Mark Labay - SVP, Strategic Development & IR Mike Rumbolz - President & CEO Randy Taylor - EVP & CFO.

John Davis - Stifel Nicolaus George Sutton - Craig-Hallum Capital David Katz - Telsey Group.

Good day and welcome to the Everi Holdings Incorporated Fourth Quarter 2016 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Mark Labay, Senior Vice President, Strategic Development and Investor Relations. Please go ahead sir..

Thank you, and welcome to the call. Joining me today are President and Chief Executive Officer, Mike Rumbolz; and Executive Vice President and Chief Financial Officer, Randy Taylor. Before we begin, I would like to remind everyone that the Safe Harbor disclaimer in our public documents 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 all of our SEC filings, all of which are posted within the Investor Relations section of our corporate website.

These events could cause actual results to differ materially from those described in our forward-looking statements and as such, we would like to caution against undue reliance on these forward-looking statements. 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 and adjusted EBITDA margin.

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 and to provide better comparability between periods in different years.

We also make certain compensation decisions based in part on our operating performance, as measured by adjusted EBITDA. And our credit facility and outstanding bonds require us to comply with the consolidated secured leverage ratio that include performance metrics, substantially similar to adjusted EBITDA.

For a full reconciliation of these non-GAAP measures to GAAP results, please see our earnings press release and related 8-K, both of which are available on our corporate website within the section captioned Investors.

Finally, this call is being webcast, which may also be accessed within the Investor Relations section of our corporate website and a replay of the call will be archived. With that, I'm pleased to introduce our President and Chief Executive Officer, Mike Rumbolz..

Thanks, Mark and good afternoon everybody and thank you for joining us. This afternoon we reported 2016 fourth quarter revenues of $217.5 million and adjusted EBITDA of $49.4 million. Full year revenue was $859.5 million and adjusted EBITDA was $198 million.

The key takeaway from our fourth quarter and from the majority of 2016 is the continued progress that we've made in executing against the strategic priorities that we began to implement late in the first quarter of 2016.

Since then, really over the final three quarters of the year we brought needed stability to the organization and have positioned the company on a much stronger footing to execute on our growth initiatives. So let me begin by providing you with a few highlights of the progress that I've already seen.

In our games segment during the last three quarters of the year we sold more units on a quarterly basis than in the comparable year period, prior periods while still maintaining our ASP.

In addition, despite the removal of over 1,200 third-party Class III units from our installed base in 2016 we were able to finish the year basically even with the size of our installed base at the end of 2015.

Our payments business also continues to perform very well, both revenue and adjusted EBITDA have grown year-over-year for the last three quarters of 2016. This growth includes favorable same-store comparisons for every quarter in 2016.

Also - although we had a slow start with our compliance products sales the sales momentum for these products picked up in the second half of the year. We believe that we have built the industry's best compliance solution and it is tailored specifically to meeting the unique needs of our gaming customers.

We expect this trend of improving compliance sales momentum to carry forward into 2017. And while there are many reasons for our progress, the most important one is our people.

Last year across the entire organization we challenged everyone to focus on our key objectives to commit to strengthening our company and to put in the effort necessary to set Everi on a better trajectory.

I think the progress that we achieved over the last nine months of 2016 and the momentum that we're carrying into 2017 is a testament to how effectively our team has pulled together to address our challenges to stabilize the company and to begin to address our many opportunities.

These efforts strengthened our game and product development initiatives to the point where I can confidently say that we entered 2017 with our strongest and by far, our most diverse portfolio of gaming technology solutions in our history.

We've also made important initial strides in enhancing the efficiency of our manufacturing process and in bringing increased discipline to our expense management.

Though we still have challenges that need to be addressed in 2017, I believe our ability to meet these challenges head-on while taking advantage of our many opportunities will result in a year of growth for Everi.

One of the challenges that we previously discussed is the removal of third-party Class III games from a customer's facilities in Oklahoma, and we faced this challenge head-on in 2016 and in fact saw our overall installed base decline by only 76 units when we left the year 2016 even though 1,221 third-party Class III games were removed from our installed base over the course of 2016.

As of year-end, we had 1,333 third-party Class III units remaining in our installed base of which we believe approximately 530 are subject to removal in the first half of 2017.

Now in addition, we expect a number of our California tribal customers will move from Class II to Class III units as their tribal gaming compacts with the state are renegotiated.

We believe we could lose between 100 and 300 of our Class II games from our California installed base this year and we would expect that these units will come out in the first half of the year. We do expect to benefit from some unit sales as customers purchase Class III units from us to replace some of the Class II units that are removed.

The removal of the third party Class III units and the Class II units in California will impact our daily win per unit in the first half of 2017.

But having said that the positive news is that we expect our installed base to grow in 2017; we expect to replace a good percentage of the third-party Class III units in Oklahoma with our proprietary Class II games and continue to grow our installed base outside of Oklahoma.

In fact our focused and continued innovation in Class II helped us to grow our overall Class II installed base by over 800 units in 2016. We also have new Class II growth opportunities that we're executing upon in 2017. We've now deployed our first wide-area progressive platform.

We recently went live in four casinos in Oklahoma with our Class II Jackpot Lockdown wide-area progressive featuring two of our more popular Three-Reel Mechanical games.

Jackpot Lockdown has a base jackpot of $100,000 and combines our popular Mega Meltdown and High Voltage Games, the large linked progressive platform and a unique math model that heightens player excitement and engagement.

And beginning next month, we will introduce Jackpot Lockdown to additional casinos in Oklahoma and Texas, as well as casinos in California, Arizona and Wisconsin. While it's still early in the rollout phase, our initial feedback has been highly encouraging.

Early in the second half of this year we will expand our Class II wide-area of progressive offering to feature video real games based on the Casablanca and Penn & Teller licensed brands. Both of these games were very favorably received at G2E and they will be offered on our new Empire MPX cabinet.

We're extremely optimistic about the growth potential of these new products and I could not be any prouder of our team for accelerating and executing on our strategy to continually expand our product portfolio.

Our ability to successfully launch our wide-area progressive platforms is an important factor in our expectation that our installed base will grow this year. I expect that as we increase placements our daily win per unit will also benefit in the second half of the year.

We're also making progress with our efforts to optimize the yield from our over 13,000 unit installed base. Today we're starting to see the benefits from the success of our newer games and our Core HDX cabinet.

But just as important, for the first time we have allocated dedicated resources whose sole focus is the management and optimization of our installed base. We're very early in this process but I expect that we'll have some very positive data points to report on this effort as we move through the year.

I firmly believe that these steps will help us reach our goal of both, growing the installed base this year versus year-end 2016 and improving our yield or moving towards our longer term goal of growing our installed base to over 17,000 units. Turning now to our payment segment; we continue to show growth in revenue and adjusted EBITDA.

We continue to invest in our products and our services to ensure that we remain the market leader. For anyone that was a G2E last September, you know that we are not content with simply resting on the success of our current solutions.

We are constantly looking for ways to enhance our ability to assist our customers in driving more cash to their casino floors and helping them operate more efficiently and effectively.

We have continued the expansion of our competitive position through our disciplined approach to maintaining appropriate expense levels when entering new markets and through the introduction of new products. In early 2017, we went live for the first time with ATM services in Canada across 29 properties in three provinces.

And while this will provide some relatively modest financial benefits for us in 2017 the larger opportunities will be to integrate our ATM services with our proprietary cash access products, as well as introducing a fully integrated kiosk solution. I believe this can be a growth driver for our payments business later in 2017.

And as we've noted the last several quarters, our suite of compliance solutions continues to gain interest and we expect they will contribute at a higher level this year when compared to 2016. Now these are just some of the highlights of where we're poised to continue to make improvements in growing our business.

At the same time we expect to effectively manage our cost structure while enhancing our product engineering and manufacturing processes. Reflecting these and other factors, we expect revenue and adjusted EBITDA to grow in 2017; and Randy will provide additional commentary regarding our guidance in just a moment.

Longer term, our goal is to drive improved cash flow but we expect some incremental improvement in 2017. We do expect to make a great deal of progress throughout the year in strengthening our ability to accelerate our cash flow generation going forward. I'd now like to turn the call over to Randy..

Thank you Mike, and good afternoon everyone. For the fourth quarter of 2016, total revenues were $217.5 million comprised of $54.6 million in game segment revenues and $162.9 million in payment segment revenues. Games revenue increased approximately 8% year-over-year and payments revenue increased approximately 6% year-over-year.

Our reported operating loss, net loss and net loss per diluted share for the fourth quarter 2016 includes a non-cash impact of $146.3 million goodwill impairment charge. Impairment charge is a result of our annual assessment of the carrying values of our tangible and intangible assets.

Based on our current analysis, we determine that the carrying amount of our games reporting unit exceed the estimated fair value.

Reported net loss and net loss per diluted share also includes the non-cash impact of a $59.6 million increase and our valuation allowance recorded on certain deferred tax assets relating to our net operating loss and tax credit carry-forwards. From the U.S.

GAAP we are in a cumulative lost position as we have reported net losses over the last three years. As a result the counting guidance requires that we utilize historical results but only benefit growth assumptions for the future years in projecting future taxable income to determine our valuation allowance.

Establishment of a low valuation allowance does not impact our cash taxes nor does it preclude us from using our tax credits, loss carry forwards, and other deferred tax assets in the future. Adjusted EBITDA for the fourth quarter of 2016 increased $3.5 million or 7.6% to $49.4 million compared to $45.9 million a year ago.

Adjusted EBITDA for the 2016 fourth quarter adds back approximately $1.4 million, separation cost related to our former CEO. This is in addition to the $3.3 million in separation costs recorded in the first quarter of the year.

Adjusted EBITDA for the game segment was $28.4 million compared to $26.5 million a year ago; and adjusted EBITDA for payment segment was $21 million compared to $19.4 million last year. In our game segment, gaming operations revenue decreased 3% year-over-year to $37 million.

The year-over-year decline primarily reflects lower daily win per unit of $26.35 compared to $27.68 in the fourth quarter of 2015. Installed base at December 31 was 13,264 units which was essentially in line with the installed base at the end of 2015. We report our daily win per unit net of the impact of accretion.

Some of our legacy placement deals have renewed and placement rates that are slightly higher than the original placement fee rate resulting in an increase in the total accretion of approximately $0.6 million over the prior year period.

The increased accretion spread across our slightly lower installed base is responsible for approximately $0.46 or 35% of the quarterly decrease in daily win per unit.

The remaining decline is primarily the result of the dynamic we have discussed before in which we are managing the removals of high performing third-party Class III units and replacing a portion of these units with our Class II units.

We expect this dynamic as well as some Class II removals as a result of compact changes in California will continue to impact daily win per unit at least through the first half of 2017. Ongoing placement of units outside of Oklahoma should partially offset this impact.

In addition, the introduction of our new Class II WAP and licensed product that Mike discussed earlier should also help to mitigate this decline in daily win per unit with an expectation to the second half of 2017 will begin to see improvements on a year-over-year basis.

The fourth quarter, our installed base declined 76 units year-over-year and by 23 units on a quarterly sequential basis to 13,264 units. We provided additional details in this afternoon's press release in regards to the composition of the installed base.

One thing I wanted to highlight however was that while the installed base at 2016 year-end was down slightly from the prior year period, the 76-year decline is net of the removal of 1,221 third-party Class III units that occurred throughout 2016.

In 2016 we clearly grew our installed base in other locations, both inside and outside of Oklahoma market. December 31, we still had 1,333 third-party Class III units installed and we currently expect that approximately 530 of these units will be removed from the installed base.

As Mike had mentioned, we expect these removals to take place in the first half of 2017 and we expect to replace approximately 70% of these units by our proprietary Class II units. Revenues from electronic game sales grew approximately $5.3 million or 43% to $17.6 million for the 2016 fourth quarter compared to the prior quarter.

We sold 920 units at an average price of $17,548 compared to 645 units sold in the fourth quarter of last year at an average price of $16,648. Unit sales and ASP benefited from our higher price Core HDX units which made up almost 65% of fourth quarter 2016 unit sales, and also comprised approximately 61% of our full year sales of 2,954 units.

Unit sales were up 17% on a quarterly sequential basis even though we shipped 200 units into Alberta in the third quarter which represented our highest ever quarterly new unit sale to a single customer. Overall, adjusted EBITDA margin for the game segment was 52% in the fourth quarter 2016 compared to 52.5% in the prior year period.

For payment segment, the fourth quarter represented a third consecutive quarter in which we have grown revenue and adjusted EBITDA. 6% year-over-year increase in revenue to $162.9 million was driven primarily by growth from our cash advances and ATM revenues, partially offset by a decline in our kiosk sales and service revenue.

This quarter was the ninth consecutive quarter both of growth in both same-store transactions and same-store dollars processed. Additionally, ATM growth benefit from surcharge increases initiated by several large corporate casino customers.

Overall, adjusted EBITDA margin for the payment segment was 12.9% for the fourth quarter 2016 compared to 12.6% for the year ago quarter. The main drivers of the margin improvement was lower operating expenses, primarily legal and EMB cost compared to the prior year.

It was partially offset by higher ATM commissions and part due to increased surcharges by serving casino customers which negatively impact adjusted margin in the fourth quarter of 2016. As expected, sales of our fully integrated kiosks were down in the fourth quarter of 2016 compared to the prior year quarter.

In past years we have done a great job selling our kiosks to our larger corporate customers, many of these large customers are locked into long-term cash access arrangements with. Our new kiosk claimant placements are now focused on smaller customers. This trend will continue until the kiosk replaced in prior years need to be replaced.

Compliance revenue in the fourth quarter of 2016 was the highest recorded revenue of any quarter in 2016. We actually generated sequential quarterly improvements in revenue from compliance in each quarter of 2016.

We believe this trend is indicative of the increased interest in our compliance solutions as customers have increased their focus on the need for AML and tax compliance products. Moving on to the balance sheet, our long-term debt was $1.5 billion as of December 31, 2016.

During the quarter we repaid $2.5 million on our term loan and for the full year we repaid $24.4 million on our term loan. Weighted average interest rate on our long-term debt was 7.68% as of year-end. The three months ended December 31, 2016 we amortized approximately $1.7 million of capitalized debt issuance cost into interest expense.

We had no amount outstanding under our revolving credit credibility at year-end and the company was in compliance with its debt covenant as of December 31, 2016.

Our senior leverage ratio under the definition of the credit agreement was approximately 3.8 times adjusted EBITDA as compared to our maximum senior leverage ratio of 4.25 times adjusted EBITDA.

As reminder, for purposes of the credit agreement interest expense related to the provision of cash generated in our ATMs is treated as an operating expense and is therefore not excluded from the credit agreement definition of adjusted EBITDA.

As of December 31, 2016 our outstanding balance of ATM cash utilized by us from our Wells Fargo cash solution agreement was approximately $285.4 million. Capital expenditures were approximately $13.8 million for the fourth quarter of 2016 and $92.1 million for the full year.

Net capital expenditures for 2016 were approximately $85.5 million and reflect $4.6 million in proceeds for the sale of the aircraft and $2 million in reimbursed tenant improvement.

Game segment, capital expenditures were approximately $13 million in the fourth quarter of which approximately $9.4 million was associated with replacement units for our existing installed base to expansion units into our installed base, and trial units not yet converted to either an installed base unit or unit sales.

Capital expenditures for our game segment reflects a higher percentage of payroll and related development cost being capitalized and the impact of Cory HDX which continues to drive additional least unit replacements and expansion units. CapEx for our payment segment was $0.8 million in the fourth quarter.

This afternoon we provided our initial outlook for 2017 adjusted EBITDA. We currently expect revenue and adjusted EBITDA to grow this year with full year adjusted EBITDA expected to be between $204 million and $209 million. Let me provide a few key additional metrics we are modeling for the full year.

We expect unit sales for 2017 will exceed the 2,954 units we in 2016 by at least 10%. In the timing and the current quarter, I can provide a little color on our first quarter unit sales.

With the benefit of a new casino opening and other expansions that will occur in the first half of 2017 which we have already shipped units, we expect first quarter unit sales will be up on a year-over-year basis and fairly consistent with the unit sales that we experienced in the fourth quarter of 2016.

We mentioned earlier that we expect approximately 530 third-party Class III units will be removed from the installed base in the first half of this year and that we anticipate replacing approximately 70% of those units with our Class II games.

By the net impact from these removals, we do expect our installed base at the end of 2017 will be higher than the installed base at the end of 2016.

As the year progresses and we complete the removal of these third-party Class III units, we should be in a better position to give additional clarity on the level of overall growth we expect to achieve in '17.

The expectation will also rely in part on our visibility into the initial expected benefit and the future expansion of our new proprietary Class II WAP which as Mike indicated, is live now in four casinos.

Early in the second half of the year, we will expand our Class II WAP often to feature video reel games based upon the Casablanca and Penn & Teller licensed brands.

In addition, our expectation for growth in our installed base in 2017 is net of the impact of what we believe will be the removal of between 100 to 300 Class II games from more our California installed.

We currently expect the majority of the class of the third-party Class III units in Oklahoma and Class II humans in California that we expect to lose will occur in the first half of 2017. As a result, we expect the installed base at March 31; it will be less than the installed base at December 31.

With that I expect the install base to grow over the balance of the year. Core cash access products of our payments business should continue to benefit from the ongoing trend of improving cash to the floor. We expect to see the interest in our compliance products translate into improved sales in 2017.

We believe that the successful launch of the new kiosk product that we demonstrated at G2E in 2016 which is our cash recycler and cage dispensing units and service contracts on these products could provide some opportunity for growth in the kiosk business.

Our payment segment will also benefit from the recent expansion of our cash access capabilities in Canada to include for the first-time ever ATM services. We also provide some color as to how we think about a few other modeling metrics for 2017.

Expect cash interest expense will be approximately $92 million to $94 million to include interest on all cash of between $3 million to $4 million and approximately $6.7 million in non-cash amortization of capitalized interest costs.

Our forecasting of interest seems interest rates will rise in 2017; and the increase in LIBOR will impact our interest on the cash used in our ATMs and not provided by our customers. LIBOR seeks 1% and the interest on our term loan will also increase.

They are subject to a 1% LIBOR floor on this variable debt because LIBOR has been below 1% we have not had interest rate variability in 2016 with regards to our tern loan. We estimate capital expenditures in 2017 will be $85 million to $95 million.

CapEx related to refreshment of replacement of units in the installed base is expected to be between $38 million and $40 million. We also expect to incur between $5 million and $6 million in placement fees. CapEx for our payment segment should be $9 million to $11 million.

The success of our new wide-area progressive products and new premium license content would result in increased capital expenditures as we accelerate new placements of these products. Amortization expense is expected to decline significantly the 2016 reported amount of $94.6 million and should be $68 million to $71 million.

Decline is due to certain intangible assets that were recorded as part of our purchase price allocation from the merger coming fully amortized in 2016. Depreciation expense is expected to be between $44 million and $46 million.

Finally, we expect to recording tax benefit of less than $4 million for 2017 just net of approximately $2 million in cash taxes that we expect to pay related to state and foreign income taxes. With that I will now turn the call back over to the operator for questions..

Thanks. [Operator Instructions] And we'll take our first question from John Davis with Stifel..

Good afternoon. Mike, I just wanted - if you guys could touch on what's driving the pretty significant increasing game sales because obviously fourth quarter was much better than we expected; it sounds like 1Q is going to be similar, I think G2E, the game is launched there are impacting yet.

So is it Core HDX; maybe just comment what's driving the strong game sales growth?.

Yes, it's not really the - I mean you're right John, it's not really the licensed branded games that we were showing at G2E but it is some of the games that we were showing at G2E which are newer games that are on the Core HDX and as we have a new head, a new games business leader who has now been working in our development side for a few months; we're getting better and better at games that we're putting out on the Core HDX.

And the Core HDX itself is also a better video box for us and obviously is showing that throughout its sales..

I'd say, we've also seen - we still continue to see good sales John in the - in our Mechanical Reels, our steppers.

So it's just - I think it's just going to continued effort in that area with our sales force, we just think that in more time we'll continue to have success there and turn event is still being sold; I mean it hasn't gone away by any means..

Okay, perfect.

And maybe Mike just touch on quickly the Canadian licenses that you mentioned in the third quarter call; what's the status there? Have they been approved or are they - have you started shipping games in those new provinces; any update there?.

We haven't - to my knowledge we have only just started to explore the other provinces other than Alberta. We have done the ATM agreement that I mentioned in my prepared remarks that will put us into three provinces and I would expect that this year we'll start seeing more game sales in other provinces as well..

Okay.

And then quickly on the debt side, maybe Randy - you know, obviously some your peers have - been successful refine some of their high cost debt recently; maybe just generally talk about what potentially could be refined and how you think about it? I mean I think results now three quarters in a row put you in a position to potentially go back to your lenders and get better terms.

So is any comments there on how you guys think about the refi opportunity going forward?.

Sure. I want to say this John, we have been probably nonstop for the last couple of months, you know, in touch with our administrative bank and other - I guess advisers on - we obviously saw what happened with one of competitors.

We're in a little bit different situation just because what we've done is big and really - you have to have some things that you bring to the table to improve the credit from the term loan lenders.

But we are looking at all opportunities and options to be honest with you; so I really can't say that we've got anything right now but I would tell you it's something that Mike and I have been focused on, as well Mark over the last couple of months.

So it's a little bit dynamic, obviously it's a little dynamic with our one holder secured notes which has kind of the same covenants, so we've got little bit of challenge in there as well..

Okay, thanks.

And last one for me if I can; Randy, the CapEx - I guess range of $85 million to $95 million, it's fairly wide - I guess what drives it to the high-end and longer term as a potential for that to go down, I'm - not even saying $90 million for a few quarters now on a go-forward basis but maybe just talk about what could result in it being higher in 2017?.

Look, I want to give a little bit of a range there John because look at that - wide-area progressives really do take off if the licensed - the branded games on our new cabinet take-off then I think - you know, I want to have the ability to - and we will need the ability to put more out there and I think that will be a good thing.

So gained a little bit wider range there but I think I did that because if this goes well and we're just at the beginning of it; this will be one of things where we'll put out as many as we possibly can to beat that need or demand..

Okay, that's it for me. Thanks..

And next we'll move on to George Sutton with Craig-Hallum Capital..

Thank you. So since G2E we've heard some pretty encouraging things from the field relative to some of your newer games which again haven't really affected the numbers yet.

Can you give us a little bit of an updated thought in terms of what you're hearing from the casino operators and perhaps as we're looking out later this year with new product; how some of that might be getting influenced by what you're hearing from the operators?.

Yes, I mean we put a pretty extended and I'm happy to give sort of some high level color to that but we put together a very intense Customer Advisory Board after G2E brought some of our better customers from tribal from commercial and from multi-location operators down to Austin and spent several days with them really digging into the heart of what were they seeing with their customer base, what were the customers looking for - what kind of enhancements and features did they see that they felt were going to be important going forward on the slot [ph] floor.

And part of it I can tell you is that that we have been - since then we have been designing, first of all, we listened very carefully to what they had to say and then we started designing around that and as we design around that we found that there are certain principles that we needed to keep in mind as a development house and some of those principles are things like - you know, what is a customer looking for.

Customer, let's look at the customers desires but also what kind of mathematics can we use to really make excitement while the customers are sitting at the game. So we've started - we've embarked and Dean Ehrlich [ph], our Head of - our Business Leader in games is emphasizing that quality is going to be key going forward.

And customer reaction is going to be probably our best parameter for judging quality. And I think you're seeing - even though he was only consulting with us last year, I think you're starting to see some of that in our games as we go forward..

I appreciate that perspective. So flipping over to compliance, I'm encouraged that that has picked back up.

I think one of the challenges that you had seen was the spending of CapEx versus operating expenses; I'm just curious can you give us a reason why you think compliances has picked backup?.

I would say two things George; I think one, it was just getting the sales team also upto speed on the product and how to sell it, and to really meet with the customers and explain what the products could produce.

And I think second of all, what we've talked about at beginning of last year and throughout last year is - if you don't hit them early enough, they don't get into their capital budget. And I think that the casino operators understand they have risk here and that our product can really reduce their risk; and so they are allocating dollars towards it..

Perfect, got you.

And lastly, as you have contemplated guidance for the year I'm curious does it include any large new customers on the payment side or you're assuming a fairly static customer base?.

I would say a fairly static customer base, really; no big hits. I mean other than - as Mike talked about some of the Canadian stuff that we picked up and that again, fairly modest but it will drive some topline, nothing really major in that projection..

Yes, we didn't assume any big steals..

Okay, perfect. Thanks guys..

[Operator Instructions] Next, we'll move to David Katz with Telsey Group..

Hi, afternoon everyone. So I wanted to ask about the game sales because if we think about the first quarter being comparable to 4Q that obviously implies a big year-over-year gain but we're finishing off the year in the 10% up range which implies there is going to be some down quarters.

Can you talk about what you can share about what that curve looks like as the year progresses?.

Well, I mean the way that we have looked at it, we expect it to go - I mean, if you recall last year the first quarter was a disaster. But growing over that was a given, we had to be able to grow over that in order to prove out the thesis for our ability to operate the games business.

But putting that aside I think we're anticipating a more normalized purchasing throughout the course of the year from our customers.

So you would expect that we'll see - when the capital budgets come out they will start looking - there is lot more looking at their refresh numbers figuring out what they intend to spend, they will start allocating that over various quarters. I would expect that we'll see some seasonality again in the numbers, especially in the third quarter.

And so if you look back to - I think what a normal sort of year would look like is where we've basically modeled this going forward..

So 3Q being a little bit weak-ish seasonally, is that what we're suggesting?.

Right, right..

Okay. The other question I wanted to ask is really around the installed base and specifically around the WAP product.

My understanding of the way those are - those deals are structured is as a percentage of coin-end and my experience with other WAP products around the industry is that they generally will garner a significant multiple to traditional - even regular participation gains but certainly big multiples of the floor average.

If you could talk about what you're seeing so far or what qualitative expectations you have for that product? Having seen how it compares with what else is available out there and what kind of feedback you're getting on it and whatever you can tell us about - how those deals are structured because as they roll into the installed base my intuitive reaction would be that the yield would go up - could go up significantly..

Well, I'm with you in that regard. I'm intuitive or otherwise, I think you're right; I think that's correct and you've correctly identified the way most of these deals are struck with respect to one of the metrics that's being used for pricing as the coin in.

You're also of course looking at your win per unit per day and you're looking at your number of devices across the entire WAP platform. So you're looking at your ability to increment and garner monies for Secondary Jackpot, potentially in future.

But at the end of the day if it comes down to this, we've only seen one wide-area progressive in the Class II market to-date. And so we really, unlike the Class III where we've seen wide-area progressive for decades, this is really a fairly greenfield for wide-area progressives. And so how these perform is going to be I think fairly telling.

Our early indications is that we are getting exactly what you would expect, we're getting better performance from these devices but having said that again, it's new to the space, we have a limited number of devices out there and we're only at four location.

So I think even though we're getting very good comments back, we're getting anecdotally good news; I wouldn't - at this point I think it's too early for us to declare victory and get off the field.

I think this is going to require us to prove ourselves out on the Mechanical Jackpot Lockdown and then prove ourselves out yet again when we move to the video reels. But you basically have the - you have the correct outline for how you'd be pricing it, we're expecting to follow the Class III model.

And then ultimately - you know, presuming that we can prove out our ability to excite players and get them interested in our wide-area of progressive Class II offerings, we have the ability to move these offerings in the Class III as well and into other commercial market. So you should expect that from us in the future as well..

Right. And if I can just follow that up quickly; what do - you know, how should we be thinking about these units? And I believe the commentary whether it was qualitative or specific is - you're up to - you should be up to several hundred games by the end of - right in the near-term.

And I was saying what does that do to your cost structure and your margins as those roll-in? And presumably they - and Randy commented on the capital, but on the cost side of things, does that weigh on your margins?.

I don't think on the - again, it should be positive to our margin as the yield improves David. I don't think - the way they are structured, you really - you know, you get a little bit extra cover - obviously, the major Jackpot.

The dynamic that we have that I'm trying to make sure everybody understands is we're still looking at those third-party gains. So what I'm really hopeful of and what we really expect is that we get enough of the WAP out there that will start to offset that.

And then into the second half of the year - once we've grown over that issue, start to bring it up slowly. So in a little bit of [indiscernible], I don't know. We probably got a very little data yet on it but to my point, it's positive.

But I don't think there is any significant margin impact because it's kind of built into the model and therefore if we get the better bigger play - we should get the bigger win per unit which should help us overall..

Understood. One last one if I may, with respect to turn event which has been such an important driver; I recall G2E we saw some updates to capabilities on that product and content on that product; and I think the quarter reflected just a little bit better sales in that product.

What can we reasonably expect from turn event going forward? Is it going to peak her out [ph], stay the same or do you think you - based on what you know so far can get better?.

It can definitely get better David, there is no question.

And you're right, I mean you didn't see it falling off in the fourth quarter which was a good indicator that that through G2E we've been able to show our customers that we're not abandoning the product, it's not going to go end of life, we're not going to quit supporting it, we're going to bring more games to it, we're going to bring hopefully more excitement and more features to it.

And as a result, it will become a more valuable asset to have on their properties on the existing customer base.

And then also convince some of those that haven't taken a bank of these yet that this is a great marketing tool for their casino; that it can earn revenue when it's in revenue mode and that it can be used by the marketing department to run tournaments and create excitement.

So - yes, I would expect you will see that as we introduce the improvements that we first premiered at G2E and some of the new games that we premiered there, you should see it at least growing slightly if not growing better as previously..

And really don't forget David that those older units are on the older box and with the new Core, I mean we are hopeful and should expect that at some point in time some people who want to upgrade there is more functionality and features that can be utilized at the Core.

So I'm not saying there we're going to start selling right into that base but I think over the next year or so we should have some ability to sell back at people who have a turn event, bank debt that's six-seven years old..

Okay, perfect. Thanks very much, well done..

Thanks, David..

And next we'll hear from [indiscernible]..

Thanks for taking the question and congrats on a good quarter. I have a couple of quick ones on California to start.

So first I was wondering the 100 to 300 units that you're expecting to come out in 2017; can you give us a sense for what percentage of your total California units that is?.

It was over about 4% of our overall installed base, so it's pretty small. And in California, I don't think I'd go back and look but again I think it's - though that 300 is probably, maybe 25% to 30% of that overall installed base. And again, you know, this depends on what they do but again overall, installed based is not a big impact.

In California itself, it's a little bit bigger..

And recall we intend to sell them at least some portion of that to replace with Class III that we'll be selling and obviously we're going to look to California to expand our wider and progressive footprinting Class II..

Okay, that's very helpful. And then I guess just following up on that.

You know you mentioned selling some units, some Class III units that I guess you're converting off of Class II from lease; I guess is that a significant portion of your expectations for gain of sales in 2017 or could quantify what portion of your expectations are coming from this lease sale conversion?.

Yes, I don't know that we would quantify but we certainly - it's not a large part of our expectations for the year, no..

Okay, now that's great. And then maybe just a bigger picture question for Mike; on the gaming side of the business, the gaming tech industry is coming often substantial consolidation over the past couple of years.

So I was just wondering if you could talk a little bit about how you see your overall competitive positioning in the industry and then your views on potential further consolidation in that space?.

Sure. As you know the gaming manufacturing side of the gaming industry has consolidated pretty significantly over the last several years, including the Global Cash Excesses' acquisition of Multimedia Games. So our company was built as part of that consolidation effort.

As we look at the players that are in the industry now, and one large player that wants to be in the North America; and I'm speaking specifically of North America - it doesn't appear to me that there would be significant amounts of consolidation left to do, it certainly is possible that you could see some of the players banding together to create more specific gravity if you will but I don't see a lot of opportunities around - further consolidation in the industry.

I know that some of the groups that have been consolidated maybe looking to shed some assets, that's part of what we've seen in cycles of consolidation in the past in the gaming manufacturing space. But right now, I mean my - I believe that there is sufficient competition, both large, medium and small within the space that we can all be healthy.

And I for one quite frankly, like our position, both in ship-share and installed base because I think it's going to be much easier for us to grow this, both installed base and grow our ship-share than it is going to be for most of our competitors..

Okay, that's very helpful. Thank you..

Certainly..

Thank you for your questions. If there are no further questions at this time, I would like to turn things back to Randy Taylor for closing remarks..

We appreciate everybody joining us on the call. And we look forward to an update after Q1. Have a good day..

And that will conclude today's call. We thank you for your participation..