Everi Holdings Inc (EVRI) 2020 Q3 法說會逐字稿

Greetings. Welcome to the Everi Holdings, Inc. Third Quarter 2020 Earnings Conference Call. (Operator Instructions) Please note, this conference is being recorded. I will now turn the conference over to your host, Bill Pfund, Vice President, Investor Relations, you may begin.

Thank you. Welcome, everyone. Our team is working from multiple locations today. And while I don't expect any gremlins, I would ask your patients if we experience any technical difficulties.

Let me remind everyone of our safe harbor disclaimer that covers today's call and webcast. Our call will contain forward-looking statements and assumptions, which involve risks and uncertainties that could cause actual results to differ materially from those discussed during our call. These risks and uncertainties include, but are not limited to, those contained in our earnings release today and in other SEC filings, which are posted in the Investors section of our corporate website at everi.com. We's 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 are made only as of today, November 2, 2020.

We will also refer to certain non-GAAP financial measures such as adjusted EBITDA, free cash flow, total net debt, total net debt leverage ratio and net cash position. A description of each non-GAAP measure and a reconciliation to the most directly comparable GAAP measure can be found in our earnings release and related 8-K as well as in the Investors section on our website.

This call is being webcast and recorded. A link to the webcast and replay of today's call can be found in the Investors section of our website.

Joining me on the call today are Mike Rumbolz, our Chief Executive Officer; Randy Taylor, our President and Chief Operating Officer; Mark Labay, Executive Vice President and Chief Financial Officer; Dean Ehrlich, our Games Business Leader; Darren Simmons, our Fintech business leader; and Harper Ko, Chief Legal Officer and General Counsel.

Now it's my pleasure to turn the call over to Mike Rumbolz.

Thank you, Bill. Hello, everyone, and thank you for joining us today. Now before Randy and Mark share their insights into how our business performed during the quarter, I'd like to share a few highlights and observations.

Overall, our third quarter results were significantly better than expected. Our revenues, operating income, adjusted EBITDA and free cash flow all meaningfully improved sequentially over the second quarter of this year. This faster-than-expected recovery, driven by the strong performance of our large base of tribal and regional customers, is clear evidence of the ongoing strength in our business. In particular, the third quarter results highlight the resilience of the contributions from our recurring revenue streams, which comprised more than 75% of our third quarter revenue.

Our third quarter results also demonstrate that the focus on our long-term strategies and investments across our product portfolio have positioned us to continue to grow both of our business segments going forward. Furthermore, it's notable that our adjusted EBITDA as a percentage of revenues improved by 500 basis points from last year's third quarter, reflecting the actions that we've taken to reduce our overall cost structure and the benefit from a greater mix of our higher-margin products.

In Games, the ongoing success of our portfolio of premium units in both tribal and commercial casinos, together with the overall growth in our installed base of operating units despite this pandemic, has clearly reinforced the benefits of our strategic planning. We've prioritized the execution of our game development. And in preparing our road map for future development, we have based it not only on the creative talent and experience of our studio teams, but also on data analysis of player trends and feedback from operators. I am proud of the great collaboration between our product management people and our game development studios under the leadership of Dean Ehrlich. Together, as a team, they have driven positive performance for an extended period of time, both prior to the pandemic and following the reopening of casinos. I have never felt more confident in our pipeline of new games than I do today.

Likewise, the growth and recovery in our FinTech business under the leadership of Darren Simmons, reflects the strength of our execution and strategic focus on developing a comprehensive digital neighborhood for our casino customers. Our digital neighborhood encompasses far more than the ATMs, cash access solutions and our fully integrated kiosks. It also extends into products like Jackpot XPress and CentralCredit as well as a full array of compliance services needed in the highly regulated gaming industry of today.

Furthermore, in 2019, we added a range of strategic player loyalty products that added to our comprehensive solution set and was an important step for us in the path toward the convergence of loyalty and payments in the digital world. Importantly, what sets us apart in the industry is that all of these products and services are fully integrated with each other. This increases both the stand-alone value of each service, and due to the tremendous efficiencies that we realized through their use of these products, this significantly increases the total value that we bring to our customers when these products are embedded into their casinos' enterprise-wide network.

And one of the most important advancements in the development of our digital neighborhood is the introduction of our digital white-labeled CashClub Wallet solution. The CashClub Wallet is simply the next step in bringing value to both the player and the operator. Offering convenience for players and significant cost efficiencies for operators, the CashClub Wallet is a convergence of our digital cash access funding capabilities with our digital player loyalty services. It is a mobile app and a true digital wallet. It can act as the hub for payments across the breadth of a casino operators, resort enterprise, from the gaming floor to food and beverage, from retail to hotel and resort amenities, it can even provide the funds for players to engage with an operator's online retail and entertainment channels such as iGaming and online sports books.

In addition to the cost efficiencies for the operators, our Wallet has the ability to extend the relationship and the connection time between our casino customers and their players.

Another key feature of our digital wallet is its flexibility. White-labeled to carry the casino's branding, the CashClub Wallet is fully customizable so that the operator can deploy it with a customer experience that is reflective of their brand and meaningful to their patrons. Our digital wallet also meets the extensive needs of the various gaming regulators across multiple jurisdictions throughout the U.S. as well as banking and other financial regulations.

We expect to have the first operational uses of the wallet with 2 large, well-known tribal casino operators later this month. The use of the CashClub Wallet will enable guests to access their funds and loyalty program benefits when they want, how they want and where they want to use them, all across the casino financial ecosystem. In addition, all of this will be seamlessly integrated for the convenience of the patron and will carry those increased cost efficiencies for the operator.

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

Thank you, Mike. Hello, everyone. Throughout the third quarter, more casinos continue to reopen, and despite limitations such as restrictions on capacity and social distancing requirements, player attendance at casinos was good, as you heard from a number of public operators that have already reported. With the majority of our revenues driven by recurring activities, such as play levels on our gaming operations units, transactional funding actions or subscription models for player loyalty and regulatory compliance services, our business recovery has occurred quicker and stronger than we originally expected.

Let me call out just a few notable metrics. During the third quarter, many operators focused on optimizing their slot floors to enable a greater number of their gaming machines to remain active. The combination of more active games, a greater mix of premium units and our games' strong performance yielded a daily win per unit of $32.81. This was well ahead of the second quarter and just below the average daily win per unit generated in the 2019 third quarter, during which all of the games in our installed base were active. We estimate that the daily win for only those games actually active during the quarter exceeded $37 per unit.

Our total installed base of leased machines increased 7% over a year ago and by more than 300 units on a quarterly sequential basis from the end of the second quarter. This growth was largely due to our base of premium gains, which increased both year-over-year and on a quarterly sequential bas . Higher-yielding premium units now just over 40% of our total installed base.

Recent additions to our Game portfolio, such as our premium non-WAP game, The Vault, and the 2 new wide area progressive games on our dual curve, screen DCX cabinet, The Mask and the Karate Kid, are continuing to perform well. These additions were the primary driver behind the increase in premium units in the third quarter.

Existing premium units with original themes such as Shark Week and Smokin' Hot Stuff Wicked Wheel, also remain strong performers, while The Vault is our best ever performing game with a lot of runway for further placements in the quarters ahead.

While unit sales of slot machines improved 29% over the second quarter, most operators remain in capital conservation mode. Our average sale price was up slightly year-over-year, partially reflecting a favorable mix of our new premium Flex cabinets in the overall mix of units sold. We continue to expect that slot spend by casino operators will remain at reduced levels during the fourth quarter and at least through the first half of 2021. However, we believe the broad strength of our high denom mechanical reel offerings and the launch of our 4-cell Flex video cabinet at the beginning of the year positions us well to continue to gain ship share. 18 of the top 25 top indexing high denom mechanical reel games in the latest Eilers and Krejcik game performance report are Everi. The initial performance of the Flex, with its combination of a differentiated cabinet and new game themes with proven features and play mechanics, provides further support for growing our ship share.

In the FinTech segment, cash access revenues improved dramatically over the second quarter. The decline versus the 2019 third quarter reflects both the impact of casinos closed during the quarter and a modest decrease in transactional activity on a same-store basis. While same-store transactional activity did improve from the beginning of the quarter, it appears to have plateaued during recent weeks to a level modestly below pre-COVID levels.

Reflecting ongoing operator interest in our player loyalty products, information services and other revenue grew 22% over the 2019 third quarter driven by the year-over-year increase in player loyalty subscription revenue. Compliance services and self-service loyal products are becoming must-have solutions for casino operators. The operator interest in our self-service player loyalty kiosk led to a 33% increase in loyalty equipment revenues. However, this was more than offset by a decline in other equipment sales reflecting operators' capital conservation efforts. A portion of the increase in loyalty shipments reflects the postponements associated with orders placed earlier in the year. Having said that, I'll highlight that our backlog for loyalty deliveries remain strong.

We have integrated our loyalty acquisition assets into a single platform which is integrated into our digital neighborhood that Mike discussed, and have rebranded all our player loyalty products and services under the TRILOGY brand. With a significant installed base of existing products in the marketplace, we will continue to support all our customers, but all future product developments will be under the TRILOGY brand efforts.

I also want to bring attention to some of the terrific industry acknowledgments we've recently received related to our products and our product road map. As part of their 2020 Gaming & Technology Awards, Global Gaming Business, once again, recognized Everi for 2 notable awards. The first was for our premium game theme, The Vault, which received the gold medal for Best Slot Product. This is the second consecutive year that one of our premium slots was recognized as the casino industries' Gold Medal for Best Slot Product. Winning the top spot last year was our Smokin' Hot Stuff Wicked Wheel premium theme. Our FinTech business is recognized for the third consecutive year by the Gaming & Technology Awards. This year, we received the Silver Medal for the Best Consumer Technology for our digital CashClub Wallet solution. Last year, QuickTicket, another cashless solution, was awarded the silver medal.

Now I'd like to turn the call over to Mark to share his perspective on our performance and trends as we begin the fourth quarter and what that could mean for the remainder of the year. Mark.

Thanks, Randy. While the awards and recognition with the industry are -- always provide a great validation from our customers and peers of our product investment strategy, an even better measure of our success is the improvement we are achieving in our financial results and free cash flow. So with that, let me focus on some of those highlights for the quarter.

Driven by the strong recovery in our recurring revenue streams and the margin enhancement we achieved, in part from our efforts to reduce our costs, our third quarter adjusted EBITDA was $59.8 million, and our free cash flow was $22.8 million. Our free cash flow more than doubled the amounts we reported for the third quarter of 2019.

With this strong free cash flow generation and our improved liquidity, we were able to repay the entire $35 million outstanding on our revolving credit facility in the third quarter. At current interest rates, this will save us almost $500,000 per quarter and future quarterly cash interest costs.

Reflecting that debt pay down, the total principal face amount of our debt outstanding declined to $1.1 billion at September 30. Our net cash position at the end of the quarter was $128 million as compared to $133 million at the end of the 2020 second quarter. However, the second quarter net cash position was reflective of the cash on hand from the $35 million in revolver borrowings.

I'll finish up my debt discussions by pointing out that at the end of the third quarter, despite the $125 million increase from our new incremental term loan that we borrowed in April, the total outstanding principal face amount of our debt, less our actual net cash position, is more than $100 million less than it was at the end of the prior year period.

While we are currently maintaining our cash balances to preserve liquidity through these uncertain times, this overall decrease supports the progress that we have been making in our goal to delever.

Moving on to our outlook. As we look to the fourth quarter, there is still uncertainty in the current gaming environment. This includes visibility for the portion of our gaming operations footprint that is currently installed but inactive. However, because we expect our total premium footprint will continue to grow, more of the inactive units in our installed base will become activated, and the units that are active will perform at levels consistent with our current performance, we believe that our active units will continue to over-index their performance relative to their prior year pre-pandemic levels.

Our strong third quarter performance offers encouragement for continued momentum in the recovery of our business. Based on the levels of activity we are currently experiencing, our continued strong relative performance in both our Games and FinTech businesses and the number of casinos opened as well as their player visitation levels across the country, we are guardedly optimistic that our fourth quarter adjusted EBITDA will be comparable to the third quarter performance. This is despite the typical fourth quarter holiday declines, which have historically resulted in slower quarters for some of our revenue or recurring revenue streams.

In the fourth quarter and for next year, we expected adjusted EBITDA as a percentage of total revenues will remain stronger than at typical historical levels. This reflects the current mix of our business as well as the ongoing benefits of the overall cost improvement initiatives taken in the second and third quarters. On a quarterly sequential basis, revenues are expected to increase slightly over the third quarter levels, and we anticipate that adjusted EBITDA as a percentage of total revenues will contract slightly as we start to see increasing equipment sales.

The third quarter was exceptionally strong as the faster-than-anticipated recovery enabled the revenues to ramp more quickly than our costs. However, as I have suggested on previous calls, we expect fourth quarter SG&A and R&D expense, exclusive of noncash compensation, to increase slightly from the third quarter levels in order to support the increasing business volumes as well as prepare us for future growth opportunities. Having said that, going forward, we still expect to have an overall cost structure that is lower when compared to prepandemic run rates.

I want to remind you that on our last call, we stated our intentions to continue to evaluate and optimize our general office and warehouse facility needs to support a changing business climate and a more remote work environment. In the fourth quarter, we expect to see further consolidation of warehouse and assembly operations as well as some other general office consolidation. As a result, in the fourth quarter, we expect to incur certain onetime nonrecurring charges of between $1 million and $2 million as we exit certain of these existing facilities. But we believe these charges will position us to save future operating expense.

We expect the free cash flow will remain positive in the fourth quarter despite higher sequential cash interest costs. As a reminder, in the fourth quarter, we will pay $10.7 million of semiannual interest on our 7.5% unsecured notes. With adjusted EBITDA and capital expenditures coming in comparable to the 2020 third quarter, no additional placement fees and an immaterial amount of cash paid for taxes, free cash flow is anticipated to exceed the $4.4 million generated in the fourth quarter of 2019.

That concludes my prepared remarks. But before I turn it over to the operator, I want to remind you all that we're responding to these questions from remote locations. While I think we're getting pretty good at this, I apologize in advance if we're still a little clunky as we handle the responses. With that, I'll turn it back over to the operator for questions.

(Operator Instructions) And our first question is from George Sutton with Craig-Hallum.

Just to be consistent, Randy, I wondered if we could walk through the car type that you currently are seeing. So in February, you felt you were driving a Ferrari with the throttle wide open on an open road. The stock was $13. In June, you felt like you were a Jeep on a rugged road. The stock was $6.50. So here, we've had a great third quarter and a good fourth quarter outlook. I'm just kind of curious what car and what road this would represent.

Well, George, again, I didn't put a lot of thought into this, but I think that we're definitely off that rugged road, and I'm trying to upgrade. I haven't quite got back to the Ferrari yet. But I feel like the road is smoothed out slightly. And again, I can't see everything up ahead of us. But George, we had a really good quarter, and we're very, I would say, as we said, guardedly optimistic about where we go from here. So how is that? I'm not going to pick out a car just yet. I got to think about it more.

All right. One question for Dean, if I could. Congratulations on your second annual award of the top game. And I'm just curious with your very low share in an area like Vegas. If I was a buyer, seeing you produce the top game each of the last 2 years, I'm just curious, can you just give us a general interest level for those who haven't been working with your game product in the past. Is that starting to change in your view?

I think -- so George, thanks for the question. I do believe that it is, and it has been for a little while. It's a marathon. You're not going to, all of a sudden, go get 100% of the ship share. It takes a little bit of time. And we've been gaining our fair share as we continue along.

As long as we continue to produce what we had with respect to our mechanicals, especially high denomination, and now all of a sudden, with our Flex portrait cabinet coming out and doing extraordinarily well with 11 different games that our operators can choose on that brand-new cabinet as of right now, we feel very good about it. So I look forward to see how it plays out. We're positioned very well.

All right. If I could just thank whoever forced Randy in his script to say Smokin' Hot Stuff Wicked Wheel twice, I appreciate it.

Thanks, George.

I love it, George. Thanks.

And our next question is from Barry Jonas with Truist Securities.

Look, obviously, Q3 this year is a little different than prior years. I'm wondering if you could talk about what you've been doing there. As you're speaking with customers, what's feedback been on any new products or any indication around budgets for next year?

Yes. That should probably be taken by Dean and Darren. They did the customer interactions on our -- both our virtual G3E, but also the -- we had some customers that actually made their way to our showroom. So gentlemen, do you want to take it first? Dean and then Darren?

Okay. I think the response has been great. It's -- the real challenge is trying to present and have it come across in a similar format is actually being able to see, feel, touch machine and just get a much more immersive experience in terms of understanding that.

But with that, I mean, we're doing our best virtually, and our customers are very receptive, right? They're -- they believe that we are completely going in the right direction, and our product strategy is sound, and there's just as high of a level of confidence that I've seen in the 4 years that I've been here about our product strategy.

I mean, with that said, capital, and obviously, on our operator side, things have got a, not just sustain but continue to improve as we get through this pandemic, right? So from a capital standpoint, there -- if they get money available, we feel very good about it.

But it's a big if, especially as we go through winter. We just got to make sure we stay the course. But as far as the product side of it, very encouraging. Darren?

Darren?

Yes, similar. I guess, absent the actual physical show, we have been easily as busy as last year with lots of the virtual. We're still using the same nomenclature kind of pre G2E meetings, and we've actually had some where we've been able to have in person with all the social distancing and safety protocols, which have all been very well received.

I agree with Dean that from a product strategy standpoint, we are very much resonating with our customers from the FinTech side. You heard in the prepared remarks, and we've been talking about the expansion of our digital neighborhood, and all very well received by the customers. A lot of enthusiasm.

I do believe that they're going to be constrained on budgets from a capital standpoint. So that will, as I think indicated in the prepared remarks, in effect, some of the -- some capital purchases on hardware. Good thing is our loyalty -- our hardware has been doing very well. And I think we'll just kind of be in a wait and see as they plan their 2021 budgets. But I would say it's going to be constrained for the foreseeable future.

Great. And then, I guess, relating to those answers about budgets and capital purchases, do you think more operators are moving to gaming operations or participation models just in response to that? And then after, I have a quick follow-up on cashless.

So Dean, do you want to take that?

Yes. So Barry, I think the answer is it depends, right? It just depends on the operator and their particular situation. I will say that if you have great premium product, it seems to find its way on the floor. But they're going to be a little bit more scrutinized. As far as product sales, definitely a wait and see. It's -- do I think it's going to migrate between one or the other? I think it's just really honestly depends. It's a tough one to answer. Certain customers, for sure, are going to try and get product on as suppliers get creative with trying to get new product introduced on their floor in terms of, I don't know, pricing models and so forth. But it's just, once again, it's a really tricky question to answer that I think it's not a one size fits all.

Yes, I would agree. I think we're probably in a similar position. What I will say, though, is from the FinTech standpoint, operators are certainly willing to invest capital to look for products and services that do create operational efficiencies and can reduce OpEx. So I would say things like the digital wallet that we're selling certainly is an opportunity for them to find some operational efficiencies and cost savings and create some great guest experiences.

Other things like our promotional loyalty mobile app, again, moving to a more operational efficient where people can self-serve promotions on a mobile phone app. So a lot of those types of things are going to be, I guess, sort of capital constrained questions that they can look for efficiencies, and then they'll make the proper investments.

Great. And then I guess last one, just following up on digital or cashless. I know it's sort of developing real time, and many operators have already talked about it on earnings calls this season. But how are you thinking about how this could ultimately transform your business? I guess, to what extent should we think about it replacing current revenue streams versus being entirely additive?

Well, remember, right, so the digital wallet is an extension of the services that we're providing today in terms of how people access their funds. So it provides opportunities for us to provide a new sort of form factor in terms of how people access their money.

So we believe it's additive from the standpoint is it's a new way to get money for people's entertainment experience. And then there is opportunities for us to introduce new transaction types, which, again, is going to be additive. So I think it's sort of multi threaded in terms of the opportunity. And remember, it's just how it connects with the rest of our products and services in that digital neighborhood. So it adds value to everything that we're doing because they are integrated, they are interconnected in the digital neighborhood. And as Randy indicated earlier, from an AML standpoint and then loyalty standpoint, we've got kind of the must-have products, which are all integrated with the digital wallet. So does it transform it? Yes, as people move towards cashless. But is it a -- so that's how it will transform. And I think it will be an evolutionary process.

Great. And great Quarter.

And our next question is from David Katz with Jefferies.

Congrats on the quarter. Have to say, I'm certainly surprised by the magnitude of the number, but not the tone and direction for sure. Can we just talk about some of the commentary that you made in the release around the FinTech segment, where you referred to some 80% of one specific segment of it being recurring. What I'm getting at is, I'd love to know just within that segment, which portions you would consider to be sort of recurring fees, so to speak, right? And which would be sort of recurring volume-based?

Obviously, we know some of those, but help us break down that whole half of the business and understand what's sticky and what's not so that should we have, heaven forbid, further shutdowns or et cetera, we know where the pressure points are or not?

Yes. Sure, David. Darren, do you want to take that?

He might have -- Mark...

Yes, that's good. It's not like we can see each other.

David, the cash access line is primarily the recurring revenue from our long-standing contracts, that clearly is recurring in nature. What we would be not necessarily recurring are the kiosks and loyalty sales and the equipment sales line. When you move on down into the information services and other, which is not readily broken out, is activity such as the new software sales for our compliance products or new software sales for our loyalty products. But beyond that in there is your kiosk maintenance and service contract, your loyalty support and your compliance support as well as your central credit subscriptions revenue services.

So I would tell you, a small portion of the total revenue that we generate in that other information services and other line is probably what I would call nonrecurring as we would look at it, and it's probably -- if I had to frame it out in terms of relative size, it's maybe $5 million or so of that total number in Q3 would be 1x sales, the rest is pretty much recurring.

Okay. Perfect. And if we could switch over to the gaming side of things. If you could just give us a tad bit more color on what you're thinking about in terms of unit sales in the fourth quarter and what that looks like? That would be helpful also.

Go ahead, Mark. Yes, go ahead.

In the quarter, we were just under 500 units in this quarter, this quarter, and we think there will be some sequential growth there. I don't know how much more sequential -- how much higher looking it is going to be than that, but it will be slightly up from that number, would be what I suggested in Q4. We suspect it's kind of a little sequential for the next quarters as customers start releasing some more capital possibly as well.

Got it. Look, I don't have any more insightful questions, nice quarter. I think I'm all set.

Thanks, David.

And our next question is from David Bain with ROTH Capital.

Great. And congrats on everything. It was great to see. I was hoping I could just briefly dive into your 4Q guidance. First, can you confirm 4Q quarter-over-quarter historical game op seasonality that you saw? I mean, we're not going to feel -- they're typically about 4% or so. I'm just trying to go back and see that.

And then you mentioned a slight increase of active units so far in 4Q. If you can give us a sense, I didn't hear the active units in 3Q, I'm sorry if I missed it. And if you're just using the kind of the live game run rate from here. So any significant increase in live games will be would be gravy or kind of just how you're looking at this 4Q over 3Q a little bit further would be great.

Yes. I don't think we did -- you didn't miss anything, David. I don't think we gave actual numbers of what was active in 3Q. But Mark, do you want to address that?

Sure. I'll try to break apart the pieces for you. In terms of our -- or kind of that -- I used term seasonality just because you used it in terms of what you see in Q4, we usually do see a lull on a like-for-like unit basis in terms of the same footprint were out this year, Q4 versus Q3. The interesting thing about our business is really where we've had some great success. If you look backwards to 2019, we actually grew that substantially, but there was a lot of growth happening in our premium units around the same time as well.

So I think your framework of, call it, 5% or so is probably a reasonable way to think about how you see some -- a little bit of some of those holiday times where the gaming ops volumes maybe aren't as strong for a couple of those bigger holidays, Thanksgiving and Christmas, for example. And that, we believe, as we said in our guidance, would kind of be more than offset by continuing placements of total units, primarily premium units in Q4, plus more units becoming active.

Again, we didn't really talk about what percentage of our footprint is active, but we are still seeing new properties that were previously either totally shut down or coming back online, growing. So we think that, that kind of lends itself to showing some growth in the -- from Q3 levels of gaming ops revenue for us as we kind of move forward into Q4. So instead of seeing a decline, you probably see a flat to maybe even slightly up from Q3 levels on the results.

Okay. Great. And then if I could just one on CashClub, it's kind of bifurcated as well though. So you gave us a sense as to kind of the initial capabilities that the placements are going to have in the next a couple of weeks. But how does that augment or change a year from now? And given this is going to increase the number of transactions, as you cited earlier in the call, is there going to be a different surcharge to the end casino by -- or to the end customer by casinos? Have you discussed that with casinos? And just ways of increasing awareness of the product when it launches?

Well, as you can imagine, David, there have been tons of discussions ongoing with operators about the launch of the wallet. But let me have Darren take you through what the bulk of those have been about.

Sure. So from a patron fee standpoint, I would say there's a lot of philosophies around the acceptance and whatnot. For the most part, operators are looking at a consistent structure. There is potentially opportunities for there to be flex of fees to incentivize and/or changing the other fees, other transaction fees to incentivize people to go more cashless. So I would say right now, most are planning something consistent with where they're at today with opportunities to flex fees for ways to motivate patrons to adopt it and/or incentivize them to convert off of other transactions.

The idea is, ultimately, we have the opportunity to convert the existing physical cash transactions to digital but then also offer new transaction types, which allow people to actually move money outside of outside of their wallets and back into their bank accounts. So we see velocity increases, monies coming in and velocity, potential opportunities for monies going out where we'll have fees associated with that also. So that's sort of where we're at with those.

Okay. And then product adoption, like just how you're going to increase awareness when it goes live?

Sure. So this is significant for the operator and their marketing teams that we work with in order to get the right marketing messages. And a lot of the experience is really around the integration that we have with the system provider because that's really the technology that gets it down into the game. And so from that standpoint, there's all sorts of opportunities from the website, e-mail communication, text message communication, on-screen messaging with the applications themselves at the game itself if it's going directly into a slot machine. So a lot of that is being worked on with the operators for communication to their players. So we believe that it's a fairly seamless user experience from the standpoint of they're not going to see anything that's really different than I think than other sort of mobile app experiences they're using today. But certainly, the operators are very keen from a marketing standpoint to get those marketing messages right. And of course, they're going to amend them and tweak them and refine them as we launch.

Okay. Great execution on the quarter.

Thank you, David.

And our next question is from Chad Beynon with Macquarie Group.

Your installed base and premium growth, as we've talked about, is certainly a bright spot. And I wanted to dive into this a little bit more. Maybe reverse engineering into -- I guess what's left from an aged third-party unit standpoint or older proprietary cabinet standpoint? I know you gave us some figures on percentage of premium, but I was wondering if you could shine a light on that. I believe it's pretty low. And then related, just on the CapEx side, how are you thinking about an updated CapEx number to support your growing premium footprint?

Randy, do you want to get into that?

I can. I think Mark probably has a little more, but I would say, on the CapEx...

I was going to begin with CapEx. I was going to give you the boxes.

You got it. So look, we feel like the older third party, Chad, was anything want to talk about, I think we have, and Mark can correct me, somewhere around 200 units. They're very small. That's the old wide body. So that is immaterial, not even really an impact to us.

But from there, our Core HDX has been out for a little while, but like relatively probably 3 to 4 years. And then the mechanical, which is a big part of us, again, fairly new product out there. So I would say, I don't think our -- and then the flex is new. So you have the flex coming out, and then you've got the premium games coming out. So I feel like our footprint is fairly new, but it's always ones you fight with, right? So as we bring out these newer cabinets, we're always going to be looking back at some of the older stuff. And as you know, sometimes from the older stuff is doesn't move until somebody makes you move it.

So I think we feel pretty good where our overall age of that footprint is. And really, where we want to grow, and I talked about it is it's really in the premium products, which is what we've done. And those are relatively new, between Hot Stuff Wicked Wheel and now The Vault, where we're really growing our footprint is with newer product.

Yes. And Randy, I'll just pile on. The number is right around 300 units for those third-party games that's out there. And again, to your point, they've been out there for a while, and they're still generating returns. So we're happy to leave them out in the installed base at this point.

In terms of CapEx, for the quarter, we are still obviously working around where our customers are in terms of their desire to get new product on their floor. What we saw in the quarter was probably just under $13 million in terms of game refreshes and new unit placements for Q3. I think you'll kind of see us in that similar neighborhood in terms of where we think CapEx kind of looks like going forward into Q4. And as we start to -- start 2021, we haven't come up with guidance yet, but again, maybe a small little uptick up as more casinos or more casino customers are willing to take product and hear from that, call it, $13 million-ish game refresh level, so call it $13 million to $15 million for the near term.

And maybe, again, it's all a function of the level of interest in our customers and some of the new products, it's very successful. So what you saw last year at the same time period as we were growing the premium installed base very rapidly, that number was approaching $20 million plus a quarter. So if we're spending that kind of level, it means our installed base is growing pretty rapidly. And I think in the near term, though, I would be planning on something a little less, but still seeing growth in the installed base.

Okay. And then separately, a high level one, just given your strong free cash flow and your guidance for the fourth quarter, I think, allows me to ask this question. Is it time to kind of start thinking about more accretive tuck-in acquisitions and go back on the offensive given how accretive loyalty and some of the fintech ones were? Or is it still too early to think about some of those items?

No, no, Chad. I think you're absolutely right. I mean, I think we've been very successful with the small acquisitions, the tuck-ins that we have acquired so far, both on the compliance side and loyalty. And we continue to be looking all the time. And as you know, given the current environment, there is some developers of products that we find very interesting that may be interested in finding a new home. And so we are continuing to look absolutely.

Our next question is from John Davis with Stifel.

All right. So Mark, maybe start off. Margin was up 500 basis points year-over-year. You alluded to the cost structure staying, I guess, reduced relative to prior COVID numbers. But how should we think about that 500 basis points? Does 200 basis points of that, you get that back? So it's 300 basis points on a go-forward basis? But anything you can kind of give us directionally for the margin as we kind of think about next year and beyond.

Yes. I think we're still obviously looking ourselves where we think forecast would be for revenues for overall. But I think you're thinking about it in the right way in terms of how that number comes down just a little bit again, because as we start selling more equipment on both the fintech and the game side of the business, it's very reasonable to think that a couple 200, 300, 400 basis points start coming out. And I would tell you, the only reason that's going to fall more than that is equipment sales and there's onetime sales that are hardware-driven that have lower margins are making up more of our revenue numbers. So I'm hoping it falls even faster because that means we're selling a lot of equipment hardware out there.

But I think at least in the near term, you should expect to kind of see that kind of erosion a little bit in the overall blended adjusted EBITDA margin as we progress until equipment sales kind of start returning more to normal.

Okay. And then, Randy, I think you gave us $37 number per win per day on active units, which is almost mind-boggling at this point. But just some quick math off of that. That would imply, correct me if I'm wrong, but 85% of your machines are currently being operated, which would be kind of 90% or so of machines at casinos that are open.

Just wanted to check the math there to see if those numbers make sense? And why you think that so many of your machines at open properties, I mean, close to 90% of machines at open properties is pretty staggering. So what's driving that? Is it just performance? Is it newer gains? Just anything there would be helpful.

Sure, John. I mean, look, I think your percentages are in the ballpark. I mean, even some of the stuff you will see in Eilers where they try to parse that out, puts us in that a high percentage. And we believe, really, it's the premium game. We have 40% of your installed base now premium. And between the Vault, the DCX, the dual screen that we came out with had done very well. Smokin' Hot Stuff still does well, Shark Week, Renegade even still performs well. So when you look at that base and how many of those units are premium, it's, to your point, it's very, very strong. And I think that's a very reasonable number based on, as we talked about, Mark alludes to thinking that things will continue that way into the fourth quarter if the environment stays the way it is. We just feel like we had a fairly good hand with the Vault and some of the other themes that are coming out, and those are the games they're leading on, and those are the games that are performing well. And we're very -- we feel very good of where we're at right now going in the fourth quarter.

And John, John, you've seen The Vault. No, I think, Dean, you're going to say the same thing I will. So go ahead.

It also helps being in a carousel configuration where they could have more games turned on because it promotes social distancing. So some of the strategies that we're doing is to either have a bank in carousel configuration or additional wedge strategy that meet the needs of our customers and so forth. Those are the things that will help continue to do our part to have more gains turned on than otherwise.

Okay. That's helpful. And then last one for me. Just on the fintech side, just cash access volumes. I think they were down about 10% year-over-year, which is pretty impressive, I think, that's an average of 85-or-so percent of the casinos were open. So that would imply your access volumes were up modestly at properties that were opened. One, I just wanted to check and see if that was the case? And then also kind of what you're seeing so far in October? That would be helpful.

Yes. I'll take this one to start. I think the guys out there like Fantini who will pull together all the commercial jurisdictions and the state-level reporting of revenues and volumes. And again, I think what we were very pleasantly surprised in the third quarter that we saw was -- you reported that gross gaming revenue for the commercial jurisdictions that we reported in July were down, call it, 16%, 17%. For August, it was down only 15%. Hasn't come out with September yet, but I think those are good data points showing that it progressively got a little better as we progressed through the third quarter in terms of how revenues we're tracking for the commercial guys are reporting.

Logical to assume that tribal and regional guys that aren't in those reports probably transact similar kind of volumes, maybe slightly better just because regional guys seem to do very strongly in terms of what you see from operators out there.

What we've seen in October right now, and it's still, I would say, relatively early, and obviously, there is quite a bit of other stuff going on in the macro environment right now, particularly with things like the election, COVID starting to come back, a resurgence a little bit and making a fight as the weather is cooling off. And we have seen a little bit of, I'll say, softening in October compared to that kind of run rate of where we were exiting September, the monthly activity in the September quarter. But still it hasn't totally fallen off the cliff by any stretch. It's just a little bit of a downtick on there. All of our analysis and all of our measures that we've done in terms of forecasting or projecting as we move into Q4, assumes that there's no backslide or material backslide in any of those kind of data. What we have seen, too, is several individual properties have had recent closures in terms of outbreaks or COVID outbreaks that they'd look to shut down for a day, a couple of weeks just to clean the property and make sure it's covered.

So I think those little one-offs are still happening and contributing to some of that overall slide, and what we're seeing as we start Q4 and a little bit of the election noise, I think that's also starting to contribute a little bit, but nothing materially has changed.

And our next question is from David Katz with Jefferies.

Mike, I just wanted to get a quick sense or whomever you'd like to farm it out to, which you're doing quite well. When we look at the cost savings, right, I mean, the gross margin in total was up considerably. The degree to which you're able to save costs across the 2 divisions, is it just aggressiveness within each division? And given how well you're doing and cutting costs at the same time, how did you sort of think about that? And how should we think about that as an ongoing trend line?

Yes. I will say that I think both businesses were aggressive and looked very carefully at all of their costs. And I -- but I think Mark really spoke to it going forward. And I'll turn it back over to him. I mean, you shouldn't expect that we're going to be able to continue with that kind of a rate or improvement rate going forward. But Mark, do you want to step to that?

Sure, sure. David, I think I've been trying to frame out on Q2 call. I kind of said on this call that when we look at R&D and operating SG&A expense, exclusive noncash comp, I've kind of been framing outlook. We think those are going to run about $35 million, $40 million this quarter, probably near the middle of the high end of the range. And as we move into Q4, that steps up just a little bit as, again, employees are back and we've ramped the business, the expenses match more of the revenues that have come back on board for the entire quarter in there.

I think those kind of frameworks look good for us as we move forward. You think of it kind of at $40 million, a little more than $40 million maybe in Q4. And then as you start moving into next year, slowly ramping up from there throughout the progression of quarters throughout the quarter.

I remind you, when you look back to 2019 Q4, you have a lot of expense sitting in there related to our TournEvent of Champions event and G2E costs that are that are not going to be present in the current year, but I'm talking absolute saying it's kind of around that $40 million plus range as we move into Q4. And then moving forward, you should expect to see those G2E kind of level costs coming back in Q4. There would be a little bit of an outlier for that kind of progression of run rate from there.

And we have reached the end of the question-and-answer session. And I will now turn the call over to COO, Randy Taylor, for closing remarks.

Thank you for joining us on the call today. With the actions we've taken, the gaming industry's ongoing recovery, and the strength we have in our Games and FinTech segments, we believe we are well positioned to enhance the long-term value of the company. We look forward to providing you an update on our next quarterly call. Thanks for joining us.

Thanks, everyone.

This concludes today's conference, and you may disconnect your line at this time. Thank you for your participation.