in Q2 2018. The year-over-year increase was driven by a 14.6% increase in unit sales, partially offset by the slight decrease in average selling price to $17,338 in the quarter compared to $17,650 in last year's second quarter.

As we look to the second half of 2019 following our strong 16% increase in unit sales in the first half of the year, we have revised our expectations for second half unit sales growth. With the late timing of G2E this year and a strong comp in the fourth quarter of 2018, we are expecting our annual unit sales growth to be in the mid- to high single-digit range. Even with this revision, we believe our growth will still exceed the average growth rate of the industry for the full year, and our ASP should remain above $17,000. I also want to point out that we will be up against a tough ASP comp in the fourth quarter due to the inclusion of a high number of tournament units sold to a large strategic customer in last year's fourth quarter. Overall, our unit sales expectations translate into growing ship share and floor share for 2019.

Adjusted EBITDA margin for the Games segment was 50% in the second quarter of 2019 compared to 51.1% in the prior year quarter. The decline primarily relates to higher SG&A and R&D expense, which includes higher marketing costs associated with our B2C interactive operations. For our FinTech segment, the second quarter marked the 19th consecutive quarter of same-store growth in both transactions and dollars processed. However, cash access revenues were flat when compared to the prior year quarter. The benefit to cash access services revenue from the increase in same-store growth and from growing market share were primarily offset by 2 factors: first, as we highlighted on our first quarter call, we recently renewed agreements with several of our largest customers that include slightly higher commission payments to those customers for core cash advance services. Importantly, these extensions secure a meaningful portion of future recurring revenue and cash flow but result in slightly lower net revenues for cash access services. We expect to see continued growth in transactions and dollars processed with these customers, which should lead to future increased revenue. Second, during the quarter, we experienced an increase in certain interchange-related costs for certain ATM transactions. This changed interchange fees amounted to approximately $1 million of a lost net revenue in the quarter, which all would have flowed through directly to adjusted EBITDA. Our customer agreements generally allow us to pass along these changes as commission reductions after proper notice to our customers. Therefore, the impact in Q2 is more akin to a onetime charge as we expect to pass along a significant portion of these higher interchange costs in future periods. We expect our cash access revenues will return to growth in the second half of the year.

Equipment sales revenue was up more than 62% or $3 million in the quarter primarily due to higher year-over-year sales of fully integrated kiosks and other operator efficiency products at a higher average ASP and $1.1 million of equipment sales from our player loyalty and marketing operations.

Information services and other revenue, which includes kiosk maintenance, compliance products, Central Credit and software sales and support from our player loyalty products rose 56% compared to the prior year period. The primary driver of this increase was $3.8 million in revenues from our player loyalty solutions, most of which are of a recurring nature. We expect double-digit revenue growth in our FinTech business for the remainder of the year. This growth will primarily be driven by our equipment sales and information services due to our strong pipeline for kiosks and other equipment sales and the inclusion of the operations from our loyalty and marketing operations.

Cash access services should continue to benefit from the overall macro economy, net new customer wins and new casino openings like Encore Boston Harbor. We also expect full year FinTech adjusted EBITDA to grow in the high single digits compared to 2018, inclusive of the contributions related to the acquired player loyalty operations. Adjusted EBITDA margin for the FinTech segment in the second quarter was 48.8% compared to 49% for the second quarter of 2018.

Moving to the balance sheet, the outstanding principal on our long-term debt was $1.17 billion, and we had no amounts outstanding under our revolving credit facility as of June 30, 2019. Reflecting our ongoing commitment to reduce leverage, we utilize free cash flow to pay down a portion of our debt in the second quarter. We made total payments of $15.7 million on our outstanding term loan, with approximately $9 million related to the 2018 excess cash flow required payment. Going forward, we continue to utilize free cash flow to further pay down debt. The weighted average interest rate on our total outstanding debt obligation was approximately 6.1% at June 30, and our total leverage ratio declined to 4.7x adjusted EBITDA.

For 2019, reflecting the improvement in the interest rate environment, we have lowered our expectations for consolidated interest expense to a range of $80 million to $83 million. Our expectation includes a reduction in interest on vault cash to approximately $7 million for the full year and $3.6 million in noncash amortization of capitalized debt issuance costs.

In the second quarter, placement fees totaled $6.3 million, and other capital expenditures totaled $23.5 million. Excluding placement fees, Games CapEx was $20.1 million and FinTech CapEx was $3.4 million. Games segment capital expenditures related to game and platform design was approximately $7 million, and gaming equipment CapEx was approximately $12.1 million. The gaming equipment amount includes equipment upgrades, replacement for existing installed base units and new trial units.

In July 2019, we made our final required placement fee payment under the Player Station Agreement, which we entered into in 2017. This agreement with our largest customer in Oklahoma will now continue without additional placement fees through June 2024, unless we expand our footprint. For 2019, we would expect the full year placement fees will be just over $17 million, and we expect minimal placement fee payments for the foreseeable future. Our estimate for total 2019 CapEx at the midpoint of our range is approximately $107 million. This total includes the expected CapEx related to our acquired player loyalty business. Games CapEx is expected to be between $85 million and $87 million, and FinTech CapEx is expected to be between $20 million and $21 million. I would note the CapEx spend related to customer equipment in our Games segment was approximately $23.6 million for the first half of the year, which suggests that we could potentially spend less than our estimated range. However, as Mike and I have previously mentioned, that we expect gaming equipment expenditures to ramp in the second half of 2019, reflecting the anticipated growth in the premium installed base due to the strong demand for our E5527 cabinets.

This afternoon, we reiterated our outlook for 2019 adjusted EBITDA of $252 million to $255 million. Our full year guidance includes our foreseeable opportunities as well as the impact from the headwinds we discussed. I would highlight that while our team is focused on addressing and mitigating the impact of these challenges, we believe the core underlying strength in our business continues to position us to achieve our full year guidance.

For modeling of outstanding -- for modeling of shares outstanding, we expect to remain profitable in each of the remaining quarters of 2019. We had experienced an increase in our outstanding shares through the exercising of employee equity awards, and therefore, we expect the diluted share count to increase slightly to approximately 80 million shares per quarter in the second half of the year.

We expect total depreciation and amortization expense in 2019 to be approximately $130 million to $134 million, inclusive of our estimate for our player loyalty acquisition. We expect to record an income tax benefit of between $2 million and $3 million, and we expect cash tax payments of approximately $1 million.

Finally, we expect free cash flow will double this year compared to 2018 free cash flow of nearly $25 million. With that, I will now turn the call back to the operator for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll hear first today from John Davis with Raymond James.

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John Kimbrough Davis, Raymond James & Associates, Inc., Research Division - Research Analyst [2]

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Randy, maybe just talk a little bit about how the Atrient acquisition is going, and you disclose the contribution in the quarter. How it's going relative to your expectations, and just what the outlook is there, what's the cross-sell opportunity? Have you had success so far? Just any kind of high-level color there would be helpful.

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Randy L. Taylor, Everi Holdings Inc. - Executive VP & CFO [3]

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Yes. I would say, John, in a nutshell, it's been a very good acquisition from our standpoint. We've got Darren here, and he can add some color. But I would say, right now, it's probably slightly exceeding our expectations, which they were pretty high. That's why we bought it. That's why we did what we did, but it is performing very well. Again, some of that's equipment sales which can be lumpy. So always determining when those sales were hit is a little difficult for us since we've only owned it for just over 90 days, but we're really excited about it. It's -- I'm getting Darren to talk a little bit about the cross-selling and what you're seeing, but now in that -- but our customers are very excited.

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Darren D. A. Simmons, Everi Holdings Inc. - Executive VP & FinTech Business Leader [4]

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Yes. I think the quarter definitely was really good. And as Randy mentioned, the cross-sell opportunities are certainly strong. We look to do that with all of our FinTech deals that we do. We look at all of our products, all of our services and seeing how we can leverage our scale to bring the loyalty platform into all of those deals. So really happy with where we're at as of Q2 and looking forward to the rest of the year with that platform.

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John Kimbrough Davis, Raymond James & Associates, Inc., Research Division - Research Analyst [5]

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Okay. And then maybe just quickly, just so I understand the dynamics of the payments yield, Randy. The interchange, that goes away in the third quarter. I think you called out $3 million or $4 million. Does that goes away in the third quarter, or is that something that takes some time that's partially third quarter and fourth quarter? And then, please, what's the impact of the renewals? Just trying to parse the kind of 5% -- or sorry, 5 basis point decline in the yield versus the interchange and the renewal impact. So I'm assuming the renewal impact will continue throughout the back half.

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Randy L. Taylor, Everi Holdings Inc. - Executive VP & CFO [6]

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Yes. I think a couple of things. So we laid out that in the quarter, about $1 million lower net revenue hit us. So -- and that really was like a onetime because a lot of that we will pass through going forward, but you have to have notice. And so it hit in the quarter, and we should be able to claw some of that back and see our net revenue improve. The piece on the large customers is hard to parse out because it depends on the transactions they do, what their volume is, but it's had an impact. And it haven't gotten to that level of it because it's just hard to totally parse out. But the $1 million you can see and the piece on the larger customers, they'll start to -- they'll also start to lap. Some of these were later in the year in 2018. So some of that's been built in a little bit. But I think the one that we wanted to focus on was just the interchange piece, which should not reoccur going forward.

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John Kimbrough Davis, Raymond James & Associates, Inc., Research Division - Research Analyst [7]

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Okay. And then last one for me. I know, Mike, you called out the slower WAP growth in the back half of the year. I think the win per day came in better than our expectations. I think it was up a little over 9% in the quarter. So how should we think about the lower WAP sales, and what that should imply for the win per day, kind of in the back half of this year?

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Michael David Rumbolz, Everi Holdings Inc. - President, CEO & Director [8]

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Yes. I mean I don't think I was suggesting that we had been knocking it out of the park with our WAP placements to date. I mean they tend to be smaller because they are more difficult to get into casinos. Casinos have a long history of having very long discussions with you about putting wide-area progressive units on their floor. And so all I was really trying to message to everyone is don't expect us to just have blowouts of wide-area progressive units throughout the industry that -- it's a process. And I think we've done well with the process to date, but we're expecting it to be steady and solid during the rest of the year.

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Randy L. Taylor, Everi Holdings Inc. - Executive VP & CFO [9]

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I mean John, I would say, in looking at it, it's not only that. That may be a little slower but the E5527, which is our premium unit, it's got a really nice backlog. So I do expect that the win per day per unit to be up in that high single-digit growth in Q3 and Q4, so that's what you're looking at. I wouldn't...

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Michael David Rumbolz, Everi Holdings Inc. - President, CEO & Director [10]

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Yes. I wouldn't start bringing that number.

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Randy L. Taylor, Everi Holdings Inc. - Executive VP & CFO [11]

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This is one of the few times that I will say, hey, don't come to a conclusion there. I think right now, we feel if the product continues to perform the way it has and we can place them, which is why some of the CapEx is stronger in the back half of the year, that win per day per unit can really hold that high single-digit growth rate.

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Dean A. Ehrlich, Everi Holdings Inc. - Executive VP & Games Business Leader [12]

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And also, the wide-area progressive installed base really comes to a 2020 story as we get into commercial markets and so forth. So what we wanted to do was giving you an expectation of what 2019 looks like. But that's because we're in a -- we're not in all the markets that we intend to be in at that point in time.

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Operator [13]

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We'll hear next from Barry Jonas with SunTrust.

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Barry Jonathan Jonas, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [14]

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Congrats, Bill, for joining the team. As we sit here in August, just wondering, what do you think the flex points are between the high and low end of your guidance?

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Michael David Rumbolz, Everi Holdings Inc. - President, CEO & Director [15]

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Oh, boy. There's a laundry list actually. It could be right. And clearly, the macro economy will play into it. The ability of us to fulfill all of the orders that we have for the premium games that we're going to be putting on casino floors, our ability to increase the number of wide-area units, our ability to continue penetration with the player loyalty product that we just purchased and continue it. I mean those are kind of the top line ones, but there have to be a laundry list of 15 or 20 different things that will be important for us to get all the way through. And any one of them would not singularly stop us from being either at the top end or the low end. But if you had a combination come together, then that could push you one way or the other.

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Barry Jonathan Jonas, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [16]

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Understood. And then, we've recently seen 2 of your larger competitors announced deals with an Oklahoma distributor. Just wondering if you see potential for any changes in market share dynamics where -- in properties where you're not contractually locked in?

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Michael David Rumbolz, Everi Holdings Inc. - President, CEO & Director [17]

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Well, that's always hard to predict. It's clearly up with the operator. It's their decision, so it's up to them. But at the end of the day, the 2 deals you've seen have been from Class III providers of devices, and they're going to continue to provide those devices to the third party and they're going to continue to share in their premium unit base. And so far, I don't see any reason why our Class II footprint in Oklahoma should be subject to something like that.

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Darren D. A. Simmons, Everi Holdings Inc. - Executive VP & FinTech Business Leader [18]

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And Barry, I would add that you know what the good content prevails, simple as that. Our backlog is very, very strong. And as long as we continue to put out similar successful titles we've been putting out to this point, especially in the premium side, it shouldn't have an impact.

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Barry Jonathan Jonas, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [19]

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Fair enough. Last one, just a high-level one on the payment side. It seems like in the non-gaming world, cash transactions continue to lose share to other form of payments. Just where do you think we are in that cycle for the gaming world?

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Michael David Rumbolz, Everi Holdings Inc. - President, CEO & Director [20]

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Well, well, we're developing the e-wallet specifically because we want to be prepared in case we're at the beginning of that cycle.

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Randy L. Taylor, Everi Holdings Inc. - Executive VP & CFO [21]

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Yes. I mean I think cash is still strong for us. I mean if you look at the -- what we do from a volume standpoint by transaction type, cash is still a very strong transaction type that provides a lot of flexibility for the consumer, so that's not going away anytime soon. But as Mike mentioned, we have certainly have pivoted our strategy to be able to address digital forms of payment to be able to assist our customers with their overall strategy to become more cashless. But cash is not going away anytime soon. I think what we've seen is our customers want to be able to support all forms of payment and make it convenient for their customers, however they want to be able to access their funds to have their gaming experience.

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Michael David Rumbolz, Everi Holdings Inc. - President, CEO & Director [22]

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And Barry, I would add that -- I mean we've -- on the one end, you have purely digital transactions, on the other end, you have pure cash. We've introduced a product that really sits right in the center of that. It's QuikTicket, where you can actually purchase the ticket directly from the kiosk and then use it on the slot floor. So it eliminates the cash, but it doesn't put you into the digital universe immediately.

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Randy L. Taylor, Everi Holdings Inc. - Executive VP & CFO [23]

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Yes. And then I think what we see is the desire for operators if they do have some digital business, whether that be sports wagering, whether that be interactive to be able to have a consolidated holistic experience with their brick-and-mortar. So we're seeing how they want to be able to bring those 2 together, so I think we're well positioned to be able to do that.

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Operator [24]

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(Operator Instructions) We'll move next to George Sutton with Craig-Hallum.

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George Frederick Sutton, Craig-Hallum Capital Group LLC, Research Division - Partner, Co-Director of Research & Senior Research Analyst [25]

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Well, the glass is half full. Randy was good to point out some of the tough comps in Q4 items as he always is. Glass is half full. George would like to ask Dean about some of the substantial new product that you have in the market and just if you can give us some more granular sense. And I'm referring to things like Shark Week and Smokin' Hot Wicked Wheel, which you talked about, but also Dragon Surge, Myths & Legends, et cetera.

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Dean A. Ehrlich, Everi Holdings Inc. - Executive VP & Games Business Leader [26]

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At a high level, I would just tell you the amount of product releases in both our standard for sale category and our premium category are pretty robust. I'd say within the next couple of quarters, 2 to 3, we'll have over 30 titles that will be introduced in both the mechanical and video side. And then in the premium area, we have somewhere between 10 to 12 that will be introduced in the next few months.

So if they come out with the level of success that we've seen with Smokin' Hot Wicked Wheel and Shark Week, we're putting ourselves in a great position, which is why -- I mean I would tell you with G2E, as Mike mentioned, we're going to have a phenomenal show. I couldn't be more excited about what we're going to be displaying. Really, there's too many to talk about specifics. I mean I could go into the whole laundry list of titles, but probably left better for another time rather than to spit out a bunch of titles here right now during the conference call.

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Michael David Rumbolz, Everi Holdings Inc. - President, CEO & Director [27]

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The one thing I would say, George, and not that Dean has ever been shy about letting people know how well his development teams have been doing, but the best performance that we have seen in this company since we came together have been in the last several months in the newest titles that have come out of our development teams. So the investments that we made early on '15, '16, '17, have now started to pay off in the end of '18 and starting in '19. And that, I think, is itself attributed to the teams coming together, coalescing, coordinating and really finding their rhythm. And that's why you see our newest titles doing the best at this point.

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Dean A. Ehrlich, Everi Holdings Inc. - Executive VP & Games Business Leader [28]

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The only thing I would add, if you want a couple of titles with DCX, our new cabinet coming out within the next couple of months, you will see the Mask and Karate Kid. Those we're pretty excited about, especially being on a brand-new cabinet. We also, on our mechanical side, have Zoltar coming out in the very near future. So those are 3 just right out -- off the top of my head, but there's a pretty good list of premium content that's going to hit the field shortly.

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George Frederick Sutton, Craig-Hallum Capital Group LLC, Research Division - Partner, Co-Director of Research & Senior Research Analyst [29]

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Randy, you mentioned the cost of having some new trial units out there. Can you just give us a sense of year-over-year trial unit numbers?

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Randy L. Taylor, Everi Holdings Inc. - Executive VP & CFO [30]

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Actually, the interesting thing, George, is that our trial units are coming down. So they are under 300 at the end of the quarter. So I think to all the things Mike and Dean talked about, I really do believe that we're not having to keep as many trials out there and as long. So we always have trials. I've mentioned them as part of our CapEx spend because it hits us every quarter. But the number of units are down, which I don't think speaks to the product. I think it speaks to -- I mean the trial of the product, it speaks to the fact that people are willing to take them quicker. And so it's been very -- it's been very encouraging from that standpoint.

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Operator [31]

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And from Stifel, we'll move to Brad Boyer.

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Brad J. Boyer, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [32]

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Yes. Sorry, guys. I was on mute. You're correct. I just didn't want to talk to Bill. Anyway, so my first question is probably best suited for Dean. Just trying to get a sense of some of these early wins that you've had, particularly on the premium and the WAP side. Could you give me a flavor for sort of how diverse that footprint is today by operators? It sounds like, if I heard your comment earlier correctly, that the early wins sort of to be expected have sort of been over-indexed to tribal properties and that there could be a nice opportunity with some commercial operators, though a little more reluctant to take that type of product, especially on the WAP side. But there could be some opportunity there as we sort of transition into '20. So could you just give me a little bit of flavor on the diversity of the early wins on premium?

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Dean A. Ehrlich, Everi Holdings Inc. - Executive VP & Games Business Leader [33]

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I would say it's spread out across the board on the premium non-WAP side. What I was talking about earlier, what Mike was mentioning, is we have not launched wide-area progressive in the commercial side at all. So that's a growth opportunity, which will come in 2020. But I would tell you for the breadth of different product categories within premium, we are fairly spread out across the major segments.

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Michael David Rumbolz, Everi Holdings Inc. - President, CEO & Director [34]

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At the end of the day, what I mentioned in there, Brad, was that we have penetrated less than half of the casinos that we view as casinos that accept leased product that were only in about 225, I believe, of those.

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Randy L. Taylor, Everi Holdings Inc. - Executive VP & CFO [35]

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228.

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Michael David Rumbolz, Everi Holdings Inc. - President, CEO & Director [36]

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228, and that's less than half of what we view as the market for those products.

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Randy L. Taylor, Everi Holdings Inc. - Executive VP & CFO [37]

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And Brad, I'd add, on top of it is where we have them, we have limited banks. And I think that's the -- where we also think, as I work with -- as both Dean and I work with [Jessie] over our game upside, I mean, he is very excited about his ability to put more of the E5527, that was hit big push into this year was. He knew wide-area progressive was going to slow down until, as Dean said, we could get into commercial. But he felt like with this cabinet and how it's performing, he can put a lot out there. And look, we still have some older stuff that we can replace. And if I can replace it, something that's doing $20 a day, and I can get to $50, if some of these are doing, it's going to be beneficial. And that's why I'm real comfortable with the growth in that daily win per unit.

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Dean A. Ehrlich, Everi Holdings Inc. - Executive VP & Games Business Leader [38]

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Brad, the best way I would wrap my arms around it and how, I think, our level of excitement really is manifesting is we have about 5 different swim lanes of product categories that hit that premium segment. So between Renegade and the launching of DCX, E5527, which is killing it right now, Skyline Revolve and then our Player Classic, we have a very robust set of products coming out from each of those swim lanes. So when we talk about that 10-plus themes that are getting launched within the next few months, they cover each of those. And you know what, if these things do what they're supposed to do and we're seeing -- and we see what we've been seeing over the last few months, we're in a great position.

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Brad J. Boyer, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [39]

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Okay. Helpful. And then second part of my question around premium is just trying to get a better sense of sort of unit growth expectations in the back half of the year. And this is kind of more on participation in general, just not exclusive to premium. But if I heard your comment correctly, Mike, it sounds like so Shark Week, you have 250 at quarter end. You're expecting to double that by the end of the third quarter. I assume you're expecting to see some continued growth in Smokin' Hot Stuff. And then as you just alluded to, Dean, you have some other products out there as well on the lease side. So I'm not sure what else you could say around how we should think about growth in units, but any color you can provide would be helpful.

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Michael David Rumbolz, Everi Holdings Inc. - President, CEO & Director [40]

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Yes. No, I understood, Brad. Well, we had indicated all along that we intend to have more machines at the end of the year than we had at the end of last year. So our installed base will grow. The difficulty in trying to get to a more finite number for you is there are tons of ins and outs that go on. And while we get -- continue to get our fair share in new casino openings and expansions, we always have to be mindful of the fact that there may be casinos out there that are undertaking things that are in their interest like shifting from a Class II to a Class III, for example, that will start disruption within our installed base. But our plan -- and so far, it's holding true, is that we're going to have more machines at the end of the year.

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Randy L. Taylor, Everi Holdings Inc. - Executive VP & CFO [41]

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And then we also selectively took out several hundred units at a -- I would say, a challenge-yielding customer that we disclosed prior. So you got to bake that into it as well.

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Brad J. Boyer, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [42]

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Okay. Helpful. And then lastly, for Dean and Mike, it seems like the HRM opportunity kind of continues to grow here in the U.S. Several of the more prominent operators are starved for new content, new hardware. Just curious if you guys had any thoughts, high level, on the market? And if that would ever be anything that interested you guys?

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Michael David Rumbolz, Everi Holdings Inc. - President, CEO & Director [43]

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Oh, no, we would always be interested in new markets. And we're always interested in looking at new opportunities, Brad. So absolutely. And we have followed those historical racing devices, and we're aware of who's in the space and how much content they need. And you should assume that we're always in discussions with people on potential new markets.

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Operator [44]

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We'll now hear from Brian McGill with Telsey Advisory Group.

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Brian McGill;Telsey Advisory Group LLC;Managing Director and Senior Research Analyst, [45]

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Good results, and congratulations to Bill as well. Glad to hear he's back. I have a question on game sales. I guess what's changed from the last quarter? And where are we with corporate buyers in general? Have we had any further impact on the consolidation with the operators and the industry?

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Dean A. Ehrlich, Everi Holdings Inc. - Executive VP & Games Business Leader [46]

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Brian, it's going to be a wait and see, right, especially between the announcement with El Dorado. But I would tell you, there's still activity. It's -- without going into too much detail, it has not completely shut off. There is definite activity that's happening amongst the major strategic accounts. The question is going to be how much, and as we finish out the year and then once next year comes along, it's -- we got to wait and see. We're not going to know until they sort out some of the things that they need to sort out on their end.

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Michael David Rumbolz, Everi Holdings Inc. - President, CEO & Director [47]

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I think part of what you're hearing from us, frankly, was that we've got some difficult comps to come up against now coming into the third and the fourth quarter. And while we continue to grow, it's not easy to grow over what you did the year before when you've just grown over it yet again. And so as we look at the potential question marks around some of these properties' capital expenditures and what they're going to have for budgets or they tell us that they're not sure what they have in their budgets, then we just want to be mindful of that and make sure that everyone out there understands that while we still have set our goals out there and we're going after them, it is a more challenging environment than it was at the beginning of the year.

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Randy L. Taylor, Everi Holdings Inc. - Executive VP & CFO [48]

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Yes. And I would say that what we are trying to also talk about, while we did 14.6% in the quarter, we've done 16% growth in the first half of the year, as Mike said, tougher comps in the back half. So I just think trying to let people know that, look, we're focused on it. Could we do better? Sure, we could. But I think people need to be realistic that doing 14% every quarter is difficult to do on a base that continues to grow.

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Michael David Rumbolz, Everi Holdings Inc. - President, CEO & Director [49]

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But at the end of the day, look, we've shown already that our lease performance has been amazing in our games and has come up significantly. Well, the same thing is true with our standard games. And that's one of the reasons that you see the kind of sales increases that we've been getting. So we're not throwing in the towel by any means, Brian.

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Randy L. Taylor, Everi Holdings Inc. - Executive VP & CFO [50]

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Yes. I think we end with what Dean said, which is, look, we believe our game performance is doing very well. And that's what it all comes back to. And if it continues, we'll continue the sales.

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Brian McGill;Telsey Advisory Group LLC;Managing Director and Senior Research Analyst, [51]

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That's helpful. And then how about in Oklahoma? The governor there has been pretty aggressive talking about with the compact renegotiations that the tribes need to spend more. And I'm curious, what do you think that could mean for the overall industry and installed base and revenue and share arrangements down there longer term?

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Michael David Rumbolz, Everi Holdings Inc. - President, CEO & Director [52]

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As much as I would love to talk politics with you, I've been told that that's probably not a good thing for me to get involved in, especially when our customers are on one side and the governor is on the other. So I think I'll take a pass on that, Brian. I think it's right now the tribes have taken their position. They've banded together. They're going to go through the negotiations with their governor. And as a supplier to the tribes, we'll support them and do what we can to help them as they go through these negotiations.

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Brian McGill;Telsey Advisory Group LLC;Managing Director and Senior Research Analyst, [53]

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Okay. And then lastly, any update on what might happen in Texas with the Alabama-Coushatta? I mean do you think that could ultimately end up as a much bigger Class II facility? And would you benefit from that potentially?

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Michael David Rumbolz, Everi Holdings Inc. - President, CEO & Director [54]

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I think that's going to depend on the courts, to be honest with you. I don't know that there's going to be much growth in Texas until you see the challenges that have been made -- being overturned by one of the courts.

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Brian McGill;Telsey Advisory Group LLC;Managing Director and Senior Research Analyst, [55]

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Yes. (inaudible) Congress right now...

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Michael David Rumbolz, Everi Holdings Inc. - President, CEO & Director [56]

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And so far, we haven't seen that. Yes. No, I know. But if it doesn't, I mean -- yes, trust me, I'd rather be in front of a judge than trying to convince this Congress to pass a bill in my favor.

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Brian McGill;Telsey Advisory Group LLC;Managing Director and Senior Research Analyst, [57]

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Well, maybe if it gets through, I mean, it seems like...

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Michael David Rumbolz, Everi Holdings Inc. - President, CEO & Director [58]

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I would love to see it happen. I'm with you 100%. Would love to see it happen. I think it'll be the best thing ever. I just know how difficult it is to get legislation.

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Operator [59]

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And we have time for one final question, which will be from David Katz with Jefferies.

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David Brian Katz, Jefferies LLC, Research Division - MD and Senior Equity Analyst of Gaming, Lodging & Leisure [60]

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If you needed somebody to read the disclaimer at the beginning of your earnings calls, you've really picked from the short list of the absolute very best.

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Michael David Rumbolz, Everi Holdings Inc. - President, CEO & Director [61]

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We auditioned him by having him read it several times. So...

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David Brian Katz, Jefferies LLC, Research Division - MD and Senior Equity Analyst of Gaming, Lodging & Leisure [62]

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I'm guessing he's read it a few times. But you guys probably just bought yourself some valuation. Look, I don't want to be glass half empty David, but as we see a lot of the consolidation, so much of the earnings calls that we sit through and so much of the discourse from operators is around cutting costs. And one, in particular, within the past 24 hours talked about looking hard at participation games. And yet you've kind of shown up with something that obviously is quite opposed to that. How much of that do you see beyond just the commercial market are tribal entities who don't talk to us quite as freely, looking at costs in exactly the same way? And is there a point at which this could start to work against you? Because your games are good. There's no question. But there's obviously lots of good games out there.

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Dean A. Ehrlich, Everi Holdings Inc. - Executive VP & Games Business Leader [63]

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David, I would tell you that I'm going to stick to the same theme. Great content prevails. They're still going to be a meaningful contribution to this particular business segment. And it's always been tight. It's been tight for the last 15 years of people being -- customers being very prudent with the dollars that they spend on any type of operating leases, et cetera. Has it gotten a little bit tighter? I would say yes, sure, a little bit. But you know what, the great product finds their way to the floor. And that's how it's going to work its way through.

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Michael David Rumbolz, Everi Holdings Inc. - President, CEO & Director [64]

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And David, I mean, as an industry, we've seen this go balloon up and then come back down. And there's always been a natural tension with the operators and the suppliers over share of winnings from a casino game because the casinos always have taken the position of, look, we spend billions of dollars to build hotel casinos. And then you put a $20,000 box on the floor, and you expect to take money out of it. And that's been there since the Wheel of Fortune, since Megabucks. That tension has not changed. The conversation around it raises its head sometimes more frequently than other times. But that tension is always there, and it really hasn't changed.

So to Dean's point, there will always be some games that we'll participate on the casino floor, in any casino floor. And the better games are the ones that are going to win out in that contest. But in addition, you also raised a good point, and that is that tribal operators don't speak the same way that you hear commercial operators speaking. They take a position or have with us at least that we're their partner, and they expect us to produce good games to help their overall net income from their casino operations. And that's what we're intent to do.

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Operator [65]

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And at this time, I'd like to turn things back to Randy Taylor for closing remarks.

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Randy L. Taylor, Everi Holdings Inc. - Executive VP & CFO [66]

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Thank you for joining us on the call this afternoon. We look forward to seeing many of you at G2E in October. And following that, we will discuss further progress on our business when we report our 2019 third quarter results in November. Thanks for joining.

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Michael David Rumbolz, Everi Holdings Inc. - President, CEO & Director [67]

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Thanks, everyone.

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Operator [68]

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Again, that will conclude today's conference. Thank you all for joining us.