Everi Holdings Inc (EVRI) 2016 Q2 法說會逐字稿

Good day and welcome to the Everi Holdings second-quarter 2016 earnings conference call. Today's conference is being recorded.

At this time I'd like to turn the conference over to Mark Labay, Senior Vice President, Strategic Development and Investor Relations. Please go ahead, sir.

Thanks Don and welcome to the call.

Joining me today are President and Chief Executive Officer Mike Rumbolz; and Executive Vice President and Chief Financial Officer, Randy Taylor. Before we begin, I would like to remind everyone that the Safe Harbor disclaimer in our public documents covers this call and our webcast. Some of the comments to be made today during this call contain forward-looking statements and assumptions that are subject to risks and uncertainties including, but not limited to, those contained in our SEC filings all of which are posted within the Investor Relations section of our corporate website.

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 at the Investor Relations section of 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 introduce our President and Chief Executive Officer, Mike Rumbolz.

Thanks Mark. Good afternoon, everyone and thank you for joining us today.

This afternoon we reported 2016 second-quarter revenues of $214 million and adjusted EBITDA of $51.2 million. The key takeaway from the quarter is the strength we have seen in customer demand for our core HDX cabinet.

This was further highlighted by a high conversion rate from our trials at the end of the first quarter. The increased demand was apparent in both unit sales and in an increase in our installed base. We sold 819 units in our second quarter, up 10% year over year and our installed base increased over 200 units sequentially.

On the payments side, we continue to see increases in total cash to the floor and we benefited from higher kiosk sales relative to Q1. As anticipated, the first-quarter charges and fraud losses that were associated with the implementation of our full end-to-end EMV solution within our payments business, were significantly lower in second quarter. Overall, we are pleased with our performance in Q2 and we are looking forward to the second half of the year with a particular focus on maintaining the pace of our execution on our key initiatives.

While we were able to execute across all of our business lines during the second quarter, we consider this to be just the starting point for what we're trying to accomplish. A lot of work remains and I am confident that as all of our team members continue to bring the same passion, focus, and commitment to execution of our business strategies as they have done since I joined the team, we can continue to make progress against our near-, our mid- and long-term goals.

Our expectations for several key performance indicators for the balance of the year are unchanged from when we last spoke in May. The initial reception for the core HDX cabinet has been excellent. And the unit count of games currently under trial continues to be strong at the end of the quarter. As a result, we believe unit sales will increase year over year in both the third and fourth quarters of this year.

We also expect our installed base to continue to improve during the second half of the year. As it relates to our payments business, we believe that the positive trends in cash to the floor, and in transaction growth experienced in the first half of 2016, will continue throughout the remainder of the year. However, we expect the growth to be more consistent with the second-quarter growth, which showed some signs of slowing when compared to the first quarter.

We expect that the sales of our higher-margin fully integrated kiosks and our compliance product should also contribute higher revenue in our payments business in the second half of the year when compared to the first half. Overall, we still believe there is an opportunity to deliver growth in adjusted EBITDA in the second half of this year compared to the first half. With our third quarter results currently anticipated to be higher than our fourth quarter, which reflects the seasonality that occurs in our business.

And looking forward to the second half of the year, I'd like to comment on a few of the underlying assumptions inherent in our expectations. One key to our expectation for the full-year is the ongoing reinvigoration of our unit sales volumes.

Critical to this is the success that we are achieving with the rollout of our core HDX cabinet. Now as many of you know this is our first new-based video cabinet in nearly eight years. As we saw in the second quarter, reception for core HDX has been very positive and it is spurring year-over-year increases in our unit sales. Core HDX accounted for approximately 57% of our unit sales in the second quarter.

This past May we indicated the trials of game units were at historically high levels, which in the past have proven to be a reliable indicator of potential customer demand for our products. At the end of April, approximately 60% of the units that we had on trial were for the core HDX and we're converting these trials to revenue.

Now trials will always be a part of our business, especially with our installed base; however, going forward, as our game performance has proven, we would expect the need to provide trials for our for-sale games should be reduced. It's encouraging that our Core HDX trial unit count remains robust through the end of the second quarter. We would expect to continue to see strong demand as the cabinet continues to prove its performance to our customers.

Another assumption inherent in our expectation for increased quarterly unit sales is our entry into new markets. Early in the second quarter, we announced the sale of 200 TournEvent units to the Alberta Gaming and Lottery Commission. This makes every one of only a handful of slot suppliers to the province.

These units are expected to be recognized in the second half of 2016 and our current expectation is for these units to ship late in the third quarter. We also expect to receive regulatory approval of additional games in Colorado and our initial games in Missouri prior to year-end, which will further increase our addressable markets.

Now turning to the installed base, I mentioned that our expectation is for the installed base unit count to continue to rise. We expect the year-end level to be roughly in-line with the installed base count at 2015 year-end.

This expectation is based on the following: first, we have approximately 1900 third-party Class III games in our installed base in Oklahoma as of June 30. Our focus is to replace a good portion of these games with our class II games.

Secondly, net losses in third-party Class III games should be offset with incremental growth of Class II and Class III games outside of Oklahoma, including new markets such as Alberta. Now our installed base did experience a decline in yield when compared to the same period in the prior year for both the first and the second quarters. This is partly the result of increases in the monthly accretion of placement fees and Randy will provide some more details regarding this accretion.

The remaining impact is primarily related to the removal of older third party Class III games and the replacement of only a portion of those games with our Class II games. In addition, we have seen a decline in the yield from our Class II and Class III games in 2016 when compared to the same periods in the prior year. Now a portion of this decline may be attributed to some of our casino customers that are experiencing gaming revenue declines in certain regional markets.

However, we are addressing the decline in yield related to our games' performance in several ways. We are increasing the placement of new core HDX units. We are converting many of our older games with new games from our development investment efforts, and we are increasing the focus of management on our installed base.

As part of this increased focus, we have also added dedicated staff and we are using improved analytical tools to enable us to better analyze and quickly react to improve our games' performance. We are also ensuring that we have maximum coverage with our higher performing games in the field, while still managing the composition of titles and game cabinets at individual properties. We expect these efforts will help improve the yield from the large portfolio of games that are in our installed base.

Now in the second quarter we completed over 370 game conversions within the Oklahoma installed base. This is the largest number of conversions completed in Oklahoma during any one quarter. We expect these game conversions will improve our installed base performance and yield when compared to the levels that we experienced in the second quarter. This is in addition to our accelerated investment in the development of both Class II and Class III games which began in earnest this year and should begin to deliver the results that we are trying to achieve.

We also expect that some of the new games set to debut at G2E in September, including our first games based on licensed highly recognizable brands, will benefit our installed base in 2017. Our ability to recognize a return on the investments that we have made in our Chicago, Reno and Austin development teams will be critical to our ability to sustain growth in our installed base and to improve our yield per unit.

Turning to payments, in the second quarter our same-store cash to floor continued to show growth although slower than the growth experienced in the first quarter of 2016. This is despite the choppiness that's been seen in our regional gross gaming revenues. We expect to achieve performance levels similar to our second-quarter over the second half of the year. We will continue to focus on our compliance offering and sales of our fully integrated kiosks as well.

And with that, let me turn the call over to Randy.

Thank you, Mike and good afternoon everyone.

The second quarter of 2016 total revenues were $214 million comprised of $54.3 million in Games Segment revenues and $159.7 million in payments segment revenues. Games revenue decreased approximately 1% year over year, but payments revenue increased approximately 5% year over year. Adjusted EBITDA for the second quarter was $51.2 million down $1.2 million year over year, but up 12% on a quarterly sequential basis.

Adjusted EBITDA for the games segment was $30 million compared to $32.5 million a year ago. Adjusted EBITDA for the payments segment was $21.1 million compared to $18.9 million last year.

In our Games Segment, gaming operations revenue decreased 6% year over year to $38.8 million. The prior-year period included $0.8 million of revenue from the operations of PokerTek, which we sold in the third quarter of 2015. Including revenue from PokerTek in the prior-year period, gaming operations revenue declined by 4% year over year reflecting a lower win per unit per day of $28.22 compared to $29.30 in a smaller installed base.

We report our win per unit per day net of the impact of accretion of contract rights. Some of the legacy placement deals that we had in place had renewed at rates that are slightly higher than the former deals, resulting in an increase in the total accretion of approximately $0.3 million in the prior-year period. When computing win per unit, the higher total accretion is being spread over fewer units.

The combination of the unit volume variance and the increased accretion equates to approximately $0.22 or 20% of the overall decrease in the win per day per unit for the quarter. Because accretion is added back to our computation for adjusted EBITDA, this portion of the daily win per unit variance has no impact on our reported adjusted EBITDA for the quarter.

The remaining decline in the average daily win per unit as a result of the dynamics Mike discussed. Our ability to realize returns from the investment made in our development teams, increased focus on the management of our installed base and the commitment to the branded content will be critical factors toward improving our results in the future.

The second quarter our installed base declined by 156 units from the prior-year quarter and increased 222 units from the March 31, 2016. Our premium installed base increased by 114 units compared to June 30, 2015, and by 32 units from the end of the first quarter 2016. Our New York lottery operations increased by approximately $0.2 million year over year.

End of the second quarter, our installed base was 13,179 units comprised of 7273 units in Oklahoma and 5906 units outside of Oklahoma. Our Oklahoma installed base is down 585 units year over year, reflecting the factors which we have discussed previously, but essentially flat on a quarterly-sequential basis. Our non-Oklahoma installed base is up 429 units year over year and 228 units on a quarterly-sequential basis.

By game type, our installed base included 7752 Class II units, 5417 Class III units. Of the Class III units, 1899 units were third-party games. The third-party games declined 84 units sequentially and a total of 655 units since year-end. Expect the third-party Class III units to continue to decline in the second half of the year; as Mike had mentioned, we expect to replace a large portion of those units with our Class II games and other placements outside of Oklahoma.

Revenues from electronic game sales increased to approximately $15.5 million for the three months ended June 30, 2016. We sold 819 units at an average price of $17,722, compared to 744 units sold in the second quarter last year at an average price of $16,476.

Unit sales in AST benefited from our higher-priced core HDX units, which made up almost 57% of second-quarter 2016 unit sales. The higher-price-for-the-bet units comprised only 6% of unit sales in the June 2016 quarter compared to 29% of unit sales in the June 2015 quarter.

We continue to expect to see variability in the percentage of TournEvent sales to total sales the second half of the year and into 2017. As we entered new markets like Alberta and complete sales in these markets, TournEvent may make up a larger percentage of the total unit sales, but we would expect to see the overall percentage on average to be no more than the mid-teens moving forward.

We ended the second quarter of 2016 with just over 300 units on field trial, which is higher than the number of units on trial at the close of the first quarter, but down slightly from the trial count at the time of our call in May. The trial term for these units will end in the third quarter, at which time they should either convert to a sale, a lease placement or be removed and offered to other customers.

Overall adjusted EBITDA margin for the Games segment declined to 55.2% for 2016 second quarter compared to 61% in the prior-year period. The decreased in adjusted EBITDA margin was primarily due to lower operating expenses reported in the prior-year period driven by an increase in direct and indirect cost capitalized in inventory and mixed assets. This capitalization of costs also impacted the gross margin on unit sales in 2015 which is approximately 41.5% as compared to the second quarter of 2016 approximately 45.4%. We expect 2016 full-year adjusted EBITDA margin for the Games segment to be in the 50% to 55% range.

For our payment segment, the 5% year-over-year increase in revenue was driven primarily by increased ATM transactions from the acquisition of certain ATM portfolios in the third and fourth quarters of 2015. We continued to experience same-store growth in both our transaction count and dollars processed.

Additionally we experienced growth in revenue from surcharge increases initiated by several large corporate casino customers. These increases were partially offset by the loss of a corporate customer in the fourth quarter of 2015. Overall adjusted EBITDA margin for the Payments segment was 13.3% for the June 2016 quarter compared to 12.5% for the June 2015 quarter.

The primary driver of the improvement in margin is due to a reduction in operating expenses, excluding the loss and the sale of the aircraft and merger and acquisition related expenses in the prior-year period. These decreases have been partially offset by higher ATM commissions in part due to the increased surcharges by certain casino customers and the acquired ATM portfolios.

Payments' operating results in the second quarter of 2016 benefited from several key items. We continued to see growth in year-over-year cash to the floor and transactions. Same-store cash to floor, our best indicator of industry trends, increased approximately 4.5% year over year.

This is the seventh consecutive quarter of growth in both same-store transactions and same-store dollars to the floor; however it was the slowest growth attained for that period of time. In our last call we mentioned that our upgraded equipment and patron familiarity with pin-based transactions resulted in a volume shift to pin-based debit transactions and a reduction in signature-based debit transactions.

In second quarter 2016, the shift had appeared to stabilize towards a more normalized historical mix. Processing expenses and chargebacks associated with EMV fraud activity from transactions occurring before we completed our EMV upgrades, have also returned to more normalized levels now that we are fully EMV compliant. These items resulted in approximately $1 million incremental charges in the first quarter of 2016.

Although kiosk unit sales were down for the quarter as compared to the prior year, the unit sales did improve as compared to Q1, which is in-line with our guidance. Compliance revenue was consistent with the prior-year quarter.

Moving on to the balance sheet, our long-term debt was $1.156 billion as of June 30, 2016. During the second quarter, we repaid $16.9 million on our term loan, comprised of $2.5 million in required quarterly payments and approximately $14.4 million on our term loan as required under our excess cash flow sweep as defined in our credit agreement. Weighted-average interest rate on our long-term debt was 7.68% for the second quarter of 2016; and in the three months ended June 30, 2016, we amortized approximately $1.7 million of capitalized debt issuance costs in the interest expense.

As of June 30, 2016, we had no amounts outstanding under our revolving credit facility. We continue to manage our cash flow, but, as a result of our acquisitions made in 2015, over $11 million in placement fees in 2016, a $14.4 million excess cash flow sweep and our increased capital expenditures related to replacement and expansion units for our installed base, we now expect to borrow on our revolving credit facility during the second half of the year. The Company was in compliance with its debt covenants as of June 30, 2016.

Our senior-leverage ratio under the definition of the credit agreement was under four times adjusted EBITDA compared to a maximum senior leverage ratio of 4.5 times adjusted EBITDA. Our maximum senior leverage ratio under the credit agreement reduces to 4.25 times adjusted EBITDA at December 31, 2016. The definition of adjusted EBITDA in our credit agreement excludes interest expense related to the provision of cash in our ATMs. For purposes of the computation, this interest is treated as operating expense and therefore is not excluded from the credit agreements definition of adjusted EBITDA.

As of June 30, 2016, our outstanding balance of ATM cash utilized by us from Wells Fargo was approximately $262.2 million. We expect our interest on the Wells Fargo cash solutions agreement to be approximately $3.4 million for the 12 months ended December 31, 2016. 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.

The second quarter capital expenditures were approximately $33.1 million. Capital expenditures for our Games segment were approximately $30.3 million, of which approximately $11.2 million was associated with replacement units for our existing installed base, new expansion units into our installed base and trial units not yet converted to either a lease or sale. In addition, the Games segment capital expenditures included $10.2 million of replacement fees and approximately $6.8 million in capitalized software cost related to the development of our games.

We expect the Core HDX unit will continue to drive additional lease unit replacement and expansions. Our capital expenditures should be lower in the third quarter as compared to the second quarter, as we do not expect to pay any material replacement fee.

Finally let me provide some color as to how we think about some other modeling metrics for 2016. We expect total interest expense for 2016 will be approximately $101 million, including interest on the vault cash of approximately $3.4 million and approximately $6.7 million in non-cash amortization of capitalized interest costs.

Based on new expansion units into our installed base and the continued replacement of games in our installed base, as a result of the additional third-party Class III games, that will be removed and normal replacement of aged equipment in the second half of 2016, we now estimate capital expenditures for the year will exceed $90 million. It is important to note that we expect to replace a large portion of third-party Class III games removals to our Class II games and our expectation of capital expenditures in excess of $90 million reflects the netting of the proceeds we have received from the sale of the aircraft of approximately $4.6 million and tenant-improvement reimbursement for approximately $2 million.

Additionally, this expectation also includes the approximately $11 million in placement fees paid in the first half of 2016 and roughly $11 million in capital expenditures related to our payments business for the full year of 2016. As a result, we expect amortization expense of $94 million to $96 million; depreciation expense of $49 million to $53 million in 2016.

With that, let me turn the call back to Mike.

Thank you, Randy.

Before I open up the call for your questions, I'd like to briefly review the progress that we continue to make on our five previously identified strategic priorities that we believe are going to drive both future growth in our revenues, as well as our EBITDA. Our first priority is to increase our product library by producing new games that engage patrons and enhance the profitability for our customers.

The key trade show for our industry is G2E and it's occurring next month in Las Vegas. I'm not going to preview the full list of games and solutions that we intend to debut at G2E, but suffice it to say, that I fully expect that this will be our best show ever. We will debut more titles that will take full advantage of the unique features of our core HDX cabinet; and to give you some perspective on that, we currently have approvals for nine games that are native to the core HDX cabinet, meaning that these games are designed specifically to take advantage of the full capabilities of the Core HDX.

And we will be debuting six new native titles at G2E this year. These 15 games are in addition to the library of 132 existing games that have been approved for the Core HDX cabinet. We will also premier several branded titles for the first time in our history. We have identified one of these titles recently with the announcement of our new partnership with Penn & Teller for a game based on their special blend of comedy and magic and we are extremely excited to debut this machine.

We're also excited for our other new branded games that are going to be first appearing at G2E. As previously discussed, we're also bringing to G2E some innovations for our TournEvent solution including the next evolution of operator efficiency tools for running TournEvent as well as the first of its kind new game that offers new skill-based elements while it's in tournament mode.

We will also unveil Nitro our next-generation media system with the bolt-on bonus ability that leverages our TournEvent technology. We expect these tournament product innovations will continue to position TournEvent as the premier tournament solution of choice for casino operators. We also believe that these innovations are going to provide the opportunity for incremental sales into our existing TournEvent customers.

We also will continue to update our payment segment offerings including e-check redemption and Everi giving module for our integrated kiosks and our Everi store-value card. These products will continue to affirm that Everi is the best-in-class payments provider to the gaming industry.

Our next priority is to increase our distribution capabilities. On this regard, we're making solid progress with our new game approval process to ensure that our games move more effectively from the trial phase to the revenue phase. Our products are now approved in West Virginia and Colorado and we expect them to be improved in Missouri very soon.

As I mentioned previously, we are so utilizing increased analytics in our gaming operations business. We believe that these efforts together with some additional strategies will help us to use our new game content and new branded titles to improve productivity with our customers.

We are collecting real-time performance data and using visualization tools to assist in tracking performance on our games. Our new analytical tools are very innovative and provide us with an excellent way to evaluate our games. Currently we have 39 customer locations, representing a significant percentage of our installed base, where we use these tools and we expect to continue to add more locations and devices in the coming quarters.

Third priority is our enterprisewide cost analysis, with an eye toward operating efficiencies and cost containment. We continue to make progress with identifying areas where we can right size our cost structure and we're beginning to implement these measures. We have made initial progress in enhancing manufacturing and supply chain efficiencies and reduced some of our call-center operations.

Another area that we are making progress in is converting returned units from our installed base or new units of old product lines into sales in secondary and tertiary markets. We are also developing new cabinet products that can operate with our existing legacy cabinet inventory to provide an exciting refresher to these cabinets. We will continue to analyze the best ways to manage our inventory of cabinets on all of our product lines to ensure that we maximize their value.

Our fourth strategic priority is the development of games that leverage new licensed and branded properties. With a national footprint of jurisdictions, we believe that the selective use of licensed branded games can leverage the recognition and the familiarity of the brand to increase both customer attraction, as well as time on device.

Branded titles also open up our ability to target more attractive pricing models for our participation games that will ultimately drive our yield higher. I have already talked about our plans to roll out these games at G2E, so hopefully many of you will be on hand to see them.

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 to give casinos additional patron value and unique revenue opportunities at their every gaming devices, as well as across the gaming floor. Using our combined products, assets, our touch points, we can provide a variety of innovative solutions and we will be displaying a few of these products to our best customers at G2E.

Now over the last several months our entire team has done an outstanding job in making consistent progress against our initiatives. Given our execution in the second quarter, our ongoing progress to date and our outlook for the balance of the year and beyond, I am confident that we've implemented the right strategy to create value for our customers and for our shareholders.

Now with that, I'd like to turn this back over to Don to take any questions.

(Operator Instructions)

John Davis, Stifel Nicolaus.

Good afternoon, guys. Hi, Mike. I was wonder if you could quickly clarify the outlook a little bit. I know you said there is no change, but it seems like the language around what you expect through the back half. It was my understanding prior guidance outlook for the second half would be better than first half. I think the language now says, it believes there's an opportunity to be better. If you could just clarify that. I don't know if it has anything to do with second quarter being a little ahead of plan. Any comments there would be helpful.

Part of it is the choppiness that we are seeing out there in the market. If we saw the consistent growth throughout all of our gaming markets, then I think you'd hear us being probably a bit stronger in that. But it is still our belief that our second half is going to be better than our first half.

Okay. That's helpful. And then Randy, talk a little about the payments EBITDA margin expansion; I think it was up 80 basis points year over year. Was there any AMV benefit, or the way I think about it is, the higher surcharge would actually lower the margin because the casino operator would get all of the incremental surcharge. Maybe just walk through the mechanics of the EBITDA margin improvement year over year.

You are right, John. That really goes the other way. There was really the one we did see some of the shift back, so the margin on the cash advance signature and tended mix, but we weren't sure whether that would come back as normalized better. So that's a better overall margin for us.

And then really we had the kiosk which were better in the first-quarter and then really we just saw some savings on the expense side that improved it. And then, as we talked about, we had $1 million in fraud costs in Q1, that we didn't have in Q2. I knew there would be a lift. I will say, it was probably a little bit more than I anticipated and part of that really was some savings on the expense side.

Okay. So you guys didn't pass through any EMV fees or anything that would benefit the incrementals to both top-line and the margin?

No. (Inaudible) That mix helped us as well.

Helpful. Randy, on CapEx, if I look at this year, call it a quarter run rate with $95 million if you back out the aircraft sale. Should we expect that to trend down next year and what do you think is the more normalized CapEx level that you are just looking at roughly, just call it somewhere between $190 million and $200 million, those are my numbers of adjusted EBITDA this year. You're going to do a core base of $95 million of CapEx coupled with $95 million of interest expense, cash-interest expense, doesn't leave a lot of free cash flow so. Is there expected down next year and how do we think about that?

John, you are exactly right. The success of the Core HDX really has accelerated some of the replacements. People want to refresh their install base faster than we want to. As I said before, we have to manage that. I would expect it to come down a little in 2017. I haven't put my budget together yet; I haven't really pulled everything together. We would expect that to come down, but we still have some of those third-party games that will come out over the next 12 to 18 months that also puts pressure on it.

If both of those that say, I don't know how much 2017 will come down. I think 2017 will still be, both the industry's 2016 and into 2017 will be a challenge to manage that CapEx because we have been so successful so far and, as Mike talked about, the yield is very important to us. We also look at the yield and if we had to put more Core HDX, that will help the yield, but I don't want to just replace the unit; I want to expand the unit. So, I don't have everything pulled together yet for next year, but I would say it's going to be probably more than I want, but I don't think it will be as high as 2016.

Okay. And then maybe one more if I can. On the AFP, it looked like it was up nicely despite a pretty significant decline in the percentage of TournEvent units. I know you said it was largely driven by Core HDX. Could you give us an idea of Core HDX what percentage of those cabinets are being sold versus placed and what the price point is. Not an actual dollar amount, but compared to TournEvent or another cabinet that you offer.

I think what we gave was of the units sold, about 57% were core HDX. Hopefully that gives you kind of where we are headed to. I'm trying to think, on the installed base versus sold, I think it was like about 60 to 40. So about 60 being sold and 40% being install. That's again, part of my whole CapEx issue is how will that continue to play out but there has been a really nice conversion to actual sales. Right now it's been a higher percentage. And a lot of that really depends on if they buy [ancillary] units with the more toppers are things of that nature. There's a nice topper; there's a screen that can go on top that can also add to the price of that. So, yes, it's been helpful on an ASP standpoint so far.

Okay. That's it for me. Thanks for the color, guys.

David Katz, Telsey Group

Good afternoon. I know you have gone through a couple of these things before. But I may just dig a little deeper and if I am being repetitious, I will apologize. You did say that the back half of this year you expect to be just a little bit stronger than the front half. I am looking at it on an EBITDA basis. Right? And if we're at $97 million of EBITDA so far, through two quarters, we are expecting the back half to be a little stronger than that. And I think, Mike, you said Q3 higher than Q4. Should I be thinking about those comments on an EBITDA basis or a revenue basis or how did you intend?

No, EBITDA was my intention, David. You had it right. That was my intention; it is on a EBITDA basis. That is the way that we have seen the seasonality work out in this business, since we have had both the games as well as the payments together.

Right. And going down just a little further with respect to that, within the two segments of the business, and again, I'm sorry if I missed it, but is there any trend within payments versus games as we look at that back half?

I think it's pretty much the same, David, because the payments business, the trend is really our cash to floor and transactions in the fourth-quarter are generally lighter and it also impacts gaming ops. Whether the unit sales are actually -- I know generally Q3 can be a little bit worse than Q4 in unit sales. I don't know how that's going to work out with us just from the Core HDX that we've got out there. But I'd say on gaming ops and payments, you do see some seasonality in fourth quarter.

Right.

Christmas time and those time periods.

Now just following up on the prior question and a topic that has been discussed a little bit throughout the quarter, in terms of where your covenants are, I recognize that the logic can be considered a little bit circular as to whether having a solid quarter is a good opportunity to loosen some of those covenants versus waiting until you need them when their costs could be higher. Can you just give us your thoughts about what your latest thoughts are about how you are collectively thinking about that?

David, I can tell you, we've discussed this clearly; we've also had some discussions with lenders. As you know, it's a very delicate dance and it's one that as the debtor you want to hit it out of the park at exactly the right time. As the lender, you are going to push back and get as much as you possibly can no matter what the timing is. We continue to have those discussions internally, we can have a few of them externally, but at this point there is nothing that we are in a position that we would announce.

That's all for me for the moment, but I may come back around again.

(Operator Instructions)

David Hargreaves, Stifel Financial.

Hi. I was hoping you guys could help us in looking at EBITDA for the six months was off a few percent, but cash from operations was off quite a bit more. I think there are some large line items. Perhaps you could talk a little about the difference between the two?

I'm not sure, David, when you talk about cash from operations.

What are the settlement liabilities line that's in the cash flow to get more to the point?

The settlement liabilities are where, on the payment side, we settled the money -- we basically have at the casino location, the patron has received their funds. We have now processed it. The cash has come to us and yet we would then owe that money back to the casino. That's the settlement liability; that's why there are big swings there in that cash flow.

Depending on the day of the month that the quarter closes, will depend on how big the settlement liabilities are because if we close on a Monday then you will have Friday, Saturday and Sunday where the money will have gone out, we will in most cases settle because we settle daily with the networks, but we won't settle with the casino customers until a few days afterwards. So that will fluctuate.

Okay. Could you give us an idea, you referenced placement fees. How do those work?

Placement fees are with certain customers we have placement agreements where we essentially pay a fee upfront to place the unit on the floor. And that's, in the past been anywhere from, probably on average of 5 to 7 years and it's on average been probably around $10,000; but it depends on the agreement and it depends on the customer. $10,000 per unit, excuse me.

So as those agreements come up, and those are paid then and you have your unit on the floor for a period of time. In most cases on your install base, it's a month to month. The customer can have you come take your unit back.

In some of our cases, with certain customers, we have placement-fee arrangements where we have the unit locked up for a period of time and that fee is basically treated as an intangible but the accretion of it is an offset to revenue. It's almost like you are buying part of your revenue up front. So those placement fees come up as the contracts come up over time. We have said in the past we have somewhere around almost 5000, under 5000, with agreements out there.

Okay. I was curious, when you mentioned your intention to draw on the revolver in the second half, based on what your guidance for CapEx is and interest expense, it looks like -- I am not sure that you would have a need to draw on the revolver; and I am just wondering what you expect to draw on that for.

I think again, if you are just looking at pure cash in the balance sheet again, that's why you have to be careful because those are settlement liabilities that are owed. I look at our net cash available which is cash, plus settlement receivable minus settlement liabilities. The way we are forecasting out, it really does depend on how the CapEx rolls through and what the second half of the year holds for us and we also pay our interest through the end of the year at the end of December because, under our credit facility, the cash flow sweep, it looks to cash paid. So actually pay interest right up to the end of December There can be some bigger interest payments made in the second half of the year. I still expect to draw some on the facility.

I see. Based on the HDX trials to sales, it seems like there's been a very high ratio of trials being translated into sales and I was wondering if you could give us some idea of performance in the field, how you are during versus floor averages. You mentioned the capabilities of these machines. Anything you could elaborate on, give us a better understanding because it sounds like the demand has been really good for them.

Yes the demand has been very high, David. It's hard to use metrics with respect to conversion rates on trials to sales or trials to leases. Primarily because it depends on where the devices are being trialed. I mean if you are trialing in a market that is primarily leased devices, then you expect that one to convert to a lease versus a market where it is primarily owned by the customer and then you'd expect it to convert to sales. It's kind of hard to break up which way those would flow. I can tell you there are observers of the industry that will tell you that generally for a new device to be sold it's going to be 1 or 1.5 times, it would have to be around 1.5 times the floor average to be a sale. If you're going to lease it to them, you need to be closer to 2 times the average of the floor in order for it to be a lease out.

That's useful. Lastly, with the TournEvent being 6% of, I believe shipments or sales, that seems lower than trend had been. Is this some reflection of IGT's new Tournament product cutting into your territory.

No, we don't believe so, David. They really are very different products; and at this point, we don't see any kind of, what I would call, degradation of the value of TournEvent as a result having a spinning [wheel] tournament product trying to compete with us in the marketplace.

Excellent. Thank you so much.

Matthew Gladstone

Good afternoon. Just on the core HDX cabinet, you guys mentioned that you had more trials out there at the end of Q2 than you did at the end of Q1, but perhaps fewer than when we spoke in May. If you think about the market penetration for that cabinet, have you guys reached out to most of the customers with whom you have done business in the past? Is there still a long runway ahead of us? And as we think into beyond those that are currently on trial, is there a pipeline of either new cabinets that might be coming out in G2E this year or different types of products that could replace some of those sales if those were to saturate the market?

Yes, I totally understand your question, I think. I don't believe that we're anywhere close to a saturation point in the industry at this point. Clearly our sales force is out there talking to all of our customers, both those that have taken our products and haven't taken our products and trying to get the core on their floor to show them the performance capabilities of the box compared to the rest of the devices on the floor.

But at G2E we expect that we will be showing several form factors that will be different and hopefully different ideas and concepts of games and how those games can be portrayed for the players that will get the interest of our customers as well. So that in the future we will continue to have TournEvent sales, Core HDX sales and new game sales whether they be leased products, whether they be products that are designed specifically around a licensed brand or whether they be new products that we are bringing forward. At this point, I don't see any saturation at all on the core product.

Great. Thanks.

There are no further questions at this time, so I'd like to turn things back to Mark Labay for closing remarks.

This is Randy Taylor. I'll close it out. Thanks everyone for joining the call. We look forward to meeting hopefully with many of you at G2E in September so that we can discuss our further progress and you can see some of our new products. And we will be looking forward to talking about Q3 results. Thank you.

Thanks, everyone.

This concludes today's conference. Thank you for your participation. You may now disconnect.