Everi Holdings Inc (EVRI) 2016 Q1 法說會逐字稿

Hello, everyone. Thank you for standing by for the Everi Holdings Inc. first-quarter 2016 earnings conference call.

(Operator Instructions)

This discussion is being recorded today Tuesday, May 10, 2016. And now I'd like to turn conference over to Mark Labay, SVP Strategic Development and IR. Please go ahead.

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 you 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 our SEC filing, 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 release and related 8-K, both of which are available with the Investor Relations section within our corporate website.

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

Thank you, Mark, and good afternoon, everyone, and thank you for joining us. Before we discuss the quarter, let me touch on a couple of leadership matters.

First, I would like to welcome Lin Fox to our Board of Directors. Lin's gaming industry experience will be extremely valuable to our Company as we look to grow both our game unit sales and our leased unit footprint for the remainder of 2016 and beyond.

As noted in this afternoon's press release, Lin's appointment is in conjunction with the announcement that Fred Enlow has retired from the Board of Directors. On behalf of the Company and the Board, we want to thank Fred for his more than nine years of service to Everi, as a member of our Board of Directors. We wish him the very best in his retirement.

I would also like to comment briefly on my appointment as the Company's permanent President and CEO. When I assume the interim leadership role at Everi in mid-February, I had a primary objective for the entire organization: leverage our product portfolio, industry experience, and our compliance infrastructure to accelerate and maximize our long-term Company-wide growth opportunities.

In shifting from the Board to the interim leadership position over the last three months, I have been extremely impressed with the organization-wide commitment of Everi's employees to accomplish this objective. It's been a very enlightening three months, and I am excited to continue to lead our team to achieve our goals.

Notwithstanding our first-quarter results, I believe that we are in the early stages of achieving the progress that will ultimately unlock the enhanced value of our broad range of gaming and payment assets. I also believe that we are making progress towards realizing the additional value from the investments that were made throughout 2015, and so far this year. The Senior Leadership's mission-critical objective now is to provide the direction and the support needed to all of our team members, to accelerate the progress that we are achieving.

Now, onto the results. The first-quarter revenues were $205.8 million, and adjusted EBITDA was $45.7 million. These results reflect the impact of lower year over year unit sales, largely related to the timing of the trials of our new Core HDX gaming cabinet in the 2015 fourth quarter, and in early 2016.

Results were also affected by a year over year decline in sales of integrated kiosks to our payments customers. Now while these results were essentially in line with our expectations, we believe they represent the low water mark for adjusted EBITDA this year. We expect to generate year over year and quarterly sequential improvement in the second quarter, and we expect that the second half of the year will be greater than the first half of the year.

These expectations are based on several key assumptions: First, that our unit sales will exceed prior-year sales in Everi quarter over the balance of 2016.

Second, that our installed base will grow over the balance of the year, with our installed unit count at the end of 2016 being relatively flat to our unit count as of December 31, 2015. And third, that we will have improved quarterly sales of our integrated kiosks, when compared to the first quarter.

Now, let me share some specifics that support our expectations. Starting with selling of more units. The approach here is pretty straightforward: enhance our product and increase the number of places where we sell games.

Today the number of Core HDX trials that are currently underway is at historic levels. As many of you know, Core HDX is our first major new video cabinet in approximately eight years. It represents a significant improvement in player interaction, lighting effects, and sound capabilities, over our existing cabinet.

We've also developed game content that takes full advantage of the enhanced cabinet, while ensuring that our existing games also remain available on the Core HDX cabinet. Our customer reaction to this new cabinet has been favorable, and the performance of initial units in the field has been very encouraging. We believe this bodes well for unit sales in the second quarter, and the second half of the year.

In addition to product enhancements, we are working to expand our distribution capabilities. Today, we announced the sale of 200 TournEvent units to the Alberta Gaming and Lottery Commission, beginning in the second half of 2016, and the placement of 50 of our premium revenue shared games. This is an example of our ability to leverage our long-term payments relationship, to expand the reach of our games business.

Now beyond Alberta, we have opportunities to further expand our presence in Ontario, as well as potentially entering several new Canadian markets in the near-term. In Colorado, we have trials underway and expect to generate initial game segment revenue in the second half of the year.

We also recently received our jurisdictional license from the Missouri Gaming Commission. We are now working to obtain GLI approval for our games in Missouri, after which we can begin trials in the state. We anticipate our initial game sales and/or lease revenue from Missouri in the fourth quarter.

Turning to the installed base, where as I mentioned before, our expectation is that the installed unit count will rise throughout the year. This assumption is due in part to our entry into new markets like Alberta, continued positive performance of our Core HDX cabinet, and an expectation that any additional reductions in third-party Class III games will be partially offset by the placement of our Class II games.

Looking at kiosk sales, our expectation is for growth from 2016 first-quarter levels, based on our current pipeline of potential sales. We expect this to occur, even though overall, annual sales will be down compared to last year, due to our existing penetration of this product within the casino industry. With that, let me turn the call over to Randy.

Thank you, Mike, and good afternoon, everyone. First-quarter 2016 total revenues were $205.8 million, comprised of $48.2 million in revenues from our game segment and $157.6 million in revenues from our payments segment. Games segment revenue decreased approximately 13% year over year, and payments segment revenue increased approximately 3% year over year.

Adjusted EBITDA for the first quarter was $45.7 million, a decline of $4.9 million year over year. Adjusted EBITDA for the games segment was $28.4 million compared to $30.6 million a year ago, and adjusted EBITDA for the payments segment was $17.3 million compared to $20 million in the prior-year period.

As described in our press release, we are no longer providing the non-GAAP measures of cash earnings and cash earnings per share. These measures were established when the Company was a payments-only business. We believe our statement of cash flow as presented in our press release and SEC filings provide the information that equity and debt holders need to assess our ability to generate cash for the repayment of debt, which is our primary objective.

In our games segment, gaming operations revenue decreased 2% year over year to $39.7 million. The prior-year period included $0.9 million of revenue from the operations of PokerTek, which we sold in Q3 2015. Excluding the Q1 2015 revenue from the PokerTek operations, gaming operations revenue were flat compared to the prior-year period.

This reflects a lower win per unit per day of $29.10, compared to $29.68 in the prior-year quarter, and an overall decline in our installed base of 215 units, while our premium installed base increased 126 units. Compared to December 31, 2015, our installed base declined 383 units, and our premium installed base decreased by 7 units. Partially offsetting the decline in leased game revenue was an increase in revenue from our New York Lottery operations of approximately $0.3 million compared to the prior-year quarter.

At the end of the first quarter, our installed base was 12,957 units, comprised of 7,279 units in Oklahoma, and 5,678 units outside of Oklahoma. The mix of our installed base by gaming type was 7,655 Class II units, and 5,302 Class III units. Of these 5,310 Class II units, 1,983 units were third-party Class III games.

As discussed in our Q4 2015 earnings call, we renewed placement agreements for 1,600 Class II units in Oklahoma, but we were unable to renew placement of a possibly 500 third-party Class III units. Approximately 100 of these third-party Class III games were removed in Q4 2015, and the remaining 400 units were removed in the first quarter. In total, our third-party Class III units declined by 571 units, compared to the year-end 2015, while across our entire installed base, we increased our Class II games by 230 units during the quarter, partially offsetting the decline in the third-party Class III units.

Revenues from electronic game sales decreased to approximately $8.4 million for the three months ended March 31, 2016. We sold 432 units in Q1 2016, at an average sales price of $17,835, compared to 822 units sold in the first quarter of last year, at an average price of $16,498. Unit sales were negatively impacted by the timing of the trials of our Core HDX units in late Q4 2015, and early Q1 2016.

The increase in average sale price was positively impacted by the sale of higher-priced Core HDX units, which made up almost 30% of the sales in the 2016 first quarter. Higher-priced TournEvent unit sales comprised 16% of unit sales in the March 2016 quarter, compared to 24% of unit sales in the March 2015 quarter. We ended Q1 2016 with just under 270 units on field trial, actually 190% higher than the total at year-end 2015.

This momentum has continued into the second quarter as we now have over 390 units on trial as of the beginning of May 2016, of which approximately 60% are Core HDX units. Additionally, over 330 of these trial units will reach their trial term period in the second quarter, and should either convert to a sale, a lease payment placement, or be removed and offered to other customers. In our business unit, sales are generally highly skewed toward the last month of the quarter, but we are currently pacing ahead of where we were at this point in Q2 2015.

Overall adjusted EBITDA margins for the game segment improved to 58.9% for 2016 first quarter, compared to 55.5% in the prior period. The increase in margin is primarily due to the decline in game sales revenue as a percentage of total revenue, as game sales revenue had the lower margin than gaming operations.

Gross margin on unit sales is approximately 45% for the 2016 first quarter, compared to 43% in the prior-year period. We expect adjusted EBITDA margin for the game segment to be in the 50% to 55% range for the full year of 2016.

For our payments segment, the 3% year-over-year increase in revenue is primarily due to increased ATM transactions, which includes the loss of a major customer in Q4 2015, and the acquisition of certain ATM portfolios in the third and fourth quarters of 2015. Overall, adjusted EBITDA margin for the payments segment was 11% for the March 2016 quarter, compared to 13.1% for the March 2015 quarter.

The softness in the first quarter of payments' operating results was driven by several key items: First, we have seen an accelerated shift from signature transactions to PIN-based transactions. On our last call, we mentioned our accomplishment of becoming the industry's first end-to-end compliant cash access provider of payment solutions that utilize chip-enabled card acceptance, or EMV.

As part of this compliance initiative, we have deployed EMV compliant equipment and solutions on our integrated kiosks, cash access terminals, ATMs, and casino cage equipment. Our upgraded equipment and patron familiarity with PIN-based transactions have resulted in a material volume shift to PIN-based debit transactions, and a reduction in signature-based debit transactions.

Because PIN-based transactions are more secure, and the fraud losses experienced by our customers is less, the patron fee is generally set lower than the comparable signature-based fee. These lower per-transaction fees have resulted in lower revenue, and a larger relative commission paid to our casino customers.

The quarter was also impacted by approximately $1 million in one-time processing expenses and chargebacks related to EMV fraud activity from transactions occurring before we completed our EMV upgrades at all of locations. Another factor impacting our first quarter was lower sales of our integrated kiosks.

Looking ahead, we have made substantial enhancements and investments in our suite of compliance product solutions. We had expected increased sales in our compliance products in 2016, but have had challenges with the upfront software sales. The initial sale of the compliant software is CapEx for our casino customers, and they continue to manage the amount and timing of their CapEx budgets.

We have a number of proposals outstanding with our casinos, but our ability to close these deals will depend on the casinos' willingness to spend CapEx in 2016, or wait until 2017. We still expect these higher margins solutions to benefit our payments business, but more of this benefit may be realized after 2016. Finally, same-store cash on the floor, our best indicator of industry trends, increased by approximately 6% as compared to the same period last year.

Moving on to the balance sheet, our long-term debt was $1.173 billion as of March 31, 2016. During the first quarter, we repaid $2.5 million on our term loan, and in April 2016, we repaid an additional $14.3 million on our term loan, as required under our 2015 excess cash flow sweep, as defined in our credit agreement.

We currently have no amount drawn on our revolving credit facility. Our weighted average interest rate and our long-term debt was 7.66% for the first quarter of 2016. The three months ended March 31, 2016, we amortized $1.7 million of capitalized debt issuance cost into interest expense.

As a result of our acquisitions in the third and fourth quarter of 2015 of two ATM portfolios and the assets of Resort Advantage, the payment of over $11 million in placement fees, primarily in the second quarter of 2016 to certain casino customers increased capital expenditures in the first half of the year related to Core HDX replacement units, new installed base units, and trial units, we expect to draw down on our revolver before the end of the second quarter.

The Company was in compliance with its debt covenants as of March 31, 2016. We have one maintenance covenant under our credit agreement related to our senior leverage ratio. At March 31, 2016, our senior leverage ratio out of the definition of credit agreement was under 4 times adjusted EBITDA, compared to a maximum senior leverage of 4.75 times adjusted EBITDA.

Our maximum senior leverage ratio under the credit agreement reduces to 4.25 times adjusted EBITDA at December 31, 2016. The leverage ratio has further stepdowns in future years, as detailed in our credit agreement.

For the purpose of this covenant computation, our credit agreement provides for up to $50 million in cash as a reduction to our outstanding secured debt, when computing our leverage ratio. As of March 31, 2016, our reported cash balance was $99 million, which is in excess of the $50 million cash reduction limit.

Based on our historical cash balances, and the operation of our payment segment, we expect our cash balance at quarter end in future periods would also be in excess of $50 million. Our credit agreement definition of adjusted EBITDA treats interest expense on our Wells Fargo Cash Solutions agreement, which relates to the provision of cash in our ATMs as an operating expense, and therefore does not exclude this interest from the credit agreement's definition of adjusted EBITDA. We expect our interest on Cash Solutions agreement to be approximately $3.4 million for the 12 months ended December 31, 2016.

As of March 31, 2016, our outstanding balance of ATM cash utilized by us from Wells Fargo was $291 million. This interest expense will be impacted by any increases in the three-month LIBOR, although we are able to pass a portion of this cost to certain customers through a reduction in commission payments, once LIBOR exceeds the contractual threshold.

For the first quarter, capital expenditures were approximately $24.6 million. Capital expenditures for our games segment were approximately $21.4 million, of which approximately $11.1 million was associated with game refreshes, trial units, and maintenance cost for installed base, net of trial units converted to sale in the period. Capital expenditures for our game segments also reflects higher -- a higher percentage of payroll and related development cost being capitalized from the new development studios and the introduction of Core HDX, which resulted in additional leased units being replaced by the new cabinet in the first quarter, as well as the increase in trial units.

We expect capital expenditures to be higher in Q2 as we will be funding the placement fees previously discussed, continuing to refresh our installed base, and place additional trial units in the field. However, we expect capital expenditures to slow in the second half of the year, as we convert trial units to sales, reduce the number of trial units placed, and manage the installed base replacement units.

Regarding our integration activities, we continue to expect to achieve $30 million in run rate synergies by the end of 2016. In addition, we are focused on reducing costs in both games and payments, as we work to right size our expenses, consistent with our overall operations.

Finally let me provide some color as to how we think about some other modeling metrics. We expect interest expense for 2016 will be approximately $101 million, which includes our interest on bulk cash of approximately $3.4 million, and approximately $6.7 million in non-cash amortization of capitalized interest costs. We expect the amortization of these non-cash interest cost to be roughly $1.7 million per quarter throughout 2016.

We expect capital expenditures to exceed $85 million for the year, and this amount will be impacted by our ability to convert trial units to sale units, the number of installed base replacement units, and the placement of new installed base units. This also includes approximately $11 million in placement fees, as compared to $2.8 million for all of 2015, and roughly $12 million in capital expenditures related to our payments business.

This will translate into amortization expense of approximately $92 million to $96 million and depreciation expense of approximately $49 million to $53 million in 2016. With that, let me turn the call back to Mike.

Thanks, Randy. Now before I open up the call for your questions, I'd like to briefly review the progress that we've made over the almost 90 days since I've joined the Management team. As you may recall, we previously identified five strategic priorities, that we believe will drive future revenue and EBITDA growth, beginning later this year, and accelerating in 2017.

The first priority is to increase our product library, and produce new games that enhance profitability and efficiency for our customers. We currently have game development studios in Austin, Chicago, and Reno, making our development capabilities far greater than our output capacity in 2015. At this year's G2E, we will debut more new products and innovative technologies for our customers than at any other time in our history.

Now at the same time, we are also focused on adding new features to key existing products. As an example, we have talked about enhancing our TournEvent solution.

While other manufacturers are entering this space with their versions of our product, we believe that TournEvent will remain the tournament solution of choice. Later this year, we expect to unveil a new software upgrade package that will be offered to all of our existing TournEvent customers, and provide some advanced features, as well as a new and exciting licensed branded tournament game.

We will also continue to update our offerings within our payments segment. Including e-check redemption, an Everi giving module for our integrated kiosks, and an Everi stored value card. These product offerings will continue to affirm Everi payments products as being best in class.

Our next priority has been to increase our distribution capabilities. In this regard, we are applying additional discipline to the game approval process, to ensure that games move more effectively from the trial phase to the revenue phase. When we bring our new games, cabinets, payments, and compliance products to market, we are having them initially approved in as many jurisdictions as is necessary for our wildest -- or widest rather, and wildest, sales efforts.

At a high level, some of the progress that we are making in this regard includes testing game themes on test banks, located throughout the United States. This enables us to more effectively improve and enhance our new game content, before it is released to sales.

We are also utilizing increased analytics in our gaming operations business. We believe that these efforts, together with some additional strategies, will help us use our new game content, including for the first time licensed titles, our new cabinets, and other products to improve the productivity of our customers.

The third priority is our enterprise-wide cost analysis, with an eye toward operating efficiencies and cost containment. Over the last several months, we've identified several areas where we can right-size our cost structure and capital spend, and we're beginning to implement those measures. Our fourth strategic priority is to develop games that leverage new licensed and branded properties.

To date our games business has relied almost solely on proprietary content and in-house brands, or in the case of some of our premium participation games, on brands that are already in the public domain, such as Moby Dick. And we've done a good job in turning some of our content into known brands of their own, such as TournEvent, Anthony and Cleopatra, and Meltdown.

With the a national footprint of licensed jurisdictions, we believe that the selective use of branded games can leverage the recognition and familiarity of that brand to increase both customer attraction, and time on device. We are well underway with development of new games that utilize licensed brands. We plan to debut six to seven of these games at G2E this year.

Our final strategic priority is to reestablish revenue growth, by increasing game sales and placements, through the integration of our games and payments products. We are working on methods that can give casinos additional patron value at all of their Everi gaming devices, through our e-wallet, Everi stored value card, and ticket dispensing at our integrated kiosks. We continue to look at some additional innovative solutions, and I will update you as we get closer to introducing these products.

In conclusion, I'm excited about the progress that's been made since I stepped into the interim CEO role in February. Our progress to date, and my expectation for additional improvements in our execution, gives me great optimism for our future.

I know we have a great team of professionals across our organization, each of whom is dedicated to making Everi a great company, and I appreciate their tireless efforts and dedication. We believe we have the right plan and the right people in place to create long-term value for our customers and for our shareholders.

And with that, I'll turn the call back over to the operator to open it up for your questions.

(Operator Instructions)

David Bain, Sterne, Agee.

Thank you. First, I want to congratulate you, Mike. I think you made many happy with your decision to become permanent CEO.

I had two questions on the payments space and one on gaming. First, I want to be clear on the EMV front. So with these new rules, you had to be compliant, you had to update machines, and while you are non-compliant you had fraud liability so am I correct to assume EBITDA would've been $1 million higher, if not for the one-time costs during the transition, that you no longer have liability on the fraud front from this, and that now you are compliant, and is there an opportunity to market that versus competitors?

Dave, this is Randy. I'll answer the first question which is you still have, we still have fraud that will take place, but we have processes in place to go back after any patron, because obviously in the casino environment, there is cameras and we can capture a lot of stuff. So it's never no fraud but the real, to your point, yes, the $1 million is really a higher incremental cost.

And what happened is until all of the units were EMV compliant, the customer had an EMV card but did a swipe, and they ultimately, there was fraud, the issuing bank pushed back, and we had no recourse to recover the chargeback. So with all of our equipment now EMV compliant, if you've got a PIN card, a chip-enabled card, the chip card goes in there. If there's any fraud in that situation, which would be limited, it won't be our problem.

It was really that timeframe in which we finally got the remaining of the equipment rolled out, and onto all of our equipment, that we resulted in some fraud. A higher amount of fraud than we would have expected, and now that's been corrected, and we knew we had that issue going into this year, until they were all converted.

And just to follow up on that one, do competitors have that in place, or are you the first to be compliant as far as you're aware? Is it something that can help you gain share, or is it just something that we won't see again, in terms of one-off charges?

I don't expect to see anything, again to this magnitude in one-off charges. It's hard to tell what all of our competitors are. We know we're the first one that is fully compliant. What stages they're in, I guess I really can't say.

I think that if they're not, their customers could see a lower amount of transactions, because I don't know what they're doing, because they would also be subject to higher fraud potential. So it's one of those things that we clearly market to our customers that we are compliant, and that there should be no disruption or reduction in cash to the floor, but I really can't say what our competitors are doing. Obviously nobody's public from that standpoint, so it's really just us.

Okay, and them last question on payments. I understand that the three in one tech is only one segment of your portfolio, geared to casinos, and all those things together make you the leader and all that. But with regard to the patent dispute, can you give us any update in terms of injunctions that you may have tried to get, or customer feedback? Any thoughts ahead of the appeals board ruling?

I don't know if there's anything really more I can say on that, to be honest with you, David. We're continuing our position from a legal standpoint, and we have the ITC, which is still in appeals with the total panel, and so, there's really nothing I can update you on that, other than we are still progressing forward with it. I expect, I didn't talk about it, and there wasn't a lot of litigation cost in the quarter. It was probably just under, just over $100,000. We expect it to be less going forward than it was last year, but we continue to think this is the right path, and I just don't have any more details I can give you at this point.

Okay, and have you heard any customer feedback, and if your competitors are -- I guess it sounds like there's no injunction, are your competitors attempting to implement that technology in their base?

It really just depends. Listen, until, my understanding is the patent has not been validated, so although we've lost some positions, it's not been validated, so if somebody wants to go against it, and we ultimately prevail, we would have the ability to go back, and they could be liable. But it's really their decision on what they want to do and it's hard for me to say what everybody's doing.

David, just before a judge has taken a position that's different than the Patent Office, and there are still issues that are in front of the trial court at the federal level, that the district court is going to end up hearing. And so, that will continue as well.

Okay. And then just final one in gaming, and I'm sorry, I'll let others go. But I'm trying to assess your forward win per day for your installed base from 1Q, and I'm trying to balance a higher mix of Class II in Oklahoma versus Class III, broader base in new jurisdictions, maybe new cabinet performance, et cetera. Can you speak to win per day thoughts as the installed base mix shifts and you transition through the year in geography?

Really don't have that much of a drill down there. I know that's a metric that people look at. I don't know, part of it is some of the units that we replaced, putting out our new units, how they are performing. I just really don't have a specific for you, David, on that, as to why it came down the quarter, to be honest.

But going forward, I'm sorry, I didn't mean to interrupt.

That's okay. Go ahead.

And going forward from here though, would we expect stabilization? At least, does your guidance infer stabilization and win per day are back to regular seasonality?

I think it would be more in the regular seasonality, yes.

Okay. Great thank you both.

David Katz, Telsey Group.

So G2E, and trying to think forward to the notion that there's going to be quite a bit more product that we're going to see from you all, if you could imagine it from our perspective, as we listen to the other companies talk about what they're doing, we certainly don't assume that anyone is standing still and so everyone says wait until G2E, we're going to have some -- a lot of great stuff this year. We know in the context that volume isn't necessarily the answer. What key capabilities would you point to, or key competitive advantages would you point to in the game product to department, irrespective of TournEvent, that you think we should look out for? Or what is your overall strategy around that?

Prior to, and you're absolutely right, David. I mean manufacturers of devices almost always point to G2E, because they don't want to give away necessarily their product strategy, prior to unveiling it to their customer base at that show. But at the end of the day, we have a myriad number of products that are currently in the field, that are currently doing well, and we believe will continue to increase our footprint.

We have Everi Bet which is currently out in multiple jurisdictions, both as a purchased product, as well as a leased product that allows slot floor managers to more effectively manage the slot floor by changing the denom, or the number of wagers within a game, and do not change the number of lines that are played by the customer or the volatility or math model that underlie the game itself. That's up, as one of the most innovative products of the year from one of the gaming publications.

We also, with the Core HDX, we have a variety of titles that are doing -- some are doing significantly better than house average, others are doing better than house average, that are already in the marketplace, that we are currently selling. On the payments side, there are products that we are introducing over the course of the year, that will be available to our customers before G2E, and that we will start spreading around the country, to increase either the stickiness or the profitability of our payments contracts in the gaming industry. So there are a lot of things that are going to be happening, we are not simply waiting for G2E to -- the reason I reference that in the prepared comments, is that where we will show for the first time, licensed brands on any of our boxes, and so for that reason, it's important for us to show it off as a showcase for that.

Okay. Okay. That's it. I will give someone else a chance, and I probably have some more.

George Sutton, Craig-Hallum.

This is Jason Kreyer on for George Sutton. First of all, Mike again, I want to just say congratulations on taking the permanent position.

Thank you.

So I wanted to talk a little bit about the mix in the quarter, so TournEvent specifically was down a little bit year over year. So if you have any commentary on that? And then I believe, if I have my numbers right, you said 40% Core HDX in the quarter, but that's 60% of the pipeline. So just if you have any perspective on what you expect that mix to shift to, as we look out a quarter or two?

Jason, as we talk, we continue to believe TournEvent is a great product for us, but it has been, the percentage of our total sales has been coming down and we expect that going forward, although we obviously announced the Alberta deal, which is a significant amount of TournEvent machines. So we still think that 20% of range, 15% to 20% of range for TournEvent should hold, and maybe more when the Alberta hits.

As far as the mix going forward, I mean again, we talked about the timing of when the new cabinet got out, so only 30% in Q1, seems kind of the right mix, but clearly our expectation is that Core HDX will be a larger percentage of the sales going forward. Whether it will be 60% or not, I don't know. That's really the overall trials that are out there, some of which will obviously go to leased units, and some which will be sales. But I would think that this is our new cabinet, our new video cabinet, and it will make up a higher percentage of our sales going forward.

Okay. And then, a couple quarters ago you talked a little bit about the ship share trends that you were seeing in the market, and just wondering if you had any updates on your current share?

I don't think to really any change in our share. Obviously with the disappointing sales in Q1, I'm not sure you can really look to that for this quarter. I still think we're in the low single-digit ship share, and there really wasn't any new openings, that we -- I think what we also talked about back then was our percentage of the newer openings. So I don't think I have much to change on the ship share percentage.

Okay, fair enough. Stepping back at the little bit. A more robust pipeline of new gaming titles, I know you have talked about that a lot, and we can see some of that in some of our work. Can you give us just an idea of the timeline for, as these games are developed, what is the timeline for these actually contributing to results?

Are you talking about the licensed and branded games?

Well, just the development team. So you have ramped up the development team, so all of your new titles overall?

We're going to probably produce as many or more titles this year as the Company has ever produced and as those titles go out, obviously we expect a large portion of those to be at or above house average, and therefore be popular with our customers, as either purchase or leased games. There will be a percentage of them that may not make it, or may not be as effective as we thought they should be, which will result in some disappointments. We will pull those back.

And hopefully we now have the ability with our test banks to go through a lot of that pain or disappointment in a game's ability to produce, while it is still out on test, on those test banks, and make modifications either on-the-fly, or bring it back in, make modifications in-house, and then take it back out for additional testing. But I would anticipate that over the course of the rest of this year is when you're going to see whether that new title production is working, and working the way we expect it to.

Jason, to some extent, that also helps you to maintain your installed base, right? So if you have some games out there that aren't performing as Mike said, the house average, you can go out and install the newer games, and see the reaction there, because the real goal is to keep as many on the install base as you can. So it is a -- one, helps to keep your install base, two, helps you to expand your install base, and three, hopefully will be for sale. So it's not that easy for me to parse it out for you, but without that, you would quickly have issues with all three of those items.

Sure. Okay. I certainly appreciate the color on that. Just the last for me. So this goes back a couple of years, but there's been more discussion in the marketplace about online gaming, looks like it's potentially making a resurgence, and may be picked up in some additional states. This seemed to be an opportunity for you a couple years back, and just wondering, do you still see an opportunity for online gaming, or have you really reduced the focus, and aren't targeting that industry at all?

No. I mean, certainly, we have something that is valuable in the online gaming industry, and that's content and it's something that the online gaming companies are always looking for. And as a result, we've been looking at ways of improving the cost model around our making that content available in the online space, to others to use, and exploit it.

In addition, as we look at online, we look at whether or not there's the opportunity to get involved on a limited basis in the joint venture manner, in some other manner. But at the current time, we have no intention of taking our own -- taking up our own website, or operating our own online gaming operation, if that's where you were headed with that.

No, that's a perfect response. Just wanted an overall update, so that's helpful. Thank you.

John Davis, Stifel.

I will add my congratulations as well, Mike. First, I just want to start on Missouri. Seems to me really exciting, seems like it happened faster than you maybe had anticipated on the last call, and certainly than we were anticipating.

Do you have any stats or metrics that you could help us with, on what it looks like when TournEvent enters a new sizable gaming market? Just trying to get some feel for what potential game sales, what the market opportunity could be, because Missouri's a fairly sizable market.

Honestly, John, I don't know that I have, that we've put anything together, as to how much potential it would be in Missouri. Altogether, we obviously know that there are some corporate customers that have had our product before, that we think we can sell into, but really to lay out how many game sales are coming out of Missouri, I mean, right now as we tend out there and trials, like in Colorado, we are starting to see that. We have probably got 80 or so, 80 almost closer to 100 units in Colorado, either through trials and potentially placements or sales.

So that's the other thing is with will they sale or will they lease, although TournEvent would primarily be the sale. So that gives you a little bit of an idea, obviously Missouri being much bigger, but I don't think we have really scoped out what the overall --

We haven't really tracked penetration rates when it comes to TournEvent into a marketplace. I mean, we have rough numbers of overall penetration rates, but that really doesn't break out by product.

Okay, and then just to finish on the licensing side, from a gaming license perspective, I guess is there anywhere else that we are still waiting for license? Obviously Colorado, Missouri, is it West Virginia? Just anything else that I'm not thinking about there from a licensing perspective?

I think all of the ones that the Company has spoken about, but that doesn't mean that we have licenses in every single location. As you know, John, many Native American casinos are single locations, and therefore a single license. But we believe that our natural footprint today is significantly larger, and allows us a much larger market to sell into, than we had in 2015.

There still a couple provinces up in Canada, John, as well. That we don't have yet. How big they are, maybe not that big, but there are a few up there, as well.

Okay. And then also, I just wanted to hit on the ASP. It seems like TournEvent mix isn't all that different year over year, it's up pretty significantly bucking the trend of what we've seen over the last couple years, I guess, of declining ASPs, not only for you, but the industry. Anything to call out there?

Is that the Core HDX cabinet is a higher sales price, and you are getting more mix there? Is that what's driving, or anything you could call out?

That really is. Like I said on the notes, about 30% of our sales were Core HDX. They were still -- against the unit count, not exciting obviously for us in the quarter, but if that can translate into the future quarters, it should be good on a ASP as well. So 30% there, and then still the TournEvent units. So between the two of them really helped drive up the overall ASP.

So as we think about Core HD being a higher percentage, I think you said 60% of trials or only 30% this quarter, so should we read that as ASP could trend modestly higher throughout the back half of the year?

No. I mean, I'd like to say that. I would say hopefully it will maintain, right, because the more you start getting out there, we'll probably get some pushback. But yes, I would hope that we can continue to at least maintain the ASP that we've got, and if there's a bigger mix, it should be better.

Okay. And then maybe quickly on Alberta, very positive obviously to see the initial order there of 200 TournEvent and 50 placements. Is that more or less an initial order from them, and they want to see how, I know they've had them on trial, but how they will perform? And there's potential for more, because I think there's 28 casinos? Just help me frame that a little bit.

Yes, I think there's 28 casinos. So obviously 200 TournEvent units means that they've got them spread out through the 28 and then with the leased games. So we still think there's going to be opportunity in the future, but the big piece is to get the TournEvent there, and then let them see how those units perform, as well as the leased games. I think that's helpful for us, as well, because they can see how those units perform, and then we should be into their next -- they have cycles of capital, and so we got into the TournEvent, that was the big thing at our TournEvent product there, but I think we clearly believe that there's more possibility, or room in the future there.

Okay and then maybe quickly on win per day, I'm not trying to nail you down to a specific number, but would Canada look more like the win per day outside of Oklahoma? Or somewhere in the middle? I know you don't break it out any more.

Some of that, it wouldn't necessarily be comparable to a particular US market, because you have to look at the foreign exchange issues and the impact that has on it. When we are at par, then you can really relate it to specific markets, but as it fluctuates, it's very difficult to compare, give you a comparator. So to some degree, I think you need to model that on its own, John. Canada as a separate unit.

Okay, perfect. And last one for me, Randy, maybe quickly, I think you did a nice job laying out some of the puts and takes on the payments margin earlier, but I just want to make sure that I have everything right. So it was like 13.2 year ago quarter, I had been calculating 11.6 adjusted for the $1 million fraud for EMV. Maybe just walk through again what the puts and takes are to the 100 to 150 basis point year-over-year compression?

The other item would have been the other in the kiosk sales. So that number being, again, that margin being much better than your overall margin. So I think we were, if you look at the other revenue in the press release, I think it's showing about $2.7 million down so that will -- that margin will be probably 50% margin in prior periods.

So that margin will bring your overall margin down, and then just as I talked about, the shift in the ATM revenues up, and it's a -- it provided EBITDA, it's going to again be a lower margin. So between that and I think the other, is really what drove down that overall margin.

Okay so we think about it on a go-forward basis, starting point of 11.6, you should have a little bit higher kiosk sales, so it should be relatively stable, maybe flat, slightly up through the remainder of the year? Is that the right way to think it?

That is correct.

Okay, that's it for me. Thanks.

David Katz, Telsey Group.

Thank you for taking my follow-up. Number one I do want to register my proper manners, yes, congratulations on your decision.

But I wanted to go back to the product question and look at it in terms of Class II and Class III, and how the allocation of resources and thought is being split. And as well, what are you finding from customers that they are really asking you for? And I suppose, part and parcel of the question I was asking before is where are the holes in the market that you expect to fill?

It's a great question, David. Part of it, in all honesty, reaches pretty deeply into our sales strategy, into areas that I may not want to discuss on a public forum, because they're more proprietary. But as a general rule, to answer your question, is we look at game development. We are constantly looking at developing games that are -- that play with a very similar look, feel, and enjoyment for the customer in both Class II and in Class III. And to the extent we can do that using the same title, the same kinds of symbols, the same graphic environment that a player becomes enveloped into, in both the Class II and Class III markets, then we have done our job, and we've done it the best we can.

Part of what our strategy will be going forward is to fill in some holes in Class III where they don't have as many, in my view, as many well-developed homegrown titles that are currently in Class II markets, that can then be found by people, when they either visit or vacation in a Class III market. As you know, the way America is spread now, most population centers are within 50 miles of a casino operation, and that becomes their home operation.

If that's a Class II operation, then when they take their trip for the year or their multiple trips for the year to destinations that include gaming, and that have Class III gaming, you would want that Class III to have the same titles, the same look and feel, and have those machines available in a Class III market. And that certainly is one of the niches that we believe we can fill, and fill better than others.

Right. Okay and if I can ask just Randy for one detail, of which you gave many, would you just mind telling me again the CapEx for the quarter was what, and did you give us some guidance for the year?

I did, I gave both. $24.6 million for the quarter, and $85 million overall. But again a lot of information around that, really relating to the installed base, trial units. It's one of those things where as trials turn to sales, they start out as a CapEx, and they come back out. So I wanted to give some parameter around it, but it will fluctuate, depending on how successful we are, and whether they end up being a lease footprint or an ultimate sale.

I understand. Thank you very much. Appreciate it.

And that does conclude our question-and-answer session. At this time, I'd like to turn things back to Randy Taylor for any additional or closing remarks.

Just like to thank everyone for joining the call this afternoon, and we look forward to discussing further progress of our business when we report our second-quarter 2016 results. Thank you.

Thanks, everyone.

That does conclude today's conference. Thank you for your participation.