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Edited Transcript of EVRI earnings conference call or presentation 5-Nov-19 10:00pm GMT

Q3 2019 Everi Holdings Inc Earnings Call

LAS VEGAS Nov 13, 2019 (Thomson StreetEvents) -- Edited Transcript of Everi Holdings Inc earnings conference call or presentation Tuesday, November 5, 2019 at 10:00:00pm 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

* 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

* Chad C. Beynon

Macquarie Research - Head of US Consumer, SVP and Senior 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

* Luis Ricardo Chinchilla

Deutsche Bank AG, Research Division - Research Analyst

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Presentation

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Operator [1]

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Hello, everyone. Thank you for standing by, and welcome to the Everi Holdings 2019 Third Quarter Earnings Conference Call. (Operator Instructions) This discussion is being recorded today.

And now I'd like to turn the conference over to Bill Pfund, Vice President of Investor Relations. Please go ahead, sir.

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William H. Pfund, Everi Holdings Inc. - VP of IR [2]

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Thank you, James, and welcome to the call, everyone. Let me begin by reminding everyone of the safe harbor disclaimer in our public filings that covers this call and our webcast. Our call today will contain forward-looking statements and assumptions that involve risks and uncertainties that could cause actual results to differ materially from those discussed during our call. These risks and uncertainties include, but are not limited to, those contained in our SEC filings, all of which are posted in the Investors section of our corporate website at everi.com. We do not intend and assume no obligation to update any forward-looking statements we make. You are cautioned not to place undue reliance on forward-looking statements, which we speak of only as of today, November 5, 2019.

In addition, we will refer to certain non-GAAP financial measures such as adjusted EBITDA, free cash flow, total net debt and total net debt leverage ratio. A description of each non-GAAP measure and a reconciliation of each non-GAAP measure to the most directly comparable GAAP measure can be found in our earnings release and related 8-K as well as within the Investors section on our website. As a reminder, this call is being webcast and recorded. A link to the webcast is included in the Investors section of our corporate website, and a replay of the call will be archived on our website.

Joining me on the call 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; Harper Ko, our General Counsel; and Mark Labay, Senior Vice President of Finance and Investor Relations.

Now let me turn the call over to Mike.

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Michael David Rumbolz, Everi Holdings Inc. - President, CEO & Director [3]

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Well, thank you, Bill, and good afternoon, everyone. Thank you for joining us. Before discussing our third quarter results, I'd first like to welcome Atul Bali to Everi's Board of Directors. As you can see in the separate press release that we issued today, Atul brings a wealth of diverse gaming, sports betting and FinTech experience. His track record of successful leadership and broad-based entrepreneurial involvement in global businesses make him an ideal addition to our Board. We look forward to his strategic insight and counsel as we continue to grow our business and take the company to the next level. Welcome aboard, Atul.

This afternoon, we once again reported strong results, reflecting the solid execution of our priorities across the businesses. This was our 13th consecutive quarter of year-over-year growth in both revenue and adjusted EBITDA. Third quarter net income rose 350% to $9.3 million or $0.12 per diluted share on a revenue increase of 12% to a record $134.6 million.

Our adjusted EBITDA rose 11% to a record $64.7 million. Powering this strong performance in the third quarter were records for both revenues and adjusted EBITDA in both our Games and FinTech segments. Randy will review our financial performance in much more detail in a few moments, but first let me share my perspective regarding some of our key accomplishments during the third quarter.

In our Games business, revenue grew 5%, primarily reflecting the strong 11% growth in gaming operations. Adjusted EBITDA increased 9% to a third quarter record of $34.6 million. Our progress in gaming operations is especially noteworthy, given its high-margin contribution and the highly recurring nature of this revenue base. The primary driver of the third quarter growth was the increase in our daily win per unit. Our quarterly daily win per unit rose 15% to $33.95, an all-time high. This stellar performance reflects the benefits we're realizing from the cumulative investment we've made during the last several years.

And just to remind you, that includes, first and foremost, the enhancement of our design and development studios, which allowed our Games employees to create evermore player popular game content and design distinctive, differentiated cabinets.

Secondly, a refresh and upgrade of our installed base of cabinets and game content on casino floors; and third, an expansion of our offerings to include new higher-yielding premium units and to grow these units as a percentage of the overall installed base. These actions have contributed to the improved performance we're seeing across our entire customer base, including Class II and Class III, with both our tribal and commercial operators.

Additionally, we achieved strong quarterly sequential and year-over-year growth in the installed base, which reached an all-time high at September 30. Importantly, we continue to see strong demand for our premium products, which we expect are going to lead to further sequential growth in our installed base this quarter as well as year-over-year gain in daily win per unit. This, in turn, will further establish our foundation for profitable revenue growth heading into 2020.

Our premium units increased 1,555 year-over-year and rose by 982 units or 29% on a quarterly sequential basis. Premium units comprised nearly 31% of our installed base at September 30, 2019. Now by comparison, only 25% of our installed base was comprised of premium units at June 30,and just 20% one year ago.

In fact, the third quarter was our highest ever quarterly period of premium unit placements and the ongoing demand has remained both robust and outstanding. An important factor in the expansion of our premium base is the strong demand for the new game themes on our E5527 cabinet.

As we projected in our second quarter investor call, the number of Shark Week units installed by the end of the third quarter more than doubled, while at the same time, we continued to grow the placements of Smokin' Hot Stuff Wicked Wheel units.

Given the current performance of these games and the favorable customer reaction at G2E to our newest game theme, The Vault on the E5527, we remain confident in our prospects to retain and build upon this portion of our premium base.

Another subset of our premium games and another significant contributor within gaming operations is the growth in wide-area progressive units. Our base of wide-area progressives grew 66 units on a quarterly sequential basis to 866 games. That's an increase of 331 units from a year ago and wide-area progressive units now make up about 20% of our premium installs.

At G2E, we showcased a number of new wide-area progressive titles, this included 2 games that we're launching on our new Empire DCX cabinet, the Karate Kid and The Mask. Monsterverse will be the third game for this cabinet.

We expect to launch it in the spring of 2020, giving this new hardware form factor plenty of content for the foreseeable future. For our large Renegade 3600 platform, we showcased Press Your Luck and Snoop Dogg Presents The Joker's Wild Game themes. Additionally, in our traditional video slots, we've also added 2 new licensed titles, Smokin' Hot Stuff Jackpot Respins and Little Shop of Horrors both on our Empire MPX cabinet.

We also introduced a number of new mechanical spinning reel wide-area progressive games, including a new Zoltar series of games. And customer reaction at G2E to these games was also highly favorable. We remain on track to launch our wide-area progressive linked games in 2 major commercial jurisdictions, Nevada and New Jersey, in the first half of 2020.

As a result, we are confident in our ability to continue to grow our premium base of games in commercial markets and refresh our existing base of wide-area progressive and non-wide area progressive premium units. I believe this will also allow us to add incremental units in all of our other markets during the remainder of 2019 and on into 2020.

Our Interactive initiative continues to progress nicely. While this venture is still a small part of our total business, we continue to be pleased with its growth prospects. Our third quarter 2019 revenue was more than double the amount reported in the year ago quarter.

Recently, our real money platform went live with a customer in Pennsylvania. We have additional operator sites pending in both New Jersey and Pennsylvania for later this year and into the first half of 2020. Our library includes a broad base of games that are available today with a substantial pipeline of additional new content that will be available online in the coming months. We expect to see continued growth in our Interactive business in 2020.

Turning to machine sales. We sold 1,040 gaming machines in the third quarter, and our average sales price increased to $17,983. While in nominal terms, unit sales declined, I would note that we had a large lease-to-sale transaction at a single property a year ago. In addition, we had 60 units sold in international markets last year compared with no international shipments this year. Without that lease-to-sale conversion, our North American unit shipments increased 6%.

Overall, our average selling price has held steady through the year, and I would add that last year's ASP was lower, partially reflecting the lower-priced international unit shipments. As we continue to reap the fruits of our prior year's investments in game development and infrastructure, the benefit of being a nimble supplier is that we were able to focus the efforts of our sales force to put even greater emphasis on placing our premium participation units.

From a priority standpoint, we believe that growing the installed base of premium units and increasing the daily win per unit creates more cash flow and sustainable value for both our customers and our shareholders. With the high-margin contribution of these units and the highly recurring nature of gaming operations revenues, we are committed to taking full advantage of the strong demand and momentum that we're currently experiencing.

Now turning to G2E. We had our most exciting G2E show ever. For those of you that were not able to make it to the show, our library of games demonstrated this year increased to 50 original game themes and 15 licensed brand titles, and we showcased 2 new cabinets.

In addition to the premium participation products that I've already discussed, we also demonstrated the Empire Flex video cabinet with a 49-inch flex monitor. This is a new for-sale form factor for Everi, and we expect the Flex to be available in the beginning of 2020 with completely new and unique game titles.

A key element in our discussions with customers was demonstrating the significant improvement in the depth of our library for each of our cabinets. Our development efforts are not only directed toward building greater depth and success in video products, but also ensuring that we have imaginative and innovative new content to support our current strength and momentum in high denomination mechanical spinning reel machines.

If we were to continue to expand our market share beyond our existing footprint on customers' casino floors, we need to provide them not only with exciting new products, but also with a deep content library that sustains their confidence that we will be able to refresh all of our cabinets that they already have on their floor. And I believe we've done just that with our most recent G2E showing.

While we received many accolades for a variety of our products recently, none was more affirming of our efforts in our Games business than winning the gold medal for Best Slot Product for our Smokin' Hot Stuff Wicked Wheel game from the Global Gaming Business Annual Gaming and Technology Awards.

Game development is a very collaborative process. It's a team effort often across multiple studios with many employees sharing in the creation of our successful games. I congratulate the entire team for the honor they've bestowed on Everi through their winning of this award.

Now listening to customer comments at the show as well as in post-G2E forums such as the operator roundtable discussion held by Eilers & Krejcik Gaming gives me great confidence that we've taken our games to the next level across multiple slot floor categories. We had favorable comments across the board on our full range of premium mechanical and video offerings, our standard mechanical and new video offerings as well as all of our FinTech and loyalty products.

As in the Games business, development of innovative new products is also a primary goal of the FinTech business. We continue to develop products that improve the casino patron's gaming experience and enhance efficiencies for our casino customer. An example of our development efforts is our QuikTicket solution, which received a silver medal for Best Consumer Service Technology from the Global Gaming Business Annual Gaming and Technology Awards. I also want to congratulate all of the team members across our FinTech business in Las Vegas and India, who collaborated on bringing this innovative product to market.

Turning to our FinTech business. We continued our consistent execution as the preferred provider of integrated solutions for the gaming industry. That steady focus translated into the 2019 third quarter being our 11th consecutive quarter of year-over-year increases in both revenue and adjusted EBITDA.

In our cash access business, transaction volumes and total dollars processed continued to grow, resulting in our 20th consecutive quarter of increases on a same-store basis. We also increased our customer base with the addition of several new customers as well as expansions with existing customers. This led to a revenue increase of 10% in the third quarter over the same quarter a year ago.

FinTech equipment sales revenue in the quarter was up 42%, which was inclusive of $1.2 million from the player loyalty business. Unit sales growth, exclusive of player loyalty was up meaningfully on both the year-over-year and quarterly sequential basis and at generally higher ASPs.

While unit sales growth was primarily from new placements and winning new customers, a portion of our growth is due to the early stages of a refresh cycle for our kiosk equipment. Given the high transaction volume and productivity of these self-service kiosks, the need for state-of-the-art cash access equipment has motivated many casino operators to begin replacing older units.

As the overall base continues to expand and products grow older, we expect FinTech to benefit from replacement sales that will drive further revenue growth this year and in coming years.

Revenue from information and other services increased 52%, including $3.4 million from the acquired player loyalty and marketing business. Organically, our revenues grew nearly 8%. This revenue is comprised of our recurring kiosk service and maintenance revenues as well as revenue from new software license sales and recurring software, maintenance and support associated with our credit information, compliance and player loyalty products.

Our software-based services were one of many things that resonated with customers at G2E, the loyalty based products and promotional marketing services as well as our offering of compliance focused products provide us with a growing stream of recurring software license fees.

Now before turning the call over to Randy, I would like to add that we continue to be extremely pleased with the integration of our loyalty product business and its growth prospects. At the time of the acquisition last spring, these products were in about 100 customer locations, and we believed there was substantial opportunity to cross-sell across our entire customer base.

Based on the reception and feedback at G2E, I couldn't be more positive about that business, its strategic fit within our portfolio of products and its growth potential. The products and technologies supporting them provide a tremendous opportunity to accelerate our customers' acceptance of our FinTech digital products. This opens a huge potential of white space for us to grow and expand into, while continuing to draw upon the existing strengths and resources of our company. Strategically, I can envision loyalty becoming yet a third engine driving our future growth.

And with that, I'll turn the call over to Randy.

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Randy L. Taylor, Everi Holdings Inc. - Executive VP & CFO [4]

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Thank you, Mike, and good afternoon, everyone. For the third quarter of 2019, total revenues rose 12%, reflecting a 5% increase in Games revenue and a 20% increase in FinTech revenue. Revenue increased 8% on an organic basis, while the player loyalty and marketing business contributed $4.6 million in revenue in the quarter. Adjusted EBITDA for the third quarter of 2019 increased by 11% to $64.7 million, reflecting third quarter record results in both Games and FinTech.

In our Games segment, revenue grew 5% and adjusted EBITDA increased 9%. Our adjusted EBITDA, as a percentage of Games revenue, increased to 49.9% in the third quarter of 2019 compared to 48.3% in the prior year quarter. The margin improvement primarily reflects the revenue mix shift to a greater contribution of higher-margin gaming operations revenue, and in particular, the strong improvement in our daily win per unit. The mix shift more than offset the impact of higher R&D expense in the quarter.

In gaming operations, revenue grew 11% to a quarterly record $48.5 million, inclusive of $4.8 million from our New York Lottery operations and $1.2 million from our Interactive business. The 15% year-over-year increase in daily win per unit is on top of the strong 9% growth in the year ago quarter.

As we have previously noted, a $1 increase in daily win per unit on 14,000 units for an entire year would result in more than $5 million in incremental annualized revenue. This operating performance reflects the improvements we've made during the last year across the full range of our portfolio of game content and differentiated CapEx. These product improvements, including our strong pipeline of premium content, are coupled with our discipline in deploying incremental capital in the form of additional gaming machines that will provide us with an appropriate return.

Premium units provide some of our highest financial returns. Based on the strong average daily win per unit performance across our premium units, the present cash payback for each new cabinet deployed is generally less than 12 months, with the potential to maintain that cash generation over several years with less costly future game refreshes.

While our installed base is up 273 units year-to-date, we remained focused on growing our installed base and maintaining a high daily win per unit. Given the investments we continue to make in our installed base and additional capital being focused on premium units, we expect to see another double-digit increase in daily win per unit in the fourth quarter as compared to the prior year quarter.

In regards to our Interactive, I would add to Mike's comments that although the business is small, we are very encouraged by the social B2C performance being achieved in key metrics, such as the conversion rate of players becoming paying players; the average revenue per daily active user; and the efficiency of our advertising spend.

Regarding unit sales, we now expect our full year unit shipments to be up between 3% to 5%. For your modeling purposes, I would remind everyone that we had a large sale of TournEvent units to a major multiproperty customer in last year's fourth quarter. This sale not only contributed 120 units to the prior year unit growth, but also enhanced the average selling price. Our average selling price for the fourth quarter of 2019 should be in excess of $17,000.

Turning to our FinTech segment, 2019 third quarter revenue increased 20% to a record $65.3 million. Revenue increased 11% on an organic basis, excluding the player loyalty and marketing business. Adjusted EBITDA grew 14% to a record $30.1 million.

Our adjusted EBITDA as a percentage of FinTech revenues in the 2019 third quarter was 46.1% compared to 48.6% for the third quarter of 2018. The decrease primarily reflects a mix shift in revenues towards more equipment sales, which provide a lower gross profit contribution, higher incremental check warranty expense and an increase in SG&A and R&D costs.

The warranty expense increase was primarily a result of gaining new customers where our experience level was low. We fully expect this to improve during the next couple of quarters as our experience level with our customers' patrons increases, allowing us to reduce our overall check warranty expense, just as we have done in the past with other new customers.

The increase in our SG&A and R&D cost for the FinTech includes the costs associated with the player loyalty and marketing business, which was acquired in March of this year. In addition, we have increased our focus on innovation and investing in development efforts that we believe will provide significant growth avenues for the future, such as our digital CashClub Wallet, which we demonstrated at G2E. This product is in real-world testing at 2 travel casinos.

As Mike already commented on the individual FinTech lines of business, I won't repeat the information, but rather focus on our expectations for the remainder of the year. We expect to continue to report double-digit revenue growth in the fourth quarter in our FinTech business. We expect steady growth in revenue from cash access services, which should continue to benefit from the overall macro economy, net new customer wins and additional casino openings. Faster growth will be driven primarily by equipment sales and information services due to our strong pipeline for kiosks and other equipment sales, along with the inclusion of our loyalty and marketing operations.

To echo Mike's comments on our loyalty business, based on customer discussions, we expect to see significant growth in revenue from loyalty products and services in Q4 and continued growth into 2020. We expect full year FinTech adjusted EBITDA to grow in the low double digits compared to 2018, inclusive of the contributions and integrated related costs from the acquired player loyalty operations as well as reflecting higher SG&A and R&D costs.

Moving to the balance sheet and cash flow, the outstanding principal on our long-term debt declined to $1.16 billion, and we had no amounts outstanding under our revolving credit facility at the end of the quarter. We generated $39.3 million of free cash flow for the 9 months ended September 30, 2019. Reflecting on our commitment to reduce leverage, we paid down $8 million on our term loan in the third quarter and year-to-date, we have paid down $25.7 million. We also utilized $20 million to make the initial payment on our acquisition of a loyalty products business.

As a result of our debt repayments and the improvement in adjusted EBITDA, our total net debt leverage ratio declined to 4.5x adjusted EBITDA at September 2019 quarter end compared with 5x one year ago at September 2018.

Our short-term target for total net debt leverage is getting it under 4x trailing adjusted EBITDA. We believe this is achievable during the next 12 to 15 months. Our longer-term goal is to achieve and maintain total net debt leverage at approximately 3 to 3.5x trailing adjusted EBITDA. To achieve such leverage objectives, we will continue to target the use of our accelerating free cash flow, primarily toward debt repayment. The only potential alternative use we might envision would be for a compelling complementary tuck-in acquisition that would grow future adjusted EBITDA and free cash flow on a highly accretive business -- accretive basis, such as we are currently delivering with the loyalty products acquisition.

In the third quarter, capital expenditures totaled $35.9 million and placement fees were $5.5 million. Games segment CapEx was $30.2 million and FinTech segment CapEx was $5.7 million. In the third quarter, we made the final placement fee payment under the Player Station Agreement with our largest customer in Oklahoma. This effectively locks in about 30% of our total installed footprint until June 2024.

For 2019, the full year placement fees are expected to be just over $17 million, and we expect only minimal placement fee payments going forward. This afternoon, we raised our estimate for the total 2019 CapEx to a range of $130 million to $133 million, inclusive of the $17 million in placement fees. The increase reflects higher Games CapEx due to the success and momentum being achieved with our high performing high-margin premium gaming units. We now expect our year-end footprint to reach between 14,500 and 14,700 installed units with the majority of the added games being premium units.

Games' CapEx is now expected to total between $96 million and $98 million, while our FinTech CapEx expectation is $17 million to $18 million. This afternoon, we reiterated our outlook for 2019 adjusted EBITDA to be in a range of $252 million to $255 million. While our revenue growth outlook remained strong, we are also focused on reinvesting in internal development activities to ensure that we maintain this level of sustainable growth into 2020 and beyond as well as making sure our compensation levels and incentives are competitive and aligned with our growth in this tight labor market.

Our full year guidance includes our foreseeable opportunities as well as the impact from any headwinds envisioned, including revenues, mix shifts and higher R&D and operating costs. We expect total depreciation and amortization expense in 2019 to be approximately $130 million to $133 million. We now expect to record an income tax benefit of between $4 million and $5 million, and we expect cash tax payments to be less than $1 million.

For modeling of diluted shares outstanding, given recent experience related to the exercising of employee equity awards, we expect the diluted share count to increase slightly to approximately 80 million shares for the fourth quarter of 2019.

Finally, as a result of our higher CapEx investment in the second half of 2019 to grow -- to continue to grow our installed base of high-return premium units, we now expect free cash flow to range from $42 million to $45 million in 2019 compared with $25 million in 2018. While we have not completed our budgeting process, we believe that free cash flow is likely to double or nearly double in 2020. Of course, the final amount will again be dependent on the amount of CapEx funding, fueling the growth in our gaming operations business. With continued success from new games, we will maintain our focus on growing our installed base and daily win per unit, which, in turn, will grow our foundation for further long-term revenue, adjusted EBITDA and free cash flow growth.

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) And we'll take our first question 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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Just wanted to touch on the, I guess, expected uplift or further improvement in the installed base here in the fourth quarter, I think it implies about 300-or-so units at the midpoint higher. Can you break out what percentage of that is coming from premium placements? Obviously, given the momentum there, I think those were up about 1,000 quarter-over-quarter. So just how do we think about that incremental growth? And is most of it coming from premium placements, which would then support kind of a double-digit or higher win per day?

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Dean A. Ehrlich, Everi Holdings Inc. - Executive VP & Games Business Leader [3]

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John, this is Dean. To answer that, I'd say the growth will come primarily from premium units.

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John Kimbrough Davis, Raymond James & Associates, Inc., Research Division - Research Analyst [4]

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Okay. Any -- is it still -- is it Shark Week, Wicked Wheel? Or are you starting to sell -- The Vault's available yet? Like what are the kind of the premium units that are driving that?

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Dean A. Ehrlich, Everi Holdings Inc. - Executive VP & Games Business Leader [5]

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Shark Week, a little bit of a Smokin' Hot Stuff Wicked Wheels still, keep in mind, that's being deployed since the end of last year. We are releasing The Vault, the initial install of that should be prior to Thanksgiving. Those are the -- I would say, those are the 3 primary drivers at this point, but also our mechanical as well. We have both are coming out that will help give us a little bit of a boost as well.

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John Kimbrough Davis, Raymond James & Associates, Inc., Research Division - Research Analyst [6]

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Okay. Then, Randy, do you want to hit on the payments margins here for a second? How much of the year-over-year decline is driven by what it was potentially a lower margin acquisition and investments made there versus if you kind of looked at it on an organic basis. Maybe just to remind us of kind of the puts and takes on the margin as we head into the fourth quarter Payments business?

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Randy L. Taylor, Everi Holdings Inc. - Executive VP & CFO [7]

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I would say, John, that, look, on the acquisition, it's still got a lot of recurring revenue. So it's really been the fact that we've sold more equipment sales than we have in the past. So with the kiosk sales and with their promo and enrollment kiosks, it's a lower margin, even though we've got a nice recurring revenue stream. So it's hard to say. I think we looked -- as we look into the fourth quarter, we still think that equipment sales will be strong. So it's going to impact our overall margin, but I don't think it will be changed dramatically from what you've seen here. I think it's more been -- it's very complementary in margin to our business because it's got a nice recurring revenue source as well as the kiosk, and they're smaller. And we actually have a little bit better margin probably on that.

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John Kimbrough Davis, Raymond James & Associates, Inc., Research Division - Research Analyst [8]

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Okay. And then I think last quarter on the call, you made a comment that 3Q and 4Q adjusted EBITDA would be more similar sequentially than in previous years, is that -- I think, if that holds, you're kind of looking towards the high end of the guidance range. Just any change to that? Or is that still what you do expect going forward?

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

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So I have to go back and check the notes. But I think what I would say is, I think, we believe that fourth quarter will be better than it's traditionally been, John, probably not as much down. I don't know that it will be the same, but I don't think it would be your normal decline as much as we've seen in the fourth quarter. So -- and if you remember, you are going to have some costs that hit like G2E all hits in the fourth quarter of this year. So there are some other SG&A costs that I think will hit in the quarter that might pull that down a little bit.

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John Kimbrough Davis, Raymond James & Associates, Inc., Research Division - Research Analyst [10]

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Okay. And last one from me. As we kind of look out to next year, I think you said you expect free cash flow to double or so, which would kind of be at the low end of the prior $90 million to $100 million kind of targets that you guys had laid out. How should we think about the incremental CapEx dollars, by my math, right? I think you guys said the dollar increase in win per day is $5 million to revenue and almost $5 million to EBITDA. So how should we think about what the incremental CapEx? I think you raised CapEx guidance this year, obviously, you're getting investments. But I think the EBITDA upside should offset any incremental CapEx. So is it fair to think that there should be no real change to the 2020 free cash flow guide?

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

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Look, it's all -- as you know, John, it's all present -- based on will they stay out there and perform. They've done great. So I don't think there is, right now, an indication from our standpoint that these won't stay out and continue to perform that well. On the flip side, if we continue to get the demand, we may use more CapEx in 2020, if the demand stays strong. So look, as you know, my normal stance is, I'm not going to overpromise right now. So I think that you're thinking about it right, because it should drive more revenue if those things stand out there, which we expect they will. But again, we're just not done with our forecasting just yet. So I'm not really prepared to go any deeper than that.

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Operator [12]

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Next, we'll hear from Brad Boyer with Stifel.

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Brad J. Boyer, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [13]

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Congrats on a solid quarter. First question is just around the premium participation increasing the installed base close to 1,000 units quarter-over-quarter, that was pretty impressive. Just curious, I mean, I assume given the size there that those units were pretty well spread out across the operator base, but could you just give us a sense of sort of if there was any skew there to tribal, non-tribal, that would be helpful and sort of how that broke out?

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Michael David Rumbolz, Everi Holdings Inc. - President, CEO & Director [14]

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I would say it's across the board, not skewed to one particular area, one way or another.

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Randy L. Taylor, Everi Holdings Inc. - Executive VP & CFO [15]

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Yes, Brad. It was -- go ahead.

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Michael David Rumbolz, Everi Holdings Inc. - President, CEO & Director [16]

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Yes. It's 2 and 3. It's commercial and tribal. I mean we're out as far as we can get in terms of trying to allocate throughout the markets.

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Brad J. Boyer, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [17]

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Okay. Helpful. And then we talked about this a little bit with John there, but for the second consecutive quarter here, the product sales element of the FinTech business came in ahead of what I was looking for is pretty solid. You guys talked a little bit about a kiosk replacement cycle, obviously, Atrient is in there. I guess, as we kind of look ahead, what type of tail do you think coming out of G2E say and conversations you had around Atrient combined with sort of your expectations for this kiosk replacement cycle. What kind of tail do you think we should have for some of this accelerated revenue growth we've seen in the product sales segment of FinTech?

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Randy L. Taylor, Everi Holdings Inc. - Executive VP & CFO [18]

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It's -- I would say, look, it continues to be very strong. And Atrient, we had great buzz at G2E. So I think it's lining up very well for us. And so I know it's going to drive growth in the fourth quarter, and I still expect it to grow next year. So that's hard to determine how much -- how far you are into a replacement cycle, but I think with the Atrient loyalty kiosks and this is what we're seeing in customers replacing their older kiosks, it is going to be a driver going forward.

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Darren D. A. Simmons, Everi Holdings Inc. - Executive VP & FinTech Business Leader [19]

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Yes. And Brad, it's Darren. I would just add to that. I think there, again, as Randy indicated, we're really early in the replacement cycle for kiosks, loyalty is still performing well. We expect that to continue into 2020. And then I think just on the regular kiosk sales, we've had new business that's contributed to that growth. So I think all of those things combined are really what you're seeing as far as what happened in Q3 and what we already expect to have in Q4 into 2020.

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Brad J. Boyer, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [20]

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Okay. And then last one from me is just around product sales, obviously you had some of the comp headwinds there from the onetime lease-to-sale conversion and some international units. But if I look at it sort of for the full year based on some of the commentary you provided around your 4Q expectations, I mean, we're looking at growth that's going to be slightly below some of the metrics that you threw out at the Analyst Day last year. And then you obviously had some accelerating growth factored into your projections at that time for '20. I guess, given kind of where we are today, how should we be thinking about product sales growth kind of going forward? And I mean, do you guys still view sort of a teens plus number as realistic? Or do you think there needs to be some adjustment in the way we think about that? And that's it from me.

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Michael David Rumbolz, Everi Holdings Inc. - President, CEO & Director [21]

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Sure, Brad. Well, I think we're going to come in probably for the full year, our expectation is to still be mid-single-digit growth in our sales on that side. But one of the ways I would look at it and one of the ways that I personally do look at it is, I'm much more interested in putting a premium participation unit out and have that unit stay out 3, 4, 5 years in terms of the amount of recurring revenue and profit that I'll make from that particular machine as opposed to selling the machine to someone.

Now sales are still important, and there's still going to be an important part of us in the future. They may not be quite as robust as we had originally planned, partly because of the hits of our premium units that we can put out in part of our installed base on placements. So for modeling purposes, you may want to bring it down a little, but it also means that you need to bring up your installed base profitability.

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Operator [22]

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Next, we'll hear from David Katz with Jefferies Group.

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David Brian Katz, Jefferies LLC, Research Division - MD and Senior Equity Analyst of Gaming, Lodging & Leisure [23]

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At the risk of being a bit repetitive, I want to go back to one of your earlier points. It was a number of quarters ago that we first started talking about free cash flow doubling this year? And so with last year at 27%, we sit here today and we have 2 potential variables in that. One, which is the CapEx budget went up a little bit for good reasons. And secondarily, performance may have edged forward just a little bit. How would you -- I just be a bit more direct, how would you have us think about those 2 variables in the context of that $27 million becoming $54 million this year?

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Randy L. Taylor, Everi Holdings Inc. - Executive VP & CFO [24]

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So I would say, it was $25 million and that -- $24.8 million. So it was $25 million. So we always thought we could try to get that's right to get this change. That's right. If you're going to call me to $27 million, and I would say really what's happened is we pulled some of that CapEx into this year. We felt like, David, pulling an extra $5 million, probably more than $5 million, probably closer to $10 million into this year that we could have pushed to next year, could have we gotten to...

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Michael David Rumbolz, Everi Holdings Inc. - President, CEO & Director [25]

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Could have exceeded. Could have easily exceeded, but more importantly, as Randy was saying, we allocated that CapEx to very high-producing products that we're placing now and expect to have out for years.

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Randy L. Taylor, Everi Holdings Inc. - Executive VP & CFO [26]

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We just really think it sets us up well next year, David. And so I mean, could we have gotten there? I think we could have, but it really was based on really the backlog that we were seeing and the demand that we opened the CapEx gates.

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Dean A. Ehrlich, Everi Holdings Inc. - Executive VP & Games Business Leader [27]

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And David, this is Dean. But Dave, just really even to add to that. Our backlog was still the same as what we even started Q3 at. So we have a real challenging decision to either extend the lead times out, which you never really want to do or fulfill this seriously extensive backlog that we had, right, that did not go down. When you look at placing an extra 982 units quarter-over-quarter in premium, you would think that you would flush out most of your backlog, not the case in this situation.

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David Brian Katz, Jefferies LLC, Research Division - MD and Senior Equity Analyst of Gaming, Lodging & Leisure [28]

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Right. Okay. My point being that we're not taking dollar-for-dollar of the CapEx increase out of a doubling in free cash flow year-over-year. There has been some operating improvement to offset some of that along the way?

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Dean A. Ehrlich, Everi Holdings Inc. - Executive VP & Games Business Leader [29]

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Yes. Absolutely.

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

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Most definitely, David. Yes. Most definitely.

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David Brian Katz, Jefferies LLC, Research Division - MD and Senior Equity Analyst of Gaming, Lodging & Leisure [31]

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As the second part of that question, rolling into 2020, I think we had talked about having a pretty substantial increase again that, I think -- and not that you guided to these numbers in any specific way, but I think notionally, we were getting north of $100 million of free cash flow. And the hope being, obviously, you could stay there a while. Is that still a reasonable way to have us think about it in qualitative terms?

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Randy L. Taylor, Everi Holdings Inc. - Executive VP & CFO [32]

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Look, I think that's still our goal to get to $100 million, David. I think, as you know, I'm going to come out with, we believe we can double next year. So depending on where we end up this year, I think, $90 million to $100 million is still a number that we feel comfortable with. And hopefully, we'll exceed that if these units, it's always -- will the units stay out? And will they continue to perform the way they are? If they do, I think we're going to get there. If we have to do other things to them or refresh them with different titles, and they don't continue to perform the same way, it's a different story. But I would say, look, I don't want to put a number out there that I don't think we can reach. And that's why you're $90 million -- my top end is $90 million. If you're at $100 million, I don't think that's outside the realm of possibilities.

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David Brian Katz, Jefferies LLC, Research Division - MD and Senior Equity Analyst of Gaming, Lodging & Leisure [33]

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Last question for me, if I may. When we were together last at G2E, there was a discussion about pursuing the rating agencies to see about maybe some refinancing opportunities. Forgive me, we have a couple of calls and a lot going on this evening. So if you commented on it, I apologize. But is there any update there?

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Randy L. Taylor, Everi Holdings Inc. - Executive VP & CFO [34]

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Well, one, we didn't comment on it, and there's a slight update. We are going to -- Bill and I will be out in December trying to -- we're going to meet with all 3 rating agencies. I don't really have any update other than they know we're coming out. They've been very receptive to discussions. And with us, they have been. They understand that we're improving. It's just -- as you know, David, they have these formulas that in some cases, they're very formula-driven and says until you get to a level of leverage on our calculation, we most likely will not change. But we're going to do our best to go out there and put our case in front of them as to why we believe an improvement is -- a rating improvement is necessary. But I can't guarantee anything at this point.

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David Brian Katz, Jefferies LLC, Research Division - MD and Senior Equity Analyst of Gaming, Lodging & Leisure [35]

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They know you're coming and they know what you're coming for?

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

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That's exactly right.

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

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Exactly right.

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Operator [38]

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(Operator Instructions) Now we'll hear from Chad Beynon with Macquarie.

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Chad C. Beynon, Macquarie Research - Head of US Consumer, SVP and Senior Analyst [39]

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Wanted to ask about the gaming operations win per day. Certainly, better than, I think, most expected, particularly after we've seen some results from some of the domestic operators, who showed relatively benign growth on the slot side. So clearly, your legacy units are either doing better than they were on a year-over-year basis or just the shift with the new premium games is kind of bridging up the difference there. So not sure if you're willing to get too specific here, but can you just kind of talk about either notionally or percentage wise, what is really driving this increase? Because I believe on a year-over-year basis, the win per day was up over $4. And last quarter, it was under $3. Just trying to get a better sense of how the legacy units are doing? And if that means there's still a lot of life left for them to stay on the floor? Or if this is really just a factor of the new premium games, just absolutely knocking it out of the park?

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

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Yes. Not a problem, Chad. First of all, it's really -- it's both. The premium units, there's no question, are doing extremely well. And they've become, obviously, as you see, we had 900 just in the quarter, they're becoming a larger -- and as I mentioned in my prepared remarks, a larger portion of our installed base. But our standard machines, our non-premium games are also doing better. Our content is being better received by the player. And as a result, those games are also going up on their win per unit per day. So it is a combination of both. I mean hard to put a percentage on it. I mean clearly, I think the premiums are on a dollar basis, earning more. But as a percentage basis, they're probably -- it skews towards them, but I wouldn't say it's skews completely to them.

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Chad C. Beynon, Macquarie Research - Head of US Consumer, SVP and Senior Analyst [41]

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Okay. And then on the New York central determinant system contract renewal, can you just remind us where we are in that process? Your expectations? And if renewed, roughly what this would mean from a CapEx standpoint?

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Randy L. Taylor, Everi Holdings Inc. - Executive VP & CFO [42]

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So the current contract ends at the end of this year. And I would say, as we went through this before, I think we've had these questions before. We -- it's just a -- it's New York. It's a state agency, and it's just bureaucratic and takes time for that to be finalized. We feel good about where we're at. But until it's signed, it's not signed. And so we expect to continue to update people once we know, but I don't have any answer for you now, but it really effectively would be ending at the end of this year. I don't -- from our standpoint, I don't see a significant amount of CapEx involved. There is some. We do have to do upgrade some things, but it's not going to be a huge CapEx issue for us. We just want to get the contract signed, if we are selected. So that's where we're at.

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Dean A. Ehrlich, Everi Holdings Inc. - Executive VP & Games Business Leader [43]

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And you should anticipate that our bid included the understanding that there would be some things that we had to spend money on to bring up to the standards of today.

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Operator [44]

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Next, we'll hear from 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 [45]

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Mike, at the end of your prepared comments, you said that you could envision loyalty becoming a third item driving your growth, almost like it would be a separate line item. I'm curious what exactly you meant by that?

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Michael David Rumbolz, Everi Holdings Inc. - President, CEO & Director [46]

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Well, the one thing I should first say because otherwise, Randy will kill me is, I don't view it as a separate business segment that requires separate reporting, because it is clearly in the FinTech space. But having said that, what I mean is that the uptake and the things that we can do with loyalty in the digital world, including attaching it to other digital products that we're coming out with and that we've talked about previously could become an extremely important growth driver for us going forward. As it is, it's still a great growth driver just in the space it's in today. But if we can take it into the digital realm, I think it becomes even bigger.

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George Frederick Sutton, Craig-Hallum Capital Group LLC, Research Division - Partner, Co-Director of Research & Senior Research Analyst [47]

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Okay. Understand. And last for me. The incremental CapEx spend that you pulled forward, is there a way for us to think of an ROI on that spend? Or what incrementally you are actually getting for that spend?

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

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George, the best way we tried to lay it out is, these premium units, if they perform the way we expect them to -- we get our cash back within less than 12 months. And the expectation is those units should stay out there 2 to 3 years with very little cost, i.e., we may have to refresh the game theme on it, and that's why we have a strong pipeline behind that. That's why we're -- we've got Vault coming out, and we have another, Dragon, behind that, he knows exactly what it is. And so it's -- they cost a little bit more. But as Mike talked about in the daily win per unit kind of how that percentage works, they're making up a higher percentage of that daily win per unit. So we just think it's a very good investment in the challenge and Dean's team and what they're doing in the development side is to keep them out there as long as you can, because the cabinet is going to be fine. It's just keeping the theme on it.

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Operator [49]

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Barry Jonas with SunTrust has our next question.

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Barry Jonathan Jonas, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [50]

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So I wanted to start with Oklahoma. Last quarter, a competitor cited what sounded like company-specific issues in that market. Just curious if their issues had any impact on your current installed base? Or maybe your outlook for the market?

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Michael David Rumbolz, Everi Holdings Inc. - President, CEO & Director [51]

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Not at all. I can't comment on what they're experiencing, but we're not experiencing that.

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Darren D. A. Simmons, Everi Holdings Inc. - Executive VP & FinTech Business Leader [52]

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And Barry, look, it still continues to be a very strong market for us. And as Mike talked about, our -- both our standard and our premium are doing well and continue to be improved by the new content we put out there. So we still are very favorable in the Oklahoma market.

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Randy L. Taylor, Everi Holdings Inc. - Executive VP & CFO [53]

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And I would just add to that. I'm sorry, I would just add to that, as Mike had commented earlier, which is it's not only in Oklahoma. It's across our entire Class II and Class III base.

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Barry Jonathan Jonas, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [54]

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Understood. And then just maybe a follow-up on the environment for product sales. I just want to be clear and this is consolidation or cost cuts weighed on customer budgets? Or is that really less a factor relative to some sales shifting to placements? I guess, net-net, has there been any noticeable change in tone from your customers?

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Dean A. Ehrlich, Everi Holdings Inc. - Executive VP & Games Business Leader [55]

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Well, I'm not -- no, there hasn't really been a noticeable change in tone. And I don't know that, to the extent, people expect that to come about that anybody is in a position today to indicate whether or not it's going to happen. What I would say, though, is G2E was towards the end of the third quarter and what happens inevitably every year is in the lead up to G2E slot managers and buyers in casino markets tend to slow the role until they see what the new products are that are coming out at G2E and how quickly those will be in the marketplace. So I don't think it was -- I wouldn't attribute it to anything to do with operators consolidating or cutting back at this point.

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

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And Barry, I don't want a bearish tone either on product sales because in 2020, with our introduction of Flex, all the original content that we have going on there, we're very, very excited about it. Can we predict from our customer side what's going to happen? No. Having a late G2E things kind of play itself a little bit later. But from our standpoint, take all the noise out of it, we're introducing a brand new cabinet to us for 2020 with a lot of original content, and we are extremely excited about it. And we got to see where that lands.

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Barry Jonathan Jonas, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [57]

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Great. Just a quick one, hopefully, a quick one. On the FinTech side, G2E, some of your competitors were pushing mobile wallet products. Maybe just talk about where Everi stands from a competitive positioning on that product?

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Darren D. A. Simmons, Everi Holdings Inc. - Executive VP & FinTech Business Leader [58]

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Yes. Barry, it's Darren. Yes, we're right there. I mean we've got a couple large travel customers, there's one large one that we're going into production with shortly, and we expect us to be right there with our customers as they're prepared to consume the technology into their gaming floors. A lot of customers are very strategic in how they're looking at this. And our view is the way we set ourselves up with our loyalty platform and be able to use that as a key entry for a player acceptance then we're in a good spot to deliver on it.

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Operator [59]

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Our final question will come from Ricardo Chinchilla with Deutsche Bank.

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Luis Ricardo Chinchilla, Deutsche Bank AG, Research Division - Research Analyst [60]

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All my questions have been asked and answered.

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Operator [61]

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Thank you for your questions. I would like to turn the conference over to Mr. Taylor for closing remarks.

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Randy L. Taylor, Everi Holdings Inc. - Executive VP & CFO [62]

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Thank you for joining us on the call this afternoon. We look forward to discussing our 2019 fourth quarter and full year results with you in early March. Thanks for joining us.

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Operator [63]

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That does conclude today's conference call. Thank you for your participation. You may now disconnect.