Hello everyone, and thank you for standing by. Welcome to the Everi Holdings 2022 Third Quarter Earnings Conference Call. [Operator Instructions]. As a reminder, this call is being recorded. Now let me turn the call over to Bill Pfund, Senior Vice President, Investor Relations. Please go ahead, sir..
Thank you, operator. Welcome everyone. Let me begin with a reminder of our Safe Harbor disclaimer, which covers today's call and webcast. Our discussion will contain forward-looking statements that involve risks and uncertainties, which could cause actual results to differ materially from those discussed in our call.
These potential risks and uncertainties include but are not limited to those contained in our earnings release today and in other SEC filings, which are posted in the Investors section of our corporate website at everi.com. Because of the potential risks, you are cautioned not to place undue reliance on forward-looking statements.
We do not intend and assume no obligation to update any forward-looking statements, which are made only as of today, November 08, 2022. We will refer to certain non-GAAP financial measures such as adjusted EBITDA, free cash flow and net cash position.
A description of each non-GAAP measure and a reconciliation to the most directly comparable GAAP measure can be found in our earnings release and related 8-K today, and in the Investors section on our website. This call is being webcast and recorded. A link to the webcast and replay of today's call can be found in the investors section of our website.
On our call today are Randy Taylor, Chief Executive Officer; Mark Labay, Chief Financial Officer; Kate Lowenhar-Fisher, General Counsel; Dean Ehrlich, Games Business Leader; and Darren Simmons, our FinTech Business Leader. Now, I'm pleased to turn the call over to Randy Taylor..
Good morning, everyone, and thank you for joining us. Building on the strong results of last year and the momentum of this year, both our third quarter consolidated revenues and adjusted EBITDA reached all time quarterly highs.
The top line improvement reflects the wide-ranging demand for our diverse product and service offerings, and was driven by ongoing growth in our recurring revenue streams and an even faster pickup in revenues from the sales of FinTech hardware and gaming machines.
This strength in revenues carried through to the bottom-line as both net income and adjusted EBITDA increased over the prior year.
The third quarter increase in net income and the all-time quarterly record in adjusted EBITDA is inclusive of our continued investments in R&D, as we continue to fast track additional development of new games and FinTech products to power growth next year and beyond.
A combination of top-line growth and focus on operational excellence, drives strong free cash flow which is perhaps the most compelling evidence of the successful execution of our growth and capital allocation strategies.
With $145 million of free cash flow generated year-to-date, we are on-track to generate a 20% plus increase in free cash flow this year compared to last year.
Our strong free cash flow continues to benefit from the momentum in our core businesses, a launch of newly developed products and services, the successful integration of acquisitions and their acquired products, and the overall complementary nature of our games and FinTech portfolio.
With our solid balance sheet, this tremendous free cash flow provides the capital to drive future growth through investment in our own internal new product development initiatives and the acquisition of complementary businesses. At the same time, we are well-positioned to return value to shareholders through share repurchases.
The positive customer feedback that we received at G2E last month, reinforces our confidence in our strategic focus on new games and products. We unveiled our new Dynasty Vue cabinet, the first installment in the new next generation Dynasty Family of Video Cabinets.
The Dynasty Vue cabinet is expected to launch in the second quarter of 2023 with four differentiated family of game content, the broadest offering at any cabinet launch we have done.
With this unique look and feel, the Dynasty Vue will complement our existing cabinet lineup and provide customers with an exciting optionality to expand and diversify their footprint of every product.
Feedback from our customers has been extremely positive, as for some time many customers have been asking for a differentiated, lower-profile cabinet that contains all the feature rich functionality of the latest video cabinets.
This new for sale cabinet is just one of the many tools in our arsenal that we plan to leverage as we strive to grow toward our stated goal of a 15% ship share.
Each of our new cabinet launches is supported by our development team's ability to create original, engaging content that will be available for distribution across Class II, Class III, central determination and historical horse racing markets. At G2E, we displayed a broad sampling of the nearly 90 new themes that are planned for launch in 2023.
This will be an almost 40% increase over 2022. It's not just about the number of games, but more importantly the diversity of our content offering. Our commitment to the development of original and innovative games, provides customers with the confidence to invest in average products.
We protect their investment with a robust pipeline that supports both our new and existing cabinets. Everi's expensive game pipeline also supports our rapidly growing Digital iGaming business by providing an extensive library of proven, land-based game content from which we can curate the best performing games into new and existing iGaming markets.
Recently, Everi was recognized by Eilers & Krejcik as the number one provider of new digital content with our latest games significantly outperforming the major competitors. Turning to our FinTech segment. Two major trends emerged at G2E.
The continued interest in our expanding portfolio of products and services that offer productivity and cost efficiencies for casino operators and the expanding range of mobile capabilities. Our digital class club wallet was again a focal point for customers and investors.
Demand for our cashless solutions remains high with inbound interest from tribal, commercial and regional customers alike. As cashless interests continue to evolve and grow within the gaming space, we are steadily pulling away from the competition.
We believe we are well-positioned with our cashless options and view our offerings as a natural seamless extension of our existing cash-based financial access services. Operators are taking note of Everi's multiple integrated cashless and cash based solutions.
Not just our digital wallet, but also the advantages of partnering with the industry's gold standard for cash access. A notable example of this was the recent opening of the Boyd managed Sky River Casino just outside of Sacramento, California.
Not only did we garner a 15% allocation of their slot floor, but the new property purchased a comprehensive suite of our FinTech products and services. We created for them a custom mobile loyalty app integrated with our CAS Club wallet first solutions on display from venue ties.
This recent addition to the Everi family is an extension of Everi’s core mobile offering that expands our addressable market beyond casino gaming for the first time with an established customer base in several, sports, entertainment, and hospitality venues.
This technology-based customer focused acquisition aligns perfectly with our capital allocation strategy. Venue Ties provides a complimentary product portfolio that is extensible to our current customer base.
It extends an enhanced guest experience beyond the casino floor, while offering significant opportunities to profitably scale and drive growth in new markets with the advancement of our loyalty and payments offerings.
As we integrate our two businesses, Everi is at the very center of the convergence of sports business and sports betting with a consumer appealing mobile first solution that offers enhanced guest engagement and new revenue opportunities. Our booth also featured gaming voucher redemption kiosk from our ECASH business in Australia.
The ECASH Premium CT and many CRT small footprint self-service kiosk received a lot of attention from operators in distributed route and charitable gaming markets. Two verticals where our current larger kiosks do not have a presence. Well, these are just a few of the many products highlighted at G2E.
Our team's passion and enthusiasm were on full display. All the excitement coming out of G2E could not have been accomplished without the amazing team here at Everi.
I'd like to take a moment to thank the entire Everi team for their continued dedication to excellence and their relentless pursuit to lead the gaming industry with innovative and original products. It's their efforts and passion that have allowed our organization to be this successful.
As we move forward with a strong balance sheet and ample liquidity, we will continue to pursue a capital allocation strategy focused on maximizing shareholder value and simultaneously solidifying our position as a premier provider of games and FinTech solutions to the gaming industry.
At its core, our capital allocation strategy is aimed at creating shareholder value through high return internal investment accreted, both on acquisitions and returning capital to our shareholders.
Internally, we look to leverage our best-in-class development teams to expand and improve our existing product offerings while we look externally to evaluate opportunities that will enable us to acquire and scale up new products and expand into new jurisdictions.
Finally, with our strong cash flow, we will continue to invest in Everi and opportunistically repurchase our shares through our share purchase program. Now, let me turn the call over to Mark to provide a bit more insight into our operational successes. .
Thanks Randy. I'd like to begin my financial overview by noting that we had another strong quarter. On a consolidated basis, we set all time quarterly records in total revenues, recurring revenues, and adjusted EBIEDA.
Our operating momentum from the first half of the year has continued in the third quarter with incremental placements of our highly profitable gaming machines, as well as same store increases in financial access volumes. Our total revenues were up 21% to 204 million, driven by record recurring revenues and non-recurring sales.
We generated growth in every category in each of our business segments. Our core businesses continue to perform well and we are benefiting from our recent accretive acquisitions as well as our early-stage growth operations. Non-recurring revenues, which primarily include the sale of gaming machines and FinTech hardware were up 64% year-over-year.
As Randy noted, our year-to-date free cash flow is running nicely ahead of the record amount we generated in 2021, although free cash flow was down compared to the third quarter of 2021. I'll note that this was the result of the refinancing we completed last summer.
The timing of our semi-annual interest payments on our unsecured notes shifted to the first and third quarters as compared to the second and fourth quarters. This means that the third quarter of 2022 included 10 million of cash interest payments on our unsecured notes, while the prior year third quarter did not have a similar payment.
To further put things into perspective, while year-to-date free cash is up only 4% over the prior year, we expect to surpass the amount of free cash flow generated in 2021 by 20% plus in 2022. A key contributor to our strong cash flow generation is the consistent strength of our core recurring revenue operations. With growth in both business segments.
Third quarter recurring revenues grew 9% over the third quarter of 2021, and we're up 43% over the 2019 third quarter. Within our game segment, drivers behind the growth and our recurring revenues include the expansion of our install base, the growth of our Digital iGaming operations, and our entrance into the historical horse racing market.
I would note that our domestic install base has increased every quarter for more than three years. We ended the third quarter with 17,735 units, which is up over 1300 units year-over-year and is up 271 units sequentially. Further contributing to our gaming operations growth was the 1.3 million, the 34% increase in Digital iGaming revenues.
Through our Spark remote game server. We have been successful in leveraging the development investments of our land-based content. Our ability to quickly take our proven content and add enhanced features such as progressive jackpots has generated consistent growth in this high margin recurring revenue base.
Gaming machine sales also continue to improve as we sold 1,841 units in the third quarter. This is 665 units or 57% more compared to last year. Over the last 12 months, we have sold more than 7,100 units. This represents the highest number of unit sales for any 12 month period in our history.
And individually, each of the last four quarters represents our four highest quarters of unit sales. Although visibility into longer term, operator capital spending remains limited. Our backlog of orders for the remainder of the year and into early 2023 remains solid, and we are on track to continue our unit sales momentum.
Within the game segment, the percentage of adjusted EBITDA to revenue was unfavorably impacted by the changes in revenue mix, as well as an increase in direct product cost associated with game sales and increased investment in R&D. The rapid growth of our game sales far exceeded the 5% growth in our higher margin gaming operations.
While the gross margin percentage on sales of gaming equipment declined by over 400 basis points year-over-year, primarily due to rising components and freight costs.
In addition, as Randy noted, we placed great emphasis on our internal investments, and remain laser-focused on the development of original content to drive future placements and defend our existing share.
Our stepped-up investment in game development resources to support our future growth initiatives is a primary driver of increased games R&D expense. And this investment includes the resources we acquired through our recent acquisitions.
Our FinTech segment had a phenomenal quarter, with revenues up 27% year-over-year leading to all time quarterly record adjusted EBITDA of $39 million. Excluding the $4 million of revenue contribution from our acquisition of ecash, organic revenues were up 21% year-over-year and 34% over the 2019 third quarter.
Driven by constant share gains and increased activity on a same-store basis, this was the third consecutive quarter in which our core recurring financial access business delivered more than $10 billion in funds to customers floors.
This recurring, high-return business is a key contributor to Everi's foundational strength, as it provides consistent performance and drive significant free cash flow to fuel future growth.
Financial Access Services revenues increased 15% over the prior year to $53 million, with same-store transactional volume up mid to high single-digits throughout the quarter on a 2% year-over-year increase in total transactions completed. Helping to drive this performance has been the return of international players to U.S. casinos.
Although it's important to note that, this international transaction volume is not yet back to the activity levels from pre-pandemic periods. Contributing to the Financial Access Services growth is the ongoing success of customer and patron adoption of our cashless alternatives to fund gaming experiences.
Currently, these cashless alternatives represent less than 5% of our overall Financial Access transaction. And as adoption increases, we expect a smaller base of cashless to grow more quickly than our cash-based, same-store transactional volume.
Even though we remain exceedingly early in its deployment, our cash flow wallet continues to receive significant interest from new and existing customers. Today, we are live or in deployment with seven customers at 38 sites in 14 jurisdictions, which is twice as many locations as we had at the end of our second quarter.
With each new location, we deepen our expertise and to further establish Everi as the gaming industry's leader in mobile funding. Our software and other revenues grew 30% year-over-year, driven by the continued success of our subscription-based services and the benefit of one-time brand tech and loyalty sales to new casino openings.
Our recurring subscription-based loyalty products remain a key contributor to this growth, as we execute on improving and scaling this acquired technology into our digital neighborhood. Our software solutions have a large recurring revenue component, which for the third quarter represents 69% of software and other revenues.
I'd like to remind everyone that, generally accompanied with new one-time sales and software, we typically see a corresponding increase in future recurring revenues, as these customers later engage in subscription-based support and maintenance services after investing in every reg tech and loyalty solutions.
Our FinTech hardware revenues benefited from new casino openings as well as sales growth with existing customers, increasing 81% to 16 million. This growth includes 2.8 million in sales of voucher redemption kiosks from our recent acquisition of Australia based ECASH. Organically, we grew almost 50% compared to the prior year.
The all-time quarterly record operating income and adjusted EBITDA for the FinTech segment benefit from our strong top-line revenue growth.
And while total FinTech adjusted EBITDA grew more than 20%, the percentage of adjusted EBITDA for FinTech revenues declined slightly due to the change in revenue mix, coupled with higher equipment cost of revenues, and higher r and d expense.
Supporting our increased investment in our internal new product development, FinTech R&D expense as a percentage of FinTech revenues in the third quarter increased to just over 6%.
Updating you on our share repurchase program, during the third quarter, we purchased just under a million shares of our common stock for $16 million, and since the inception of our buyback program in May, we have now repurchased 2.9 million shares.
As of September 30, this leaves us with approximately 100 million of available buying power under our existing share repurchase authorization. Moving forward, we expect to continue to balance capital allocation between internal investments, attractive tuck in acquisitions, and opportunistic share repurchases.
Based upon our year-to-date results and the steady momentum expected in the fourth quarter, we narrowed our full-year guidance this morning. Notably, our adjusted EBITDA has been tightened in the middle of the previous range, while pre cash flow has been narrowed toward the high end of the prior range.
As we entered the fourth quarter, I'd also like to remind you that our net income for the fourth quarter of 2021 was positively impacted by the reversal evaluation allowances on certain deferred tax assets that resulted and 63.5 million of quarterly tax benefit.
While this will create a comparison difficulty with reported net income for Q4 of 2021, the impact on CAS taxes has remained minimal as a result of our ability to utilize our extensive net operating loss carry forward. With that, I'll turn the call back to the operator for questions. .
[Operator Instructions] Our first question today is coming from Jeff Stantial with Stifel. .
Maybe just starting at the changes to the guide, tightening it a bit at the midpoint. Looks like it implies about a 3 million step down and adjusted EBITDA for Q4 relative to Q3. Looking back historically looks like seasonality, typically more like 2 million.
That gap just conservatism around the macro or is there something else I'm missing here? When thinking about Q3 to Q4 seasonality. .
Jeff, thanks for the question. I think I'll let Mark go into it a little bit deeper, but don't forget that G2E hit all in Q4 this year. And so depending on what years you're looking at, there may have been a split with G2E in a prior period.
So again, we think this is fairly seasonably for our business, but I'll let Mark go in a little bit more if he wants. .
Yes. I think, Randy, you hit on the head that, there's a little bit of -- usually in Q4 some of the recurring revenue streams, like cash access have a little bit of a step down just because of the natural flows of how the holidays work and how gaming works in that quarter.
And as Randy mentioned, G2E is in there and some of the older years pass with things like turn events and other stuff in there. There's some allocations splitting the costs too, where with turn event totally gone and G2E kind of returning back to more normal this year Q4 you'll see a couple million dollars of pure cost for it. .
And then moving to R&D. So you were vocal throughout the prepared remarks, leaning in to R&D reinvestment, both gaming and FinTech drive greater breadth and depth of titles and continue this cadence of kind of internal product launches that we've seen on the FinTech side. Look, we all saw this unfold display at G2E, so not a huge surprise.
I guess my question is more, should we expect kind of that it looks like touch over 8% of revenues expense in the quarter, is that a new baseline move moving forward? Or should we think about things kind of going back more to that 7% to 7.5% range that I think, Mark mentioned back on the, on the Q1 call, just how should we think about the right level of reinvestment moving forward? Thanks.
.
Sure, Jeff. What I'd say is look not completed budgets for next year. So I don't really want to get into how that will translate next year, but I think for fourth quarter it's probably going to be in that range. It's going to be probably fairly consistent with what we've seen in third quarter.
But again, as Mark said, some of the revenues come down so it may look a little bit higher, but I think dollar wise it'll be consistent with where we were in Q3. .
Thank your next question is coming from Barry Jonas from Truist. .
I wanted to just start on the game side.
Can you maybe give some color on the daily win per unit?.
I'll start with consumer behavior, and I'll turn it over to Dean. We're not -- again, based on our cash access volumes, what we've seen through third quarter and starting into Q4, we're still seeing year-over-year growth. There again, much smaller growth than there was obviously in 21 over 20.
But again, seeing growth 22 over 21 and that single to mid-single digit growth area. But I'll that be kind of go more a little bit in the daily win per unit specifically. .
Hey Barry. If you take a look at win per unit, it's been relatively, I would say consistent through 2022.
And I think on a couple of calls back, we talked about a pretty substantial increase of longer lease type revenues that will also have an impact that if you were to look at it year-over-year and whatnot, forget about the tailwinds and everything else in 2021, but straight looking at the complexion of the footprint.
If you add those, if you were to take those units out, I would say we've been fairly consistent. .
And then I guess just to follow up on the game side, a recent Supreme Court ruling may have paved the way for expanded Class 2 gaming in Texas.
Can you talk about how your position there and any potential upside upside for Everi?.
Barry, to make sure I'm understanding this is, just the two tribes in Texas that you are speaking towards?.
Yes, I think some other players in the space have talked about potential upside. And just curious how that --.
Look, we have a great Class II footprint. We have a great relationship with our travel customers. And so we expect there to be some upside with regard to our operations at those locations..
Got it. If I could just speak one more in. You mentioned 5% of transactions are -- of funding transactions are cashless right now.
I'm curious how that stat is at the properties that are actually enabled with cashless?.
Barry, I was going to just say, first and foremost, the comment was it was less than 5% so less than 5%, just for clarity there in terms of the actual number. And I think Darren has got a little bit better set.
You are saying where we actually have the wallet doing transactions on top of our other cashless options that we provide to customers?.
Yes..
Or you're asking for a total number of properties as a percentage of our base?.
I think you would just say in all the transactions..
So right now, we are probably trending sort of averages across the enterprise where we rolled out. Why what I would say is, sort of the traditional ways people access funds between 5% and 10% have converted over depending on sort of the maturity of the rollout with that particular customer and sort of timing. So it's gotten very well.
We continue to see more customers at those properties opt into utilizing wallet. And so the trend is very good and sort of as we expected..
Thank you. Next question is coming from David Bain from B. Riley. Your line is now live..
Great. Thank you. I guess first maybe to just follow-up on the R&D question. It sounds like the absolute dollar could be flat in 4Q. And if we look at R&D as an absolute dollar increase for '22, it's obviously up pretty significantly and you sell the free cash flow, the beads. We get the benefits of that R&D next year.
How do we look at -- and I know you are not giving guidance, but how should we expect the R&D from an absolute dollar basis rolling forward? Is it going to be any kind of increase like we saw in '22? Or was this more of a real investment year from that perspective?.
Yes, David. Look, I think, look, we are not giving guidance, but I don't expect R&D to increase in '23 the way it has in '22. And remember, we are really catching up in '22 as compared to '21, right? I mean we had some outstanding year in '21. We just come off of '20 where we had reduced staffing and then are building up towards that.
But I think in general and kind of how you are looking at it, not going to see the same kind of increases in R&D in '23 that you have in '22. But it's hard for us to give you a solid guidance of where that will be..
No, but that's helpful. Okay. And then second, you were active on the M&A front throughout the year.
Can you give us a sense to what it contributed to EBITDA this year? Was it more close to flat? And as we look at -- and again, I'm not asking for guidance, but if we look at next year do they contribute to EBITDA, just any kind of broad contacts or data points with regard to M&A, either specifically or as a group.
If we look at next year versus this year, that would be helpful as well. .
I'll have Mark kind of talk about the range for this year, but I would say, look, as you know, you've got integration costs, you've got other things that take place when you first acquire. So we, we should see a lift from these acquisitions next year, one because of when they were acquired.
So we should see additional lift in ‘23, but again, not done with the budgets haven't really lined in what that will be, but they will be -- will be lift there in ’23, and then for ’22? Mark?.
Yeah, look, we've talked about them as we've acquired them that we felt like, both ECASH and --- code would both be contributing about a million dollars a quarter. Atlas being a pretty much the pure, the assets we acquired there being kind of more development studio, not revenue generating was a little bit of a negative overall.
And we think really venue ties, at least for Q4 in 2022, will probably be a net push for us in terms of what we actually generate from there. And they're all performing within what we expected, if not a little better than we expected, and we expect growth out of those business units as we go into 2023. .
And just to clarify, EBITDA growth as well as revenue growth?.
Yes, yes..
Next question is coming from David Katz from Jefferies. .
I wanted to just go back to the gaming portion of the business and I think Mark and your commentary, you said visibility obviously is tough, but what scenarios have you sort of thought through or laid out that you're able to discuss around what happens -- what Everi's world looks like in 2023, should we have more of an economic downturn, right? Are there any sort of qualitative points you can share with us?.
I'll throw in a few David, and then go from it. It's just really hard right now, David, because I would say, look, we still have a fairly solid pipeline for fourth quarter. But we have a very good recurring revenue base that generates a lot of revenue.
And so if there's some pullback in the sales we think we're -- our balance sheet is in the best place that it's ever been. So, we feel like that shouldn't have any material impact. It just -- you just don't know what you're talking about, what a pullback would be.
So I don't, Mark, do you have anything else to add?.
No, look, I think you've kind of hit on the head that we're -- the uncertainty is certainly about what could be. We don't know yet. We look at where we are trending and how, if we're seeing any impacts in our day-to-day recurring volumes or our cash access volumes that we process on a daily basis.
And we haven't seen much creep into our numbers yet in this one. So while a lot of the other industries and spaces, the macro seem to be getting hit a little sooner, we certainly haven't seen it yet.
So it's harder for us to frame out, but we're going through the budgeting process and doing some of that sensitivities, and we certainly can, probably a better spot to talk about it when we talk about our year end results in our forecast for 2023. .
And if I can just follow up and, and apologies for kind of a negative line of questioning, but it's just been so pervasive for us with respect to your tuck-ins, like venues, venue ties what sense do we have about how they would respond in? Are they purely economically tied, I suppose, is really what my question is, or are there other dynamics within it where it could be potentially countercyclical?.
So yes, they obviously, they're early growth, but I think they're outside of the verticals that we're in and the venues of sports or hospitality it's hard to say how they'll be impacted. I'm -- I think it could be an offset, but it's just hard to say. I really can't.
I mean, I would say that if everything goes the way we think it will go, they'll be additive and both will go in the right direction, if there is some type of a macro pullback I don't know. You look at what's going on in Vegas on F1 and things like that, that sports is still very important part of the economy.
So I think it's just too early to tell David, to be honest, until we get our arms around it completely.
Darren, you got anything to add?.
Yes.
Look, I think, if there is some kind of a pullback, I think one of the interesting things about again, our digital strategy around mobile and loyalty and whatnot, is that engagement is actually fairly inexpensive for any kind of bit business, right? So if you can engage your customers, your patrons via mobile channel that's generally fairly inexpensive.
So I would say that there is opportunity that somebody might look at that and say, hey, we want to be able to increase engagement and what better way to hit a lot of people fairly simply through the mobile channel. So I think there is certainly upside opportunity for that if there happens to be some kind of pullback. .
Thank you. Next question is coming from Chad Beynon from Macquarie. .
Mark, just back on the guidance, understanding that you're free to cash flow comments we're very positive. But on net income, which you obviously don't bring to the bank looks like depreciation stepped up meaningfully since the last guidance on the second quarter, I think by around 10 million.
Is this a change in accounting or is this just because of the acquisitions and then as we think going forward, is this kind of a good quarterly depreciation number to use past Q4? Thanks. .
I think, you kind of as we've continued out of the pandemic and some of the depressed capital spending levels we've had there, our CapEx has slowly been rising comparatively in some of the I'll say zero fixed assets that are lower – value fixed assets are being lefted by higher price stuff.
We've also had acquisitions in the accounting related to some of the acquisitions that we have is adding depreciation cost well as just the normal business that we've had going on here.
Fundamentally, I think, you're probably right in the neighborhood with how to think about depreciation and amortization for the quarters, it's probably continues to have a little step up from quarter-to-quarter, again, as we kind of have more CapEx that we did say in 2020.
And 2021 is those lower value spins kind of roll off, if you will, but it's not shouldn't be I think the Q3 run rate is probably a reasonable rate with a little uptick. .
Perfect. Thanks for that. And then on the games business unit sales, can you just kind of remind us where you are in your HHR success journey? I believe you just started selling units into those markets.
Maybe how'd you guys do in the quarter? Is this something that we should think about over the next couple quarters? Because I think there are some nice growth opportunities nationwide in this segment. And obviously from an existing base, your ship share is pretty low at this point? Thanks..
Sure, Chad. I think you hit top on the head, but I'll let Dean kind of walk you through kind of where we are. And again, we believe there is opportunity here going forward..
I'd say on the Intuit code side, as there is expansions that gets directly positively impacted. But even from an every content cabinet side of it, we will start shipping into those particular markets in Q1 of 2023. So I'm very encouraged about that.
But I even just more broadly wouldn't mind taking a step back because we have heard a lot about questions in R&D, but we talk about building for the future. We got three new cabinets coming out in 2023. One of them is Dynasty Vue that Randy talked about. Two others at the end of the year.
We are doing 40% more themes, if you look at it over on a year to year basis in our same store and we are also getting into not only HHR, but international and the distributed gaming side by the end of 2024. So I just felt, obviously, you have asked about HHR, but I'm sure those other questions are front of mind you as well..
Yes. I guess we just say, look, we are very pleased we're at right now, and feel very good about the future..
Next question today is coming from George Sutton from Craig Hallum..
Thank you. You referenced very positive feedback you got at G2E. We saw that front and center. I am curious for Dean and Darren as they have made follow-up calls since then.
Has there been anything incremental positive or negative that would have been reflected in guidance potentially, or not?.
I'll make sure, I'll turn it over to Dean and Darren. I would say from my standpoint, nothing from customers that would change how they are viewing our products or what we're launching or what we are doing to continue to make sure that we are there for them, and then if they invest in us.
We have products coming out as I talked and being contacted, we are increasing our theme bandwidth for our customers in the addition of [indiscernible] I think it gives Darren a lot of opportunity on his side. So there is nothing that I'm aware of alternative that we have heard that customers have any concern with how we are executing right now..
So I would say, customers are encouraged. They like -- they definitely like what they see. We are at record levels on both sides of the business and they feel like they want to continue along the journey with us, as we continue to bring out more and more product.
So I couldn't be more encouraged, based on the feedback that we received over, not only just a G2E, but we have had many, many, many customers into our showroom, at the office that provided the same amount of feedback.
They love the new cabinet that we are putting out on, you can't get it quick enough, but that will come in the second quarter of next year and appreciate not only the new development from a cabinet side, but the extra support on the existing cabinets that are still being distributed as well..
Yes. I mean, Dean, Randy, we had a great quarter, a great G2E tremendous amount of enthusiasm from customers.
And I guess, the other thing to comment on is our team members super enthusiastic about what we have been doing, what we've been building, the investments that we've made? And from the FinTech side, look, we continue to execute on our long-term strategy. We've been successful so far, we can -- we'll continue to be successful.
We think about the expansion, the extension of this digital neighborhood concept that we've been building around our real gold standard of core products and services. And I think, that resonates with customers.
And the opportunities that we now have on the sort of the mobile digital side with the -- acquisition and all of the sort of mobile first initiatives really is I think separating ourselves in the space.
And again, like I say, very much resonating with our customers, how everything is integrated together and obviously, a couple questions around what if there's a pullback look, we still are focused on building out those products and services around self-service and operator efficiency products. So, which again, those also resonate with customers.
So, look, it was a great G2E, great feedback, great meetings post G2E and we still drive forward and look to continue to build on a great quarter. .
One other quick question for Mark, relative to the cost of components and the freight costs that impacted your margins on the sale of games, can you talk about any pricing initiatives or anything that is in front of us potentially to improve those dynamics?.
Look, George, good question. I just say it feels like some in the supply chain, I'll kind of understand you a little more broadly and determined supply chain, we seem to see more stability in terms of delivery and commitments to delivery from suppliers.
I don't want to say we're out of the woods or well beyond this, but things are certainly getting better on that front, and that's certainly helping us to mitigate some of the acceleration costs that we might need to do to get components here in a more timely fashion if things are delayed. And so that's helping the cause.
We've kind of been talking on the last several calls about our views on whether the cost and the pricing challenges we've been facing are more short-term nature, longer term.
And look, we evaluate the what these costs and components mean to us in terms of the value of the underlying inventory and look at all possible levers that includes possible price increases, that also includes maybe buying more and trying to soar a little more inventory on hand and evaluating all the possibilities of that.
We haven't made any final decisions. Again, we'll talk probably more about that on our year end college. We talk about the forecasting for ‘23 and give you an idea how we look at the margins of going forward. But I think we're doing the right things right now to try to mitigate the exposure short-term. .
Your next question is coming from John Davis from Raymond James. .
Just want to Mark start on free cash flow growth or how we should think about it going into next year. Let's leave EBITDA aside for a second. Talk about some more of the things that you probably have a better handle on at least at this point. So, my message is maybe $15 million of incremental interest expense next year.
How should we think about CapEx either on a percentage of revenue, is kind of this a good 16%, a good kind of way to think about it kind of going into the next year. Just trying to understand, as we think about specifically interest expense and CapEx in regards to free cash flow at ‘23. .
Yeah, you're pretty creative question to ask about guidance for next year. Even though you qualified it, then you're not asking about guidance. I like it, but I'll help you out a little bit as best I can. I think you're thinking about interest rates the same way that we are. Again, I have no crystal ball what the Fed ultimately does.
And it seems one day they're doubling down and other days they're slowing down. But I think I'm in the same kind of neighborhood as your thinking in terms of how rates rise and what that does to us in terms of our variable debt that's out there.
CapEx we've been the last several years and we've tried to manage our CapEx to the level of the revenues we generate and how we are able to turn that into revenue generating assets. And so obviously the covid periods of 2020, we were significantly lower in CapEx, and we've been starting to kind of come back.
Our equipment's getting a little older in the field some of the larger footprint that we have, and we've been having a little more spend for customer equipment this year.
I think as we start moving into next year, you see that CapEx probably in the same relative neighborhood as where we are, maybe a little bit of uptick, and then there could be some discrete projects in there that we're solving for as well. But again, we'll give you a better clarity on the year end call as we talk about our CapEx forecast for 2023. .
All right, fair enough. So as we think about maybe Mark or Randy, just any kind of thing, how is cash the floor trended so far in October for the fourth quarter? It seems like some headlines out there that October's a pretty good month. Just curious, kind of what you're seeing there.
And then also maybe directionally help us think about game sales and 4Q Obviously there's usually a dip in 3Q because of G2E.
G2E went well, but you put up a monster third quarter growth number and game sales, so just trying to help us how think about 4Q there?.
Sure. So I'll take it. I think I've got it, but if not, they can, anyone can chime in. So first of all, on the cash access, transactions, dollars to the floor, you're right, John, October was again a nice growth in transactions year-over-year.
So and even into the start of November, that we're still seeing I would say single digit growth probably in that single to load to mid-single digit growth. So it's been pretty consistent. It's up and down one week. It might not be as much, but the next week it comes back. So to date, we still feel very strong.
I mean, feel very good about how the transactions and dollars of floor running. So from a game sales standpoint, remember fourth quarter of last year when we really kind of hit our stride and started to sell I'll say closer to this 1900 units that we've never had before.
And a little bit of that was, they had some -- we believe they had some capital that they needed to spend before year end. So we've got a difficult year to compete against, but we feel like we've got a good pipeline. And so what will we hit? We did last year in Q4, don't know yet.
There's still a lot of pulls and pushes some things, we'll think something's going to be in that quarter. And then the operator pushes it out for a number of reasons, right? Some of it may be an expansion or a new property and they're just not ready. But the pipeline still looks pretty good for Q4.
I just don't know if it'll match what we did before last year. Anything else being there or….
I think we're right in the ballpark. .
Thank you. Next question is coming for Edward Engel from ROTH Capital. .
I know it's a bit tough to tell, but when you talk to your customers, does it feel like the replacement cycle is kind of stalled out at where you've kind of been the past one, two quarter is, or do you kind of still see some more momentum left to still have a full recovery versus 2019 next year, which kind of imply 2023 could be even better than 2022, at least from a industry demand perspective?.
I'll let Dean kind of give some color on that as what he's seeing with the customers..
This is one of the challenges. We feel great about what we see in the replacement cycle. We don't see it slowing down, whether it's going to be more or less in '23 versus 2022, it's very hard to tell just based on what's happening out there. But if you were to snap to shock right now, the replacement cycle is very, very positive..
Perfect. Thanks. And then I guess one more in gaming. On the digital side, it looks like revenues did dip a bit sequentially. It was kind of in the first sequential dip we have seen a while.
Is this really the seasonality or was it timing of game launches or anything kind of worth calling out here?.
Sure. I think the major thing was the launching of our jackpot games in digital. We were hoping to get that out a little bit earlier, and it didn't. So that's a little bit of a pullback that we think will recover in the fourth quarter. So it's really more of a game launch issue than anything else related to the iGaming.
We still think that, that revenue source and that product will continue to grow. And I look for a lot of good things to come from large IP and RGS server..
Thank you. Next question today is a follow-up from Jeff Stantial from Stifel..
Hey, great. Thanks for squeezing me back in. I just have one quick follow-up. It looks like in guidance CapEx, you are planning to spend a bit less than the guidance implied at Q2.
Can you just walk through kind of the delta there?.
Yes. Look, I think as I kind of said in the last time we talked about CapEx here that we are kind of managing the capital expenditure spending, making sure we are maximizing value and we are letting some of the refreshes we did work themselves in and not needed to have you on.
So we have kind of managed that number to be that a little bit again, just prudent business more than anything else yet..
And look, we lean hard into Q2 on refresh the same thing in Q3. So I think we feel like, hey, Q4 is a little harder also to get your product on their floor. They kind of lock their floors down in December, because they don't have a lot of movement going on. So I don't think it's anything major.
It just may have been the timing of when we had laid out, but feel pretty good about work CapEx should come into the year..
Thank you. We reached the end of our question-and-answer session. I'd like to turn the floor back over to Mr. Taylor for any further or closing comments..
Thank you for joining us on the call this morning. We look forward to providing an update on our next quarterly call. Take care..
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