Everi Holdings Inc (EVRI) 2017 Q4 法說會逐字稿

Good day, everyone, and welcome to the Everi Holdings, Inc. Fourth Quarter 2017 Earnings Conference Call. Today's conference is being recorded.

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

Thank you, and welcome to the call. Joining me today are President and Chief Executive Officer, Mike Rumbolz; Executive Vice President and Chief Financial Officer, Randy Taylor; Executive Vice President and Games Business Leader, Dean Ehrlich; and our new Executive Vice President and Chief Legal Officer, Harper Ko.

Before we begin, I'd like to remind everyone that the safe harbor disclaimer in our public documents covers this call and our webcast. Some of the comments to be made during this call contain forward-looking statements and assumptions that are subject to risks and uncertainties, including but not limited to, those contained in 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 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.

At the start of fiscal 2018, Everi has adopted ASC 606, the new revenue accounting standard. Unless otherwise noted, today's call and any forward-looking statements will follow the current revenue accounting standard, which is consistent with our calls throughout fiscal 2017.

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 requires us to comply with a consolidated secured leverage ratio that includes performance metrics substantially similar to those -- 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 have been filed with the SEC and are available on our corporate website within the section captioned Investors.

Finally, this call is also being webcast. A link to the webcast has been included with the Investor Relations section of our corporate website, and a replay of the call will be archived.

With that, I'm pleased to introduce our President and Chief Executive Officer, Mike Rumbolz.

Thank you, Mark, and good afternoon, everyone, and thank you for joining us.

We concluded 2017 with another quarter of strong operating and financial performance. This afternoon, we reported that 2017 fourth quarter revenue increased 14% to $247.9 million, and adjusted EBITDA rose 4% to $51.3 million. For the full year, revenue rose 13% to $974.9 million, and adjusted EBITDA improved 7.5% to $212.8 million, which is just above the high end of our adjusted EBITDA guidance range.

2017 marked an important milestone for Everi. Our meaningful year-over-year increases in both revenue and adjusted EBITDA has clearly returned our profile to that of a growth company.

Operational achievements in 2017 in our Games segment included a more than 20% improvement in units sold compared to 2016. We also maintained an average selling price over $17,000 per unit. Additionally, in 2017, we stabilized and began a new era of unit growth in our installed base. Even with significant quantity of third-party removals and replacements, we were able to overcome the net removals and achieved modest growth in our installed base. Most importantly, during the fourth quarter, we reported growth in our daily win per unit for the first time in 8 quarters.

One consistent theme that we have discussed in our prior calls was our need to continue to invest capital in our Games business. This has been a necessary step since we believe our product offering was not sufficiently up-to-date for today's casino market. The age and condition of the units included in our installed base has been an important contributing factor to the previous trend of declining daily win performance. The capital we have invested and continue to spend is focused on differentiating our cabinet offerings and expanding the number of cabinet types that we sell to our customers or place in our own installed footprint. This investment is in addition to the focus of our game studios on creating better quality and more engaging and innovative game content.

With an installed base of over 13,000 units, it's critical to have new -- a new hardware form factor and to have exciting game offerings so that we can consistently grow our footprint. Our newest designs of base cabinets and top boxes are both modern looking and attractive to gaming patrons. Our technology is now capable of supporting the high quality of games that are being created by our developers both today and in the future.

In 2016, we introduced the Core HDX cabinet. We followed that up in 2017 with our single-screen Empire MPX or E43 cabinet. We believe these new form factors, along with our Player Classic mechanical reel offerings, provide our customers with a variety of options, which position us well to hold onto and even expand our existing installed base of placements. These cabinets, together with the solid original content that we have developed for play on them, provide us with a strong foundation for continued growth in our daily win per unit.

Our investments in new game content design are also beginning to generate solid returns. Last year, we introduced our first Wide-Area Progressive link into Class II jurisdictions and Local-Area Progressives for our Class III customers. Through the first 12 months of operation, we have actually had 3 separate top jackpot payouts on our Wide-Area Progressive link. Our largest jackpot payout to date was just under $1 million, which is certainly life-changing for that player, but also proves that our Wide-Area Progressive platform is a success and is driving value for both our customers and their players.

We have also begun introducing our first titles based on licensed themes. Our new game content and our entry into this new product segment have created an opportunity for accelerated growth within our premium games segment. Our 2017 year end premium unit count was up over 36% from 2016. The higher daily win per unit that we generate in this category, together with the increased number of units, contributes to the year-over-year growth in daily win per unit that we reported in the fourth quarter of this year and that we expect to report going forward.

With the robust pipeline for additional premium content and our new premium cabinet form factors being introduced in 2018, we expect to see continued growth in this highly profitable segment.

We've also seen other evidence of additional operating successes in our Games segment in 2017. I believe that we had our most successful G2E ever last October, with more exciting new game content, more new hardware form factors and newer gaming innovations, all of which we expect to have available for our customers in 2018.

In July, our investment in and continuing commitment to our Games business allowed us to secure a long-term placement agreement with a major customer for over 30% of the units that are in our installed base. This long-term agreement is evidence that the investments we are making resonate with our customers and yield tangible results.

We finished the year by extending our very successful long-term agreement with the New York Lottery to provide the central determinant system for video lottery terminals across that state. In 2018, as a result of our investments and development focus, our Games segment is positioned to become a meaningful growth business.

Our Payments sector has achieved several notable accomplishments in 2017 as well, and not the least of those was 4 consecutive quarters of double-digit revenue and adjusted EBITDA growth. In fact, our full year Payments adjusted EBITDA of $96.9 million represented our highest annual performance since 2009.

Compliance revenue increased almost 20% for the full year, and we further extended our leading market position in casino payments as we won contracts for the majority of the new casinos that opened in 2017. We also had a high level of net wins from competitive takeouts. At the end of 2017, we had at least one of our Payments solutions in more casinos across the United States and Canada than we have ever had before. These accomplishments are a direct result of our continuing commitment to innovate across our product portfolio in order to provide our customers with great gaming entertainment for their guests, the ability to optimize how their guests access funds across the casino floor and to help them meet the growing burden of regulatory obligations.

Everi is a very different company than it was even a year ago. If you go back even a little further than that, our Games business has come a long way from being a niche provider of Class II games in Oklahoma and Washington whose only real source of growth opportunity was a unique tournament product. We now are becoming a full-service equipment supplier, offering a more compelling and comprehensive product portfolio. We are all extremely proud of TournEvent, and we're going to continue to improve on this product.

Now while it is the most successful slot tournament system in the market, we have convincingly evolved well past that singular product. Today, Everi addresses the broad array of product categories that are needed on the modern slot floor. We have more new innovations and new products on the way than ever before in our company's history. Our ship share per unit sales continues to increase, and we expect and continue to grow our large fleet of units in the installed base. And having said that, we're just as proud of our Payments systems business. Our payments operations represent far more today than when we were simply the largest provider of cash access services to the casino industry.

While our cash access services are still the most used products in the casino industry today, we also lead the industry in the depth of our product offerings. We continue to add and integrate new products into our solutions set. Our base compliance and information software products, along with innovative new products, like CashClub Concierge, Jackpot Xpress and our cash recyclers, lower the operating cost of a casino environment and make it more efficient while allowing casino customers to provide a better guest experience to their patrons.

Other innovations like our Everi Cares Giving Module enable our customers to partner with their patrons and positively impact their communities.

We are often asked about the next evolution of Payments offerings. We believe that cashless wagering systems are the next major step in gaming. Today, it is only slowly gaining traction as both our casino customers and their patrons adopt and accept this change. But like many technology shifts, such as ticket in-ticket out, once the adoption starts, it may move very quickly.

With our CashClub e-wallet, I believe that we're at the forefront of change and are continuing to demonstrate that we are and will remain the leader in gaming payment systems technology and innovation.

For financial reporting, we report 2 segments, Games and Payments. I believe this has led many of you to think of Everi and to value us as 2 distinct types of companies under one roof. We don't see ourselves that way, especially given the process that we have made across the enterprise. Everi is a gaming technology company with multiple growth opportunities on which we're executing. In this way, we are not dissimilar from many of our larger gaming equipment industry peers.

We are a leading provider of technology solutions for the gaming industry. We provide gaming entertainment products, casino operational management systems and payment systems to casinos throughout North America. Defining ourselves in this manner helps drive our vision and our execution to be a transformational industry force. As we execute on this vision, we will continue to drive incremental growth in our business.

Today, as noted in this afternoon's press release, we announced our expectation of achieving adjusted EBITDA between $225 million and $230 million. To reach these targets, we expect to sell more units this year than last year, maintain our average selling price, drive additional growth in our installed base and generate year-over-year improvements in our daily win per unit each quarter this year. We also expect contributions from established products such as our core HDX cabinet as well as from our newer E43 and our newest E5527 cabinet. We also anticipate our higher-performing Wide-Area Progressive and Local-Area Progressive games will result in continued growth in the premium unit portion of our installed base.

While 2017 was principally focused on the much larger number of core base units in our footprint, we recognize the long-term opportunity for more rapid growth will come from the premium games segment. In 2018, we will address our aging premium footprint by using some of our capital expenditures to refresh and expand that portion of our installed base. While the E43 and the Core HDX have addressed our core base in the past, we have a new cabinet, the E5527, that will be introduced -- in fact, has been introduced now, I'm told, yesterday or today, with a new theme, The Brady Bunch. This new premium cabinet will be used together with our E43 to modernize our premium unit offering.

Our gaming operations team has a singular dedication to managing the profitability and the yield of our installed base performance. This includes efforts to expand our installed base as well as a focus on evaluating the operating performance of our lower performing units. We intend to make prudent business decisions about our capital expenditures to improve these units. This helps us to better manage our capital spend while improving our yield on a per-machine basis. Our longer-term stated targets of double-digit ship share and 17,000 units in our installed base remain unchanged, and we will take additional steps toward achieving this in 2018.

We have a similar expectation of another year of growth in our Payments segment, with anticipated wins for a majority of the new casino openings. We expect once again to achieve more net contract wins from renewals and competitive takeouts. Compliance software and kiosk revenue will also continue to grow throughout the year as we continue to expand our core compliance installations and ad placements of CashInsite with Everi IQ, which is a new product that I will explain in just a second; Jackpot Xpress, our cash recycler; and our cage cash solutions.

Our key operating priorities for Payments this year are focused on solutions that provide for an enhanced experience for the patrons of our gaming customers, while at the same time improving operating efficiency while reducing operating costs. This is aligned with our customers' core focus on maximizing their patrons' experience.

The ability to accumulate patron financial activity data from our Payments system, together with patron spending habits across the entire casino ecosystem, creates actionable insights related to patron preferences and future spending. This data can be a powerful tool to assist our customers in creating deeper player loyalty.

Our newly developed CashInsite with Everi IQ provides a new growth opportunity within our information product segment as we deliver a powerful analytical tool set to assist our customers in their focus on the patron. Our analytic tools also provide operating benefits to other core products in our offering. Opportunities for AML intelligence will be expanded as our customers place more focus on regulatory compliance activities surrounding patron cash monitoring. We also expect the other newly introduced products like CashClub Concierge and our CashClub e-wallet will take our core cash access services across the casino floor and the retail footprint of our operators in a mobile fashion. This will improve the experience of the patron and create operating efficiencies and cost savings for our operators.

Also during 2017, we completed a series of debt refinancing transactions that improved our capital structure, and at current rates, lowered our overall annual cash interest by almost $20 million on an annualized basis. Combined with our expected earnings this year, we believe these improvements to our capital structure will drive higher free cash flow this year and set the stage for a significant acceleration in free cash flow once we conclude our quarterly placement fees in the third quarter of 2019. Our priority for this growing free cash flow is to reduce our debt, and we believe, we have put in place the right foundation to achieve this goal.

Now let me close today with these thoughts. We have achieved tremendous progress over the last 2 years. Today, Everi is a growing gaming technology solutions provider. This is a direct result of the dedicated team of employees who all consistently give maximum effort to achieve our corporate goals. The success that we have achieved thus far is a direct result of their continuing hard work, and I cannot thank our employees enough for their commitment. I am extremely proud to work with them on a daily basis.

While our growth and the tangible results of our investments are notable, I believe our progress is also currently somewhat underappreciated. We were at an inflection point for our business, and as we continue to demonstrate our ongoing progress in growing our business and our earnings, we believe our accomplishments and position within the industry will be better appreciated and valued. We are focused on continued growth in our business and value creation for our shareholders, and we have every expectation that we will achieve both of those.

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

Thank you, Mike, and good afternoon, everyone.

Before I begin my normal quarterly discussion on the results, let me make sure to alert you to the 8-K filing that we made today related to the expected changes in our financial reporting as a result of our implementation of the new revenue accounting standard. I will have a more detailed discussion on the expected changes later in my prepared remarks, but I will refer to our historical reporting practice for the first part of my discussion regarding the results of operations for the fourth quarter.

For the fourth quarter of 2017, total revenues were $247.9 million, comprised of $57 million in Games segment revenues and $190.9 million in Payments segment revenues. Payments revenue increased approximately 17% year-over-year, and Games revenue increased 4% year-over-year. Timing of the TournEvent of Champions this year benefited the fourth quarter by approximately $1.6 million of revenue when compared to the prior year fourth quarter. Excluding this revenue, Games segment revenue was up approximately 1% compared to the prior year.

Adjusted EBITDA for the fourth quarter of 2017 increased $1.9 million or 4% to $51.3 million. Adjusted EBITDA for the Games segment was $27.2 million compared to $28.4 million a year ago, and adjusted EBITDA for the Payments segment was $24.1 million compared to $21 million last year.

In our Games segment, gaming operations revenue increased $2.4 million year-over-year to $39.4 million, with the increase primarily due to the timing of our TournEvent of Champions event.

Our installed base at year end increased 32 units year-over-year to 13,296, while 2017 fourth quarter daily win per unit of $26.60 compared favorably to the $26.35 a year ago.

In terms of the daily win per unit, as Mike noted, this was the first quarter in 8 quarters that we generated a year-over-year improvement. Daily win per unit is benefiting from an increase in our higher-yielding premium footprint which rose 37% or 681 units year-over-year to 2,532 units. This total included 353 WAP unit placements compared to 0 in the prior year. We also continue to expand our non-Oklahoma installed base, which rose 435 units year-over-year. These increases, along with the improvements we are expecting to see in non-premium game yields, will continue to positively impact our daily win per unit as we expect daily win per unit will grow year-over-year in each quarter of 2018.

On a quarterly sequential basis, our installed base was up 81 units. Our installed base of premium games increased 8% or 184 units, including 120 WAP units that were added in the quarter. We expect premium games to be an ongoing area of growth in terms of installations and daily win per unit going forward.

For 2018, we expect our installed base will grow between 7% and 8%, with a significant portion of this growth coming early in the year. In the first quarter of 2018, we are seeing strong net additions in part due to our placement of approximately 400 units at the new Four Winds Casino in Indiana and another 100-plus units from a casino opening in Oklahoma that was initially expected to open in the second quarter. Because of certain compact changes, we still expect some units in California to come out of our installed base in the second half of 2018. These unit declines should be offset by growth in the premium units segment as a result of some of the new premium bank product solutions that we plan to introduce like the Renegade and Empire Arena product lines.

We are also prioritizing the management of our overall installed base this year. So while we do expect to achieve growth over the full year, a significant portion of our efforts this year will be focused on optimizing the yield of our placements and ensuring we invest in our current installed base in a manner that delivers an appropriate return.

Revenues from electronic game sales were $17.5 million for the 2017 fourth quarter, essentially in line with the prior year period. We sold 926 units at an ASP of $17,611 compared to 920 units sold in the fourth quarter last year at an ASP of $17,548.

For the full year 2017, unit sales were 3,647 units or an approximate increase of 23%. For 2018, we expect unit sales will increase approximately 10% and we don't expect to see any material change in ASP.

Adjusted EBITDA margin for the Games segment was 48% in the fourth quarter of 2017 compared to 52% in the fourth quarter of 2016.

For our Payments segment, both revenue and adjusted EBITDA grew for the seventh consecutive quarter in the fourth quarter of 2017. The 17% year-over-year increase in revenue to $190.9 million includes double-digit growth from our cash advance and ATM revenues, growth of 2% in check services revenue and a strong quarter from equipment sales and service revenue related to our fully integrated kiosks. Cash advance and ATM revenue benefited from new casino openings and several new agreements as a result of competitive takeouts. The fourth quarter also marked the 13th consecutive quarter of same store growth in both transactions and dollars processed. ATM revenue experienced further growth from surcharge increases initiated by several large corporate casino customers and the expansion of ATM services into Canada.

For 2018, we are forecasting mid-single-digit adjusted EBITDA growth compared to 2017.

Adjusted EBITDA margin for the Payments segment was 12.6% in the 2017 fourth quarter compared to 12.9% for the fourth quarter of 2016.

Other revenue from our Payments segment, which includes revenues from equipment sales and service and our compliance products grew 9% in the fourth quarter, primarily as a result of strong sales of our integrated kiosks. For 2018, we expect equipment sales and service revenue from our integrated kiosks and revenues from our compliance products will continue to grow and exceed the amounts reported in 2017.

Before moving on to the balance sheet, I want to highlight a disclosure from this afternoon's press release and our 8-K filing. On January 1, 2018, the accounting standard covering revenue from contracts with customers became effective for all of our future interim and annual reporting periods. In our quarterly filings throughout 2017 and in our annual filing our Form 10-K that we expect to file before the end of the week, we have discussed the expected implementation of the new revenue standard. Today, we also filed a Form 8-K to assist investors and other interested parties in understanding our current expectation of the impact to our historical reporting periods as a result of the adoption of this standard. The standard will require certain cost of revenue to be reclassified out of cost of revenue and netted against revenue rather than current gross revenue presentation. These changes are not expected to impact reported operating income or loss, EBITDA or adjusted EBITDA, or other cash flow measures. However, with the reduction in reported revenues, without an impact on adjusted EBITDA, our adjusted EBITDA margins will be positively impacted.

For the revenues and cost of revenues of our Games segment, we expect revenue recognition to be consistent with our current practices. However, with respect to our Wide-Area Progressive offering, which we launched in 2017, we will be required to net the direct cost associated with the progressive jackpot against Games revenues. This differs from our existing practice of recording these amounts separately to Games' cost of revenues.

For 2017, the only year impacted by this change, the total amount of this reclassification is approximately $0.6 million.

The impact to our Payments segment revenues and cost of revenues is expected to be much more significant in nature. We expect revenue recognition to be consistent with our current practices for our product lines. However, we do expect significant changes in the reporting of revenues and cost of revenues for our core cash access business. These changes specifically relate to our current reporting of these revenues on a gross versus net basis. Our current practice for our cash access services results in the company recording the service fees collected as revenue and the associated direct cost of commissions, interchange and other related direct third-party processing expenses as cost of revenues.

Under the new guidance, we are required to report these items net, which will result in a reclassification of certain historically reported cost of revenues being offset against the revenues. The cash access revenues and cost of revenues for amounts previously reported will decrease by approximately $564 million, $476 million and $438 million for the years ended December 31, 2017, 2016 and 2015, respectively.

I want to reiterate that none of these changes are expected to have any effect on the historic reported operating income or loss, net loss, cash flows or the timing of revenues recognized and cost incurred, nor will they have any impact on the reported adjusted EBITDA in those periods.

Finally, I would also point out that we have not completed our evaluation yet and we may identify other impacts from the implementation of this guidance as we continue our assessment, and we will continue to update you on any significant changes. I would recommend that you review the information included in our Form 8-K, 10-K and prior Form 10-Qs for a deeper understanding of these changes.

Moving to the balance sheet, and reflecting the refinancing and the repricing transactions completed in 2017. Long-term debt was $1.19 billion, and we had no amounts outstanding under our revolving credit facility as of December 31, 2017. The weighted average interest rate on our outstanding debt obligations at year-end was approximately 5.7%. In the fourth quarter, we paid approximately $2.1 million in required repayments on our term loan.

As of December 31, 2017, the outstanding balance of ATM cash utilized by us from our Wells Fargo cash solutions agreement was approximately $289.8 million.

Our consolidated secured leverage ratio at year-end was 3.6x adjusted EBITDA compared to a maximum senior leverage of 5x.

For 2018, we expect interest expense of between $83 million and $87 million, which includes interest on vault cash of approximately $7 million, $2 million of imputed interest on the Player station agreement, and approximately $3.4 million in noncash amortization of capitalized interest costs.

Capital expenditures in the fourth quarter and full year were approximately $26.6 million and $109.8 million, respectively.

Games segment capital expenditures in the fourth quarter were approximately $22.9 million, of which approximately $15 million was associated with replacement units for our installed base, new expansion units into our installed base and trial units not yet converted to either installed base unit or a sold unit.

Full year CapEx in the Games segment was $98.1 million, of which $55 million was for replacement, new or trial units in our installed base, and $13.3 million was for replacement fees.

Payments segment CapEx was $3.7 million for the quarter and $11.7 million for the full year.

In 2018, we currently forecast total CapEx of between $125 million and $130 million, of which approximately $114 million will be for the Games segment. We expect to pay $22.3 million in payments related to our player station agreement, of which $20.2 million are related to placement fees and $2.1 million relates to imputed interest.

As a reminder, placement fees will impact quarterly CapEx through the third quarter of 2019, after which the related unit placements will remain in our installed base for at least another 4.5 years without additional placement fees.

As we are able to expand our footprint with this customer, we may also have some other payments to secure additional placements, but we do not expect those amounts to be material.

As noted in this afternoon's press release, we established our outlook for 2018, which includes year-over-year revenue growth and adjusted EBITDA of approximately $225 million to $230 million.

I've discussed already many of the underlying metrics and other expectations in our 2018 outlook. However, a few other items that may assist you in your modeling are as follows: depreciation expense is expected to be approximately $56 million to $60 million; amortization expense is expected to be approximately $66 million to $70 million; and finally, we expect to record a provision for income tax of between $3 million and $5 million for 2018, which includes cash tax payments of approximately $2 million.

With that, I will now turn the call back to the operator for questions.

(Operator Instructions) We'll hear first from David Katz with Jefferies.

I wanted to just ask about in the Games segment the EBITDA margin was a little bit lower than the trend line, and I wanted to know specifics around why that would be.

David, we're really having a hard time understanding you. So something...

Hearing.

Yes, hearing you. I'm sorry. Not understanding, but hearing you. Say that again? I know it's on the Games segment and the EBITDA, but I didn't hear the last sentence.

Sorry, the margin -- the EBITDA margin in the Games segment was a little bit lower than normal. Why was that?

Yes. So one of the major items was the G2E, the cost associated with the -- that -- well, 2 things. Well, just the G2E show itself, those costs hit in the fourth quarter. While they didn't hit in the fourth quarter of last year, there's probably about $1.5 million in cost there as well as the TournEvent of Champions, where it's in the revenue, but it's also in cost, and the TournEvent of Champions margin is much lower. So fourth quarter is not quite comparable '17 to '16 because of a couple of those items. So had you moved just the G2E cost out, the margin, I think, would have been around 51% compared to 52%. So it's pretty comparable. It's just where the costs hit in fourth quarter of this year versus third quarter last year.

Got it. So if we're thinking about margins on a run rate going forward, specifically in the Gaming segment, we should be thinking north of 50% is a reasonable way to think about it?

That's correct. That's correct. I mean, yes.

Okay. And with respect to the CapEx guidance. It's a little bit -- also, it's just a bit higher than it's been. Not a lot, but it's maybe kind of $20 million, kind of $15 million higher than it's been. Is it fair to assume that, that's a function of game placements more than anything else?

A couple of things. I would say there's a few dollars in there, probably around $3 million to $5 million associated with the Payments side, where we're going to continue to invest in a lot of the products that Mike talked about, which are -- will be capitalizable cost as well as -- as we're moving into Canada on the ATM side, generally ATMs, we own. So there's a little bit there. And yes, the other piece is really we started off well in '14 with the -- I mean, sorry, with '18 with the placements in South Bend and the one opening. So again, trying to give a range, we're -- as we say, we're going to continue to manage that and monitor it, but we really believe that to grow the installed base, it's going to take some CapEx requirements.

Got it. And just one last one, if you don't mind. The progressive Class II seems to be looking quite well, and you gave some good color around that, which I appreciate. Any way that you can help us calibrate the addition of those games and whether they are more accretive than other placements? Obviously, they're more costly, but are they more accretive earnings wise and sort of the order of magnitude around that?

So a couple things. I don't think they're really -- they're more costly from the standpoint that we have to pay the jackpot, but the actual units themselves are in line with what we're coming out with generally our new products. Again, it's hard to say. I know people want to kind of pin you down on what's the lift off of the jackpot. It is -- those units do perform better and are starting to show up in our win per day per unit, but I really kind of want to stay away from how much different and how much better it is because it depends on the location of the unit. So I guess I'll leave it at that, but we think we're headed in the right direction. That's why Mike talked about premium units. That's why we're focusing on those. And I just think the increase in our premium footprint is what's going to continue to drive that win per day per unit.

Great. And I'm sorry, one last one. I lied. Which is on the Payments business, '17 was obviously an unusual year to the upside. And I think your guidance is more modest, but I think historically more appropriate. I don't want to characterize it for you, but assuming that what the guidance you've laid out for this year is a bit more of a -- would you consider it a historically normal year for Payments rather than what we saw in '17?

Yes. I think we want to let people know that '17 was really a terrific year for Payments, but I think as we look at some of the new products that we've had coming out, we feel very good about 2018. And we think a -- that mid-single-digit growth is very achievable with some of the new products we have out and just obviously the macroeconomics of what's going on. So we feel good about it. But yes, I don't want anybody to really -- we don't really want anybody to think that hey, we're going to have the same type of EBITDA growth for the year that we had in '17. I would love to see it happen, but I'm not counting on it right now.

(Operator Instructions) We'll hear next from George Sutton with Craig-Hallum.

First, congratulations on the daily win per unit turn. Long time coming.

Thanks, George. Yes, yes.

So Mike, you started to position the business a little bit more in a focused way than I think you have previously, talking about being a gaming solutions provider. I'm curious what's behind that decision. Is there a cross-sell success that you're seeing? Is there -- are there strategic discussions you've been having with the customers that are kind of leading to that conclusion? Just curious what's behind that.

Yes. Actually, it is exactly that. We are seeing the cross-sales, we're seeing the ability to provide a complete solution from our systems, from our payments, from our games to a customer that provides a solid margin for our business. And so as we see that and as we continue in these discussions, it seemed appropriate to make sure that people understand that we are very similar to the larger competitors in our space, in that we have multiple lines of business, but they're all centered around a casino customer. And as we converge those lines of business with a single customer, we can and should expect to be able to hold or increase margins.

Got you. You -- we've had a few months to digest -- or at least customers have had a few months to digest post G2E, and I was curious what caught the most attention. You mentioned The Brady Bunch cabinets. Can you go in a little bit more detail on that specifically and sort of what you think caught the most attention?

We can, but Dean is here, and I would think you'd want to hear it straight from him.

Perfect. Exactly.

So tell you, we're really excited about The Brady Bunch just launching on our new E5527. That's, as Mike mentioned, is going out this week and live, so -- which is wonderful. So that's one of the additional new form factors that we have. But if you took a look at G2E and looked at all the differentiated content coming out, we got 10 new licensed products coming out throughout the year, in 2018, and then if you add the new Renegade top box, the Arena form factor, which also goes on top of the E5527, the product roadmap just aligns extraordinarily well. So that's really the gist of it.

And I would say, George, don't forget -- the other thing I'd just say is don't forget about the new products we brought out at G2E for Payments because I would say that the -- to add on to what Dean said, I think that both segments really showed some nice products, including our CashInsite, our Cash Club Concierge and our wallet. I think they all were well-received on both sides.

That would be CashInsite with Everi IQ.

Actually, while we're on that theme, I have one more question. Relative to the cashless offerings, at what point do you see that being a new revenue -- meaningful new revenue driver for you? And is there a point where you see that as a revenue deterrent?

Yes. It's difficult to gauge when it will become a significant revenue driver for us. I truly believe it will be. So part of the answer lies in the speed with which our casino customers adopt and their patrons adopt that as the preferred method for moving value, cash value around the floor of a casino. There are some built-in, I think, incentives for a casino operator to want to move away from cash. But my personal view is that there's always going to be cash in casinos, because cash allows you to be totally anonymous. But I would think you'll see in -- we expect in '18 to start seeing the first uptakes in cashless wagering throughout the casino industry. And as those are taken up and are either successful or are difficult to find success with should really define for us how quickly it's going to happen.

We'll move next to David Hargreaves with Stifel Financial.

Could you speak to your ship share and talk about how that's evolving sequentially? Are you gaining share on the Games side? And could you talk a little bit about what game titles specifically are available and the timing? What's still in trial? Because I'm not sure you had everything available during the quarter and I just want to see what lies ahead that we can grow off of. And I'd love to know how Penn & Teller is doing, where you have it deployed to start. And then I have a Payments question.

Okay. So I'll take that one. Our ship share, depending on how you look at it and all the different various factors, we, I would say, last year started out at around a 3%, 3.5% range, and we're north of about a 5% range right now. So we are pretty close to doubling. We're up a point in terms of ship share, purely on a replacement side is what I'm talking about right now. Penn & Teller, to answer your other question, it's doing very well. This was launched in mid-fall last year and is doing well as we deploy across the country. Rolled it initially in Nevada, and then most recently started hitting the other jurisdictions and performing very well. Some of the follow-up titles is what we're the most excited about, though. You got Buffy the Vampire Slayer coming out that fits that the exact form factor. Launching Willie Nelson towards the end of the month. As you just heard before, we just launched Brady Bunch. We have South Park coming out around summer time, and on and on and on until -- and that's not even hitting Renegade or hitting our Empire Arena. So just a tremendous amount of product that has got this very solid pent-up demand that we're looking forward to get out there to see what it's going to do. Other than that, I don't think we want to go too much more into the product roadmap with specific months because these dates tend to move. But basically, what I've given you -- with the dates I've given you are anticipated launch dates. So we feel very good about that. That's it.

Could you give some high-level commentary about customer demand and what orders have been like?

Well, to answer customer demand, I would say, yes. And I'm not prepared to go into exact detail on our backlog and the exact amount of units that are there. But I would tell you that there is a pretty significant pent-up demand for products that we're launching.

I mean, David, as we said, we gave some guidance. Our expectation is we're looking for a 10% growth in unit sales this year. So with Dean -- we really don't want to talk about what our backlog is right now, but I think we feel pretty good about that growth in '18 on a units sale side.

Okay. And on the Payment side, the strength that we've seen in the business there on the top line, does that have to do with any acceleration of contract renewals, leading up to the 3-in-1 Rollover expiration? And could you talk about how sales have been since that expiration? Any emerging thought process in how you're selling and how people are receiving?

Yes, well, first of all, let me just tell you that it had nothing to do with the run up on renewals with respect to the 3-in-1 Rollover. That rolled off and was a non-event. I mean, we won the majority of new contracts for new casino openings last year, and we had competitive takeouts last year, which contributed to our growth in that segment. The Rollover -- the Rollover patent coming into the public sector has been a non-event for our company.

And I think it's one of the things that we -- that sometimes people would look at it. It's not like it's gone away. We still have Rollover. We think we do it the best. We think that we drive more cash to the floor for our customers with that enhancement to our products. And if competitors come out with something, that's fine. But we think we've got a great product there and it will continue to help cash the floor. And so far, renewal wise, we're on track, and really -- it hasn't really come up in our discussions on renewals.

Okay. And lastly, could you talk about the materiality of the compliance products that you guys are offering? I'm just curious as to how significant they are to the results at this point.

I think we talked about before, it's an excess of $10 million, I think, on a top line. I'm not giving a specific, but it's overall. It's a very profitable business for us. We think there's still a greenfield out there and an ability to grow that. But from a total revenue standpoint on the Payment side, it's still very small. But we think it's got room to grow, and it's very profitable to us.

Very high margin with very large greenfield.

And the product extensions that we put out there that we showed at G2E, things like Jackpot Xpress, I think, those are great products to help take that core business that has been established over the last couple of years and add on to it as we move forward into '18 and beyond.

And our next question will come from Howard Bryerman with PENN Capital.

Just a follow-up on what David was asking. Can you help me clarify the 14% increase in the Payments revenue number? Does that have to do with the accounting change that you were trying to explain before? Because if you look at your cost of goods sold number, that's gone up significantly as well. So is this just an accounting reclassification that is responsible for the 14% increase? Or am I looking at this incorrectly?

No. I think I've -- let me make sure I can clarify. I mean, the way we're reporting historically through 2017 has not changed. So the 14% increase in the Payments business is consistent with what our growth has been for the full year. And it's really been a number of items. It's been casinos we picked up late in '16 that benefited '17. It's been just same-store growth, where we've seen a lot more transactions going on. We also picked up Canada business in 2017. And our kiosk and compliance revenues increased. So it's been just a -- really it's -- Payments has been really hitting on all 4 cylinders this year and doing -- so it's a number of factors. The accounting changes is that going forward in 2018, to your point, the cost of revenues, as you said, increased fairly consistently with the revenue because we pay a lot of those revenues back to our casino customers as commissions, and we have interchange costs associated with them. The literature now would require us to net that. So our revenues will come down dramatically, but our cost of revenues will come down dramatically as well. But EBITDA, operating income, loss, all those metrics, cash flow, don't change. It's just a reclassification that will be required in the first quarter and going forward.

Okay, so 2018...

And Howard, with the addition -- I'm sorry. I was just saying with the addition of the ATM portfolio in Canada -- remember, ATM margins are typically a lot lower than the rest of our core cash access and other products. So when you add that revenue and those commissions in there, the cost of revenue is going to grow a little faster than the revenue.

Okay, fair enough. So 2018 will be reported on a net basis, then?

That is correct. That is correct.

So then just to follow-up -- and not to beat a dead horse here, but -- so is 2016 the comparison here, also being reported the same way that 2017 is? Or is 2016...

That's correct.

Okay, so then I'm comparing apples-to-apples?

Yes, you are. And if you look at the 8-K we filed, it will show you the historical filings and then how it's adjusted. And it'll come down right back to the same operating income or loss, but you'll see how the cost of revenues are reclassed. So the revenue comes down, cost of revenues come down, but your operating income doesn't change.

Right. So I guess what was tied to that confusion was there's a very healthy increase in revenue, but what falls to the EBITDA line is only a 3% or 4% increase. So is that the difference in margins in this business? Is that what it is?

Yes. I mean, gross versus net.

Yes, gross versus net. Yes, before we showed the gross revenue and all the cost gross, and so the margin -- I don't know if it's 3% or 4%. Doing a little bit better than that, but it's lower margins. No question. And now that you'll net it, the margins will look better, but the true dollars will be the same.

No, I understand that. I'll just try one more time and then I won't waste anymore of your time. The 14% increase in the Payment revenue number is a very nice, healthy number. If I look at the consolidated EBITDA number for '17 versus '16, it's only increased by 4%. Why doesn't more of that fall down to the EBITDA number?

I mean, the low-margin nature of your cash access business is -- again, that's kind of what I was trying to illustrate, especially the -- when we acquired a very large portfolio of Canada revenue and ATM side, for example, it's much higher commission business there. So that net margin that we pick up is relatively low dollars in absolute dollars, but the revenue numbers can be larger than the cost of revenues.

Maybe one other item to kind of explain it is -- so on an ATM transaction, which is where most of our revenue is, the surcharge charged by the casino customer, generally in our bigger customers, that surcharge is completely paid back as a commission to our casino customers. There's another source of revenue that we get which is much smaller. And to Mark's point, that's why the amount that drops to the bottom line is much lower than the revenue increase. And we can have customers who increase the surcharge and that'll increase our revenue, but not produce any more EBITDA from our standpoint because they get a percent of that surcharge.

Okay, fine. I'm also getting barraged with nasty instant messages here, so obviously, I'm the one that's not getting it here. So just one last question, and maybe this will be a little bit more intuitive -- I mean, a little bit more intellectual. I'm looking at your cash flow statement. You said that free cash flow going forward would be used to reduce debt. And as an active debt holder of yours, that's obviously what I would like to see. If you look at your cash flow statement, though, operating income from -- cash from operating -- from operations is pretty much washed out by capital expenditures, so a wash. And obviously, that has to do with higher working capital amounts here and big turnaround of deferred income tax numbers. So how do I look at this going forward? I don't like to look at EBITDA as a cash flow metric because it's adjusted, and then that's adjusted, and adjusted again. If you look at your cash flow statement, it's pretty much a wash. How do we look at that going forward?

Well, the tough thing about our cash flow statement is the way our Payments business work, which is a big impact to our cash flows is change in working capital. Because remember, we collect the cash for the transactions of the casino. We collect that cash, and that can end up on my balance sheet. And then I don't pay it back for -- it comes to me fairly quickly 2 or 3 days, and I can take as long as a week or even longer to pay it back to the casino. So I know you may not like EBITDA, but to me, it works the best for this business, which is you take our EBITDA, you take -- because there's really not a huge change in our working capital -- there are -- there are big swings, but it's really because I have settlement receivables and settlement liabilities that kind of offset it. So I look at it and say, "You take your EBITDA, you look at your cash interest, you look at my cash capital and my cash taxes, and that's what we're going to have available to pay down debt." So it sounds like you're much more traditionalist, you want to go through the cash flow statement, but it's really growth in EBITDA that's got to generate more cash flow to pay down more debt. And that's what -- to maintain our CapEx.

No, I get that, but that's one of the components that investment bankers usually like to forget about is working capital flows, changes or use of cash. And if your working capital changes and it's a use of cash, then you will not have the free cash flow to pay down debt. That's the only reason I bring it up. And if you continue to grow and there's timing differences here, then that free cash flow may be absorbed by your working capital needs. It's -- just trying to figure out how to look at free cash flow going forward. That's all.

Yes -- no. And I used to always struggle with it, to be honest, because of our business, the way that we're always in a cash positive position with our customers. So it's -- I'm not sure I can help you on this call, but we might be able to -- we'll take it offline and try to walk you through it.

We'll take a follow-up question from David Katz.

I'm actually all set. My -- I have been asked and answered.

That will conclude our question-and-answer session for today. I'd like to turn the call back over to Randy Taylor for any additional or closing comments.

We'd like to thank everyone for joining us today, and we look forward to an update at Q1 for -- in the next couple of months.

Thanks, everyone.

That will conclude today's conference. Thank you all once again for your participation, and you may now disconnect.