Everi Holdings inc (EVRI) Q2 2021 Earnings Call Transcript

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Everi Holdings inc (EVRI -1.49%)
Q2 2021 Earnings Call
Aug 4, 2021, 11:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Hello, everyone. Thank you for standing by, and welcome to the Everi Holdings 2021 Second Quarter Earnings conference call. [Operator Instructions].

Now let me turn the call over to Bill Pfund, Senior Vice President, Investor Relations. Please go ahead, sir.

William Pfund -- Vice President, Investor Relations

Thank you, operator. Welcome, everyone. Let me remind everyone of our Safe Harbor disclaimer that covers today's call and webcast. Our call will contain forward-looking statements, which involve risks and uncertainties that could cause actual results to differ materially from those discussed in 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 do not intend and assume no obligation to update any forward-looking statements, which are made only as of today, August four, 2021. You are also cautioned not to place undue reliance on such forward-looking statements. We will refer to certain non-GAAP financial measures, such as adjusted EBITDA, free cash flow and net cash position.

A description of each non-GAAP measure and a reconciliation to the most directly comparable GAAP measure can be found in our earnings release and related eight-K as well as in the Investors section on our website. This call is being webcast and recorded. A link to the webcast and a replay of today's call can be found in the Investors section of our website. On our call today are Mike Rumbolz, Chairman and Chief Executive Officer, Randy Taylor, President and Chief Operating Officer, Mark Labay, Chief Financial Officer, Kate Lowenhar-Fisher, General Counsel, Dean Ehrlich, Games Business leader and Darren Simmons, our Fintech business leader.

Now I will turn the call over to Mike Rumbolz.

Michael D. Rumbolz -- Chief Executive Officer

Well, thank you, Bill, and good morning, everyone, and thank you for joining us. I'd like to begin by sharing a few highlights and observations from the second quarter. Our outstanding results and strong growth relative to 2019 are clear evidence of the success of our organic growth initiatives as well as the sustained recovery in the gaming industry. All of our key financial and operating metrics are up impressively compared to the pre-pandemic 2019 second quarter, and we significantly exceeded our results for the second quarter of 2020.

On a consolidated financial basis, we set all-time quarterly records in revenue, net income, earnings per share and adjusted EBITDA. With financial performance, free cash flow generated in the first half of 2021 exceeded the free cash flow we generated over the prior two years combined. Our results were even slightly ahead of the expected range that we announced in June in conjunction with our refinancing activity. Operationally, our excellent performance clearly demonstrates that the complementary nature of our games and fintech segments has never been stronger.

In games, the investments that we made to expand our game development studios and broaden our portfolio of differentiated cabinets continue to drive sustained growth in both our ship share of for sale units and in our gaming operations installed base. Each cabinet style that we produce is supported by a strong pipeline of original content that is available for distribution in both Class II and Class III markets. And this library continues to expand. This content pipeline is also supporting our growth in the digital eye gaming space. In fintech, we have successfully expanded our product offerings through investments in both internally developed products as well as through strategic accretive acquisitions of complementary products and technologies. As a result, today, we offer the most comprehensive portfolio of integrated financial, loyalty and reg tech solutions for the casino industry.

Furthermore, since we had the vision several years ago to create a digital neighborhood with a focus on cashless technology, our products are integrated with one another. This provides casino operators additional value and ensures the seamless operation of these mission-critical solutions, while at the same time, providing casino patrons with player friendly offerings. As a result of our operating progress, the successful refinancing of our debt and our substantial free cash flow, Everi has never been in better shape. As we shift our focus from deleveraging, our disciplined capital allocation practice will remain the same to stay the steady course of return-focused investments. Our investments will be made with an eye toward expanding our range of complementary products to drive further share gains in our core games businesses as well as to broaden the capabilities of our digital neighborhood in our fintech business.

You can think of our integrated digital neighborhood as a broad platform, upon which we can layer new products that will continue to grow our business by increasing the value that we offer to casino operators and their patrons. We will also remain focused on investments in newer technologies that leverage our core strengths. Our digital CashClub wallet solution is just one example of this. Today, we are live with our cashless wallet solution at ten casino properties that have more than 24,000 gaming machines and 700 table games. These Casinos encompass both tribal and commercial operators, and we are facilitating cashless transactions for thousands of casino patrons in multiple states.

Our cashless wallet technology places us squarely at the forefront of the dawn of an exciting new long-term growth opportunity in the casino industry. Our competitive advantage draws its strength from our substantial experience and expertise in funding transactions across the gaming industry. This strength is combined with our unique banking-as-a-service solution focused on the CashClub wallet and strategically integrated with all of the products on our digital neighborhood platform. This creates a seamless experience for casino guests and enable significant cost efficiencies in the back of house operational side of the casino. We also have several new loyalty and reg tech related products that are under development and are continuing to extend our range of products in these categories.

Another example of our return-focused investment strategy is our remote game server. Our creation of a state of the art technology infrastructure leverages the strength of our successful game development. This has favorably positioned us to become a leading content provider for the rapidly expanding iGaming world. As our track record demonstrates our search for new technologies, geographies and interesting products can provide further sustainable growth across our fintech and games portfolios. We will invest in both internal development and in strategic acquisitions that can combine with our core strengths to provide accretive growth.

And now let me turn the call over to Randy, so he can provide you some more insight into our operational successes.

Randy L. Taylor -- President And Chief Operating Officer

Thank you, Mike, and hello, everyone. I hope you are all safe and doing well. Beyond our focus on technologies and products that Mike just mentioned, we also have strengthened and broadened the depth of our management team over the last several years. Its enhanced leadership is evident across our product development, sales management and production execution teams. We have never been stronger or had a more aligned workforce worldwide. As a result, we are executing at a high level, which, in turn, is delivering financial growth.

Our track record also reflects the emphasis we've placed on striving to build a corporate culture focused on people and collaboration. This includes intangible but important elements to foster mines that will accept the prudent risk-taking needed to create new products, while also driving home the disciplines needed for consistent execution and operating processes. We believe the strength of the worldwide Everi team, the culture of collaboration and innovation we continue to foster and having the right people in the right positions are key factors and why we have so quickly regained the momentum that our business was demonstrating just prior to the onset of the pandemic.

The heart of our success is our core recurring business operations, which represented approximately 77% of second quarter revenue. These operations are performing beyond our initial expectations and are providing exceptional growth in today's environment. While the casino industry has rebounded solidly from the depths of the pandemic, we believe our performance reflects our growth focus and consistent operating execution. The success of our premium games remains the primary growth driver of our installed base unit count and the higher average daily win per unit. These in turn drive significant gaming operations revenue growth.

Our base of premium units has increased every quarter for the past three years and now is 43% of our total installed base. This is the leading contributor to the 61% growth in gaming operations revenue that we achieved relative to the 2019 second quarter. In the second quarter, we had initial installations of the new Monsterverse wide-area progressive game on our Empire DCX dual curve cabinet. While it is very early in its rollout, the initial performance is highly encouraging. Following regulatory approval in April, we also made the first placements of our wide-area progressive games in Nevada. This opens up a substantial commercial marketplace for future growth.

Also contributing to the gaming operations growth was the 139% year-over-year increase in revenue from our digital operations compared to the 2020 second quarter. Our digital revenue was also up 50% on a quarterly sequential basis, as during the quarter, we went live at customer sites in the additional jurisdictions of West Virginia, British Columbia and Manitoba. We firmly believe that our proprietary content positions us very well for long-term growth. Alongside our success in gaming operations, product sales rose compared to the 2019 second quarter. Both replacement sales and total shipments, which includes several hundred units for new casino openings and expansions, also increased sequentially over the 2021 first quarter.

In the new casino openings, we garnered strong relative floor shares and our ship share of unit replacement sales increased compared to our typical historical share. This was partially driven by the success of our Empire Flex Cabinet and its library of what has quickly become player popular video content. Turning to our Fintech business. Total segment revenues increased 21% over the 2019 second quarter, reflecting growth in each of our three line item categories. Our financial access services revenues, formerly cash access services, which includes our cash and cashless financial service solutions increased over the 2019 second quarter by 13%.

This growth was largely driven by higher same-store transactional activity, which was up at a mid-teens rate consistently throughout the quarter. I would note that this is a much higher rate compared to the mid single-digit percentage growth rate that we typically experienced in recent years pre-pandemic. Contributing to this growth were incremental revenues from new customer wins and customer expansions during the period compared to 2019; partially offset by a few customer sites that are still closed or operating with limitations as well as an almost nonexistent international player in the U.S. due to the ongoing travel restrictions from foreign countries. Another quarter of growth was also achieved in our software and other, formerly our information services and other, which includes growth from our loyalty software sales and subscriptions and from our reg tech software for regulatory compliance. Like financial access services, revenue from software, reg tech solutions and annual maintenance and support services has a large recurring revenue component.

Recurring revenue portion represented 80% of software and other revenues in the second quarter, while initial or other onetime sales accounted for 20% of Q2 revenue. Revenues from hardware sales, formerly called equipment, increased 63% over the 2019 second quarter. Growth over both the 2021 first quarter and the 2019 second quarter reflects a meaningful contribution from the sale of loyalty and financial access kiosks, cage and other equipment for new casino openings, expansions and new customer wins. After being delayed due to the pandemic, we believe there was also a slight pickup in replacement sales of financial access kiosks.

Now I'd like to turn the call over to Mark to share his perspective on our free cash flow and outlook. Mark?

Mark F. Labay -- Executive Vice President, Chief Financial Officer, And Treasurer

Thanks, Randy. On today's call, I'm first going to focus on the significant increase in our free cash flow. Then I'll turn to the improvement in our capital structure, and I'll finish with our outlook for the remainder of 2021. The as Mike noted, our second quarter free cash flow increased substantially over 2019 in the prior years. This growth represents a more significant flow-through from the increased adjusted EBITDA, along with a more modest level of capital expenditures in the quarter as measured as a percentage of total revenue.

We believe the capex run rate in the first half of the year reflects how we have managed our capital spending to match our customers' recovery with continued improvement in our customers' operations and as we look to restart certain capital projects that were deferred during the height of the pandemic, we expect the second half capex spend to be modestly higher than the first half of 2021. Looking forward, we expect our free cash flow will also continue to increase as a result of lower cash interest. This will come from both the lower effective interest rates and the lower debt levels we have achieved following our recent refinancing.

Compared to the balances outstanding at June 30 this year, our annualized cash interest costs are expected to decrease by more than $23 million based on current run rates. It's also important to note that through this refinancing, we have extended maturities on our borrowings, with our term loan now due in 2028 and our notes due in 2029. Needless to say, this decrease in cash interest will flow directly through to future free cash flow. As a result of our enhanced cash flow profile, the very significant portion of our top line that is derived from recurring revenue streams and our expectation for continued growth of adjusted EBITDA, we are now comfortable with the long-term net leverage ratio target of 2.5 times to three times adjusted EBITDA.

We believe this level maintains a healthy and reasonable balance of debt given our size and provides the flexibility for us to pursue high return, accretive, organic and acquisition-related growth opportunities. With the cash balances we have on hand and the additional capacity of our new undrawn $125 million revolver, we believe we have adequate liquidity and flexibility to support our ongoing business needs, including any short-term setbacks.

Turning to our outlook. For the full year, inclusive of the expected early debt extinguishment costs associated with our refinancing, we expect net income to be in a range of $87 million to $95 million and adjusted EBITDA to be in the range of $332 million to $342 million. Let me share some of the variables that shape these views. First, as a result of the recent refinancing transactions, we expect to incur approximately $32 million to $35 million of pre-tax charges in the third quarter related to the extinguishment of debt and the write-off of prior financing discounts and fees. Approximately $21 million of these charges relates to the redemption premium and make-whole interest in the former borrowings, while the rest are largely non-cash charges that will impact net income but not adjusted EBITDA.

At a macro level, we believe the first half of 2021 benefited from pent-up demand, improved vaccination rates and the easing of limitations on our casino capacity. Government stimulus also likely played a role. For Everi, as Randy noted, the growth in our financial access transaction activity as compared to 2019 was well above historical levels. This strength also likely benefited the daily win per unit of our gaming operations. Therefore, while we believe much of this increase is sustainable, we are taking what we believe is an appropriately conservative view on the back half of the year due to the receiving government stimulus benefits, an increase in pressure on consumer discretionary spending and the more recent and renewed overhang of COVID and the Delta variant.

As you review your models, in the third quarter, we expect to see a temporary one quarter only pause and the growth of our installed base. As we started the third quarter, a large customer converted a couple of hundred units from leased to purchase units as they transition their floor away from a leased model. This will result in an initial reduction of our leased footprint of games. And while we continue to see growth outside of and beyond the single customer, we expect the total installed gaming operations base to be down slightly to perhaps flattish for the third quarter before again, resuming growth in the fourth quarter.

Contributing to our expectation for the resumption of growth in the fourth quarter is the expected opening of a travel customers new Class II casino facility. In conjunction with this casino opening, we expect to incur between $2 million and $3 million of new placement fees that will lock in a footprint of approximately 200 units until mid 2028. We expect to have the majority of the initial total footprint of gains at this facility. Moving on to equipment and hardware sales. In the second quarter, we generated strong units for both our games and fintech segment as a result of new casino openings and expansions. While new openings and expansions are always part of our quarterly results, the second quarter had a larger quantity than we normally would expect.

Accordingly, because of fewer new casino openings and expansions in the second half of 2021, we do not anticipate the same level of expansion sales of both games and fintech hardware in the third or fourth quarters as we have reported for the second quarter. Therefore, without that second quarter bump, we expect to see shipments of equipment and game sales at levels more closely aligned with the first quarter of 2021 rather than the second quarter. I do want to take a moment to highlight how our second quarter results have reinforced the evidence of the gains we are achieving in ship share for unit sales. While our customers purchase decision horizon remains focused on only the next 60 to 90 days, and they appear to be waiting until G2E to see what is in the pipeline.

We are seeing clear evidence of improved spending in conjunction with the success of their slot floors. We believe we are capturing a higher percentage of the spend compared to our historical levels. There are also still opportunities for continued growth, primarily from our international operations. Certain customers, like those in Canada and other international markets, where the casinos have remained closed, are only now starting to reopen. As these locations begin to see their gaming revenues return, this could lead to further revenue growth opportunities for both our games and fintech segments.

We expect free cash flow will remain strong in the back half of 2021. The fourth quarter will also benefit from the onetime change in the timing of the semi-annual interest payment on our new unsecured notes. Our new notes were issued on July 15 and will now have semiannual interest payments that will occur in January and July as compared to the previous payments we made in December and June. Thus, our former comparable December interest payment will now be made in January.

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

Questions and Answers:

Operator

[Operator Instructions.] Our first question comes from the line of David Bain with B. Riley. Please proceed with your question.

David Bain -- B. Riley -- Analyst

Great. Thank you and congratulations on the results again and improved capital structure. The first question I had was on the cashless digital wallet side. Maybe you could provide any broad-based initial thoughts on end player adoption and frequency rates. If you've noticed a learning curve or if it's proven super intuitive? Any kind of commonalities developing that may give us a sense to end-user cadence or adoption?

Michael D. Rumbolz -- Chief Executive Officer

Sure, David. Thanks. And thanks for the question. That's going to make it difficult to answer. Before I turn it over to Darren to give you some color. We're not at a point yet where I think we want to drill down into the level that you're seeking. Right now, we're -- I think as I said in the prepared remarks, we're really at the beginning of the age of cashless. And as we work with our customers on this, we're trying to nail down those numbers that you're interested in ourselves. And as we gather those from our customers, we're trying to make our own decisions as to how we think the product is not just working now, but how we might tweak it in the future. But if you want to give some high level color, Darren?

Darren D. A. Simmons -- Executive Vice President And FinTech Business Leader

Sure. Yes. Yes, David, so I think we are certainly encouraged by the user experience that we've worked with our customers on delivering to their patrons. So in general, I think what we've done is something that is going to make this a -- again, we've looked at this long term. It's a marathon, not a sprint in terms of rolling this out. And so again, our customers are being very measured in terms of the pace of how they're rolling out. And I think as we look through the second half of the year, I think we'll be able to have more data points as we expand customers through the second half of the year. And so I expect, again, I think I said last call even, I would say, the results that we have in terms of run rates and all that kind of stuff, we'll have a much better picture of that, I think, after sort of the second half of 2021. [Speech Overlap]

Michael D. Rumbolz -- Chief Executive Officer

David, the one thing I would share with you is we're seeing more than half of the wallets are being signed up for our customers that are over the age of 50.

David Bain -- B. Riley -- Analyst

Right. That's great. That's great. Okay. That leads to the intuitive section, so that's great. So I guess my next question is I only have one more. Mark, you gave a net leverage thoughts, which I thought were really helpful. And I was just hoping to follow-up, looking out 12 to 18 months, leverage should be below that lower end of that range, given if there's no M&A. I guess the question is, rather than going under levered, if there is no M&A, are there thoughts on return of capital and anything along those lines? Or if you are targeting potential M&A, any kind of strategic thought size segment would be helpful.

Mark F. Labay -- Executive Vice President, Chief Financial Officer, And Treasurer

Sure. Look, I think we certainly are in the best position we've ever been in, in terms of the capital structure right now. Our leverage profile is right kind of where we wanted it to be. If you take the midpoint of our year-end guidance for adjusted EBITDA and assume we pay nothing down on the debt will be right around three times total leverage by year-end. So kind of right in that sweet spot for us of where we think from a leverage profile. I think we're now on a different view of our capital allocation, and we can look to grow this business both organically, as we've talked about in my prepared remarks, and looking at the M&A side of things. I think we believe there's opportunities to take those smaller tuck-ins like we've been doing and maybe even look at some more strategic kind of additions that might be a little bit larger and continue to keep the growth profile going or the business going forward. So I think that's how we're looking at this as opposed to us focusing more on thinking about returning capital in the form of dividends or other means. But we would evaluate all those options as we move forward and nothing is off the table.

David Bain -- B. Riley -- Analyst

Okay, Great. Thanks so much.

Operator

Our next question comes from the line of David Katz with Jefferies. Please proceed with your questions.

David Katz -- Jefferies -- Analyst

Good morning, Everyone. Thanks for taking my questions. Look, I -- just taking in all of the commentary in the context of a super strong quarter. I think it might be helpful or constructive to just speak a little bit longer term. My sense is just from the stock reaction that there may be concerns about what the growth trajectory ultimately is. To the degree that you're comfortable, if you can talk about sort of the 2022 and onward trajectory from where we sit. And as I sit here and look at the consensus of estimates and so forth, anything around kind of what the longer-term growth trajectory here, I think, might be helpful.

Michael D. Rumbolz -- Chief Executive Officer

Sure, David. Let me take a first shot at that, and I'll turn it over to Mark and maybe Randy and our business leaders. We're in a position right now where we have been continuously growing for the last several years, and we've been doing it in a combination of both organic as well as acquisition-related product sets. One of the things that we continue to look at is additional products that may have been developed outside of our country -- our company, rather, that were not invented here that would fit well with our digital platform.

As I indicated in the prepared remarks, our platform really is designed to bring other products onto it and have it fit seamlessly and then speak to the existing products that are currently in the digital neighborhood. And so we're going to continue to pursue that, both internally as well as look at external product sets. In addition to that, I mean, we are not bound by simply the casino industry. When we look at this, I think we have very broad horizons available to us we can look into the entirety of the hospitality and entertainment sector when we look at the products that we've already developed that would have application in other industries or other verticals. So I'm not concerned about our ability to grow there.

And in our games segment, we're just kicking off on the iGaming side. We've had a couple of years under our belt now. We've just finished building the RGS and getting it up and running and integrating it with the websites of the casino operators. And we're now proving out that our content is working both in bricks-and-mortar as well as in the digital space. And we're -- and we're -- I think we're on the verge of additional growth that will be equal to potentially larger as we go forward in the next several years than we've had in the past. So I'm very optimistic about the future. Despite the headwinds that we have with COVID and what's going on in the macro environment, I'm very bullish on it, but I'm happy to have Randy, Mark or anyone else weigh in on that.

Mark F. Labay -- Executive Vice President, Chief Financial Officer, And Treasurer

I would say, David, that this management team is not satisfied with a single-digit growth. So we are going to be looking at all things that are out there to continue the growth that we've seen to date. So as Mike said, we think there's a number of avenues that we can grow in, in the other areas we haven't touched. So I would say, we're only at a 10% ship share right now on the game side. And so we still think there's room there. As Mike talked about iGaming. And I think on the fintech side, the digital neighborhood that we're working, we can -- as Mike said, there's areas to grow. So it's both organically, we believe we can do it and inorganically.

David Katz -- Jefferies -- Analyst

Okay. And if I can just circle back on one of Mike's comments around the digital stuff. Were you -- and I just want to make sure I heard you correctly, were you suggesting that the digital opportunity could be as big as the land-based gaming opportunity that you have? Or just the growth of it could be as -- as well as you have elsewhere?

Michael D. Rumbolz -- Chief Executive Officer

Yes. I was really speaking to the growth of it, David, because as you know, the iGaming and the actual iCasino space is smaller right now than even Sportsbook. So I wouldn't compare it to the land base. But I think what I was really trying to say is that the growth could be very similar, if not even bigger, because it's a smaller space and that our content is working extremely well there, just as it has in the land based. And those -- and as you know, the content on the gaming side is king. And so I think we've got growth opportunities in both land-based and in iGaming.

David Katz -- Jefferies -- Analyst

Okay, Thank you very much.

Michael D. Rumbolz -- Chief Executive Officer

Thank you.

Operator

Our next question comes from the line of Barry Jonas with Truist. Please proceed with your questions.

Barry Jonas -- Truist -- Analyst

Thanks, Just following up on that theme. Can you talk a little bit -- you mentioned international before. I was just curious how you see international as a growth strategy going forward?

Michael D. Rumbolz -- Chief Executive Officer

Well, Barry, the one thing I'll tell you is that we're always looking at other markets outside of the United States. As you know, we're in Canada, we're in the United Kingdom. We even have a very tiny footprint in Macao. So we're always looking for markets that we think would be not just good markets for our games products, but also good markets for our fintech products. And so as we look at both sides of our businesses, we think there are international locations that could be valuable to us to enter, that we look at a lot of aspects of those markets to make sure that they're going to be able -- that will be able to enter those as easily as we have the markets that we're in today. We think we've identified a number, and we'll continue to look at those and look at M&A opportunities as we go forward. I don't think we've put emphasis on one or the other at this point in time. I think we're looking at both.

Barry Jonas -- Truist -- Analyst

That's great. And then Scientific Games just announced this on parts of their business. I know we've discussed this before, but maybe worth revisiting the level of inbound kind of as it relates to Everi. So I guess, one, can you talk about how many -- is across games and fintech? And two, would you still be open to selling anything for the right price?

Randy L. Taylor -- President And Chief Operating Officer

I'm not sure I heard the first question, Barry. Look, we're always willing to sell one or the other at the right price. But I would say, we believe that these two segments are continuing to operate very well together. They're complementary. They really feed off of one another. So I think a lot of our success recently has been part of that. So we will entertain anything that is at the right price. But I think right now, we're focused on operating the company as it stands.

Michael D. Rumbolz -- Chief Executive Officer

Yes. Barry, what I would say to that is, I mean, Randy is absolutely right when he says the right price, you just have to understand that because they are working so well together, that price will be higher than perhaps people have thought they could purchase one or the other of our businesses in the past.

Barry Jonas -- Truist -- Analyst

Okay. Great to hear it. Thanks so much. That covers it. Appreciated it.

Randy L. Taylor -- President And Chief Operating Officer

Thanks, Barry.

Operator

Our next question comes from the line of John Davis with Raymond James. Please proceed with your questions.

John Davis -- Raymond James -- Analyst

Hey, Good morning guys. Just wanted to start off, Mark, on your comments around the three Q installed base, I think, being impacted by some lease to sale. So I think you said a couple of hundred units. Maybe just help us, what's the normal quarter lease to sale? Like how much of a headwind is it? And just kind of contextualize the commentary there would be helpful.

Mark F. Labay -- Executive Vice President, Chief Financial Officer, And Treasurer

Yes. I would say lease to sale is always a normal recurring part of our business operation. So what we tried to call out or I called out it, and this was the really onetime large, I'll say, a major casino shift in how they're progressing or how they view the lease model. So I would tell you, this is additive to the normal cadence of what we normally see. So usually, we've been kind of growing 150 to 100, 250 units a quarter on average historically per quarter. And that includes those lease to sale conversions. So that is a normal recurring piece of it. So this was additive. Again, and that's why we think it kind of puts us kind of flattish to maybe slightly down in Q3 when we end the quarter, but we'll still have that normal kind of growth in there, plus Q4 going forward, we expect to see growth with a new casino that we expect to have the initial -- the largest portion of the initial opening floor of it that we should be able to grow from there nicely in Q4.

John Davis -- Raymond James -- Analyst

Okay. So said another way, there's kind of an additional couple of hundred units relative to normal, but you see any issues getting back in four Q to growth.

Mark F. Labay -- Executive Vice President, Chief Financial Officer, And Treasurer

No. No, we do not.

John Davis -- Raymond James -- Analyst

And then maybe another one for you, Mark. Just free cash flow conversion here. I think if you kind of adjust the timing of interest payments, you get something a little north of 50% of EBITDA into free cash flow. I assume that, that should kind of drift higher as we go forward because EBITDA -- an EBITDA growth should more or less fall mostly to the bottom line, maybe a little bit of increase in capex. But just help us think about how you think about free cash flow conversion kind of on a go-forward basis, at least as a percentage of EBITDA.

Mark F. Labay -- Executive Vice President, Chief Financial Officer, And Treasurer

Yes. Look, I think you've hit the nail on the head that I think it should be going higher. The first half of the year, we had the old debt structure in place. So our cash interest was much higher. So second half will benefit from that. And that kind of gets you a full year up to that 50% number you're talking about. We've kind of always felt the capex of the business, supporting this business is fairly consistent from year-to-year, call it, $110 million, $115 million a year of capex. We don't see that changing materially with the core operations today. So as we're able to grow that installed base, grow the unit sales, grow the fintech business, we should get a little better flow through as we move forward.

John Davis -- Raymond James -- Analyst

Okay. And is that something you're going to see kind of creeping toward 60% or even higher? Do you guys have kind of any sort of internal targets on what you guys think free cash flow conversion can look like in the future?

Mark F. Labay -- Executive Vice President, Chief Financial Officer, And Treasurer

You know, I think it could start creeping up a little bit higher toward 60%. I don't know if it gets to 60% at least early on. But again, it should be creeping up toward there. I think with what we've done on the debt side, you've got a really nice interest -- cash interest component going forward. You'll see quite a bit of dollars there, probably closer to 40% on just the debt a year. And then with fall cash interest on there, you're mid-40s. So I think you're really good spot.

The one piece, we don't pay cash taxes today. So that's not looking to change. We have quite a bit of NOL's on the books today. So that won't change. So I think that's what's going to be getting closer and closer to that 60% number you threw up there.

Michael D. Rumbolz -- Chief Executive Officer

Yes. The only thing I would add to that, John, is, look, as we increase the EBITDA, I think that's also going to be more development costs, which could be capitalized. So whether we can hold the capex that the number Mark's talking about, I think, your bigger EBITDA will require us a little bit more either in installed base capex or just development costs because that's really how we're driving the EBITDA increase. So I think that's why I think I would, like Mark, hesitate about getting to 60% just yet.

John Davis -- Raymond James -- Analyst

Okay. And then two very quick ones to wrap up here. One, fintech margins, I think, versus 2019, were down about 300 basis points. I'm assuming anything there? I'm assuming some of it may be may be confidence related given the performance of the company. But any comments there? And then quickly, just any comments on July trends, as stimulus starts to wane, are you guys seeing -- like how should we think about July versus June and kind of the trajectory from here? Thanks, guys.

Michael D. Rumbolz -- Chief Executive Officer

Yes. Yes. Remember, we kind of called out in the call to the prepared remarks that Q2 was extremely strong quarter for us in light of pandemic from an equipment and hardware sales perspective. And that obviously has a much lower margin profile on this. That's contributing in this quarter to some of your EBITDA margin decline that you're looking at or gross margin decline because we have so much more volume in terms of hardware sales. And in fact, moving forward, we should be looking for Q3 and Q4 to be more like Q1, not necessarily like Q2, just because we had this inordinate amount of new location openings, expansions that were going on in the quarter.

Mark F. Labay -- Executive Vice President, Chief Financial Officer, And Treasurer

And I would say from a July standpoint, John, we continue to perform very well. So July was in line with what we had expected and probably just a little bit better. So I know we gave some guidance there that takes into consideration whether things, I guess, normalize a little bit. But so far, July, fairly strong for us. We'll see how the rest of the quarter ends up.

John Davis -- Raymond James -- Analyst

Okay. Appreciated it guys. Thanks for all. Got it..

Mark F. Labay -- Executive Vice President, Chief Financial Officer, And Treasurer

Got it.

Operator

Our next question comes from the line of George Sutton with Craig-Hallam. Please proceed with your questions.

George Sutton -- Craig-Hallam -- Analyst

Thank you. I wondered if we could just dial in a little bit more on a buy versus build thought process. You mentioned on the build side that you were looking at developing some loyalty and regulatory tech elements. I just wondered how narrow or potentially how significant some of those might be.

And then on the buy side, you mentioned a focus on getting high returns. I'm just curious if you could share hurdle rates or kind of how you're thinking of that buy side of the equation. Thanks.

Michael D. Rumbolz -- Chief Executive Officer

Well yes, George, let me speak -- I'll let Mark speak to the hurdle rates that we have for our acquisitions. But when we look at spending R&D on our fintech side or even on our cabinet and games side, we look for particular IRR's that we think will be additional to what we already expect to glean from the existing product set. But we also look to see what it would be if it was someone else's product, and we were purchasing it and what would we expect from them.So we try and do the analysis that it makes sense for us, whether we acquired it or whether we built it ourselves when we do that R&D spend. And the products that we're looking at, quite frankly, as you embed loyalty and reg tech into the digital neighborhood, which means you brought it into your cash access functioning across your various products.

I mean you're providing something to the casino that they have not had abilities to use before or use in the manner in which we're bringing it in before. And we find that extremely valuable for the casino operators, certainly as we speak to them. But we think it's also going to be helpful to the patrons to be able, for example, to get your W2s at the end of the year with the push of a button and have them all sent to your email. Those are the kinds of things that patrons have never seen before. And so as we embed all of those together, I think we're going to see a greater return on the products that we develop internally. And as we look externally, we're always looking at anything we think that would benefit from our ability to distribute it widely throughout the casino industry, we will use not just our sales channel, but our existing locations. And if anything looks extremely good, we'll put it into our digital neighborhood. But we're always looking at accretive acquisitions, and that's going to continue, no matter what.

Mark F. Labay -- Executive Vice President, Chief Financial Officer, And Treasurer

Yes. And look, George, Mike said on a lot of the key points I would hit on as well there. I'll tell you, we're not going to talk about specific hurdle rates, but we're looking to make sure these deals that we do are accretive to us and then are additive to our growth in both our revenue and our bottom line in terms of net income and adjusted EBITDA over the long haul. We're finally in a great position from a capital structure perspective. And the free cash flow we generate to allow us to make some more choices. And I think we've proven our track record of successful acquisitions and making sure we're making smart choices with respect to how we buy and acquire things to leverage the growth going forward, and we look to continue in that moving forward. But we do, do an analysis to make sure they make sense to us from the spreadsheet math perspective, but I think Mike covered all the other intangible aspects of it. How does it enhance our products, how does it strengthen our position with our customers? How does it provide more value and return to patrons over the long haul? Those are the things we look for from an acquisition.

George Sutton -- Craig-Hallam -- Analyst

Great, Guys. Thanks for the perspective.

Operator

Our next question comes from the line of Jeff Stantial with Stifel. Please proceed with your question.

Jeff Stantial -- Stifel -- Analyst

Great morning everyone, Thanks for squeezing me here and congrats on yet another excellent quarter. I wanted to drill into the forward guidance, specifically the cost side of the equation, EBITDA margins, again, coming in over 50% during the quarter. It looks like the guidance suggests sequential stability on margins for the back half of the year. We have heard the peers highlight potential cost headwinds toward the back half of the year, just given some supply chain issues. Can you comment on this trend as it relates to your business? And then more broadly, can you help us think about the sequential puts and takes that are based into your margin guidance for the back half year?

Mark F. Labay -- Executive Vice President, Chief Financial Officer, And Treasurer

Yes. When I look at where we've kind of been running from an operating expense perspective, I kind of always talk about operating expense, exclusive of noncash comp. Noncash comp runs roughly $4 million a quarter. Second quarter, usually when we do our grants, maybe it creeps up about $1 million, $2 million just because of how some of the expirations work and the accounting treatment. But excluding those, our operating expenses have kind of been running around 25%-ish or so, plus or minus a little bit in terms of total consolidated revenues. And R&D expense has kind of been closer to, say, six percent of those consolidated revenues.

So the good news is we continue to grow the business, we expect to see similar leverage. But to some of your pointed questions, we do see impacts in the cost structure related to like just rising wage rates. We're looking to fill positions. It's costing us a little more to fill some of those positions. But specific to us as we come out of the pandemic, we've also had increases in costs like things like travel as our field techs are getting -- being able to travel more, see our customers more, do more with our customers, those costs are kind of rising, and we've been focused on advertising and marketing. Shows, gaming shows, are coming back. So we just had an IGA. We just completed a very successful IGA conference, and we'll have G2E in the fourth quarter.

And again, when you think of that percentages I gave, you got to have a couple of million dollars probably in Q4 to cover the cost of G2E in your opex forecast. But those kind of things are arising in the second half of the year. But we think the revenue is also going to be rising for us, and that will help offset some of that cost. But again, there will be a little bit of a convergence, if you will, on that EBITDA. So we probably won't be at those second level EBITDA, that $90-plus million EBITDA level that we just suggested for Q2 in the second half as a result of some of these rising costs and some of the pullback in the equipment.

Jeff Stantial -- Stifel -- Analyst

Got it. Helpful, thanks. And then you talked success with some of your WAP games. It looks like another 16 or so units placed during the quarter, including the first commercial installs in New Jersey and Nevada. Can you talk a bit here more on the strategy moving forward on the commercial side, and states or near-term priorities to expand into? And how quickly should we expect you to expand geographically speaking?

Michael D. Rumbolz -- Chief Executive Officer

Sure, Jeff. Actually, let me -- Dean's on the line with us. Let me turn that to him.

Dean A. Ehrlich -- Executive Vice President And Games Business Leader

Okay. Jeff, this is Dean. So on the lab strategy, I mean, obviously, we look to grow in not only new markets, just a ton of runway in Nevada. We're just really getting started there. But even our existing, both Class II and Class III Native American markets as well. So to me, it's predicated on product. The one thing I would mention that there was a couple of questions earlier in the call. As far as the product pipeline, where we just have just a tremendous amount of new product that's coming out between now and the end of the year between, I'd call it, eight premium bank concepts on the premium side, and so most of them would be in the wide area progressive category. And also, even on our for sale side, where we have upwards to 20 different for sales teams that are going to cover both our video and mechanical products.

So I think we're poised and ready to grow on all fronts. Obviously, we look to expand a wide area progressive install base as much as possible. That one takes a little bit more time. But as you can see, throughout the quarters, we always can have -- always to this point, continue to trend up. And that's what we're looking forward to doing.

Jeff Stantial -- Stifel -- Analyst

Great. That's very helpful and thoughtful. As always appreciate the color and looking forward to seeing you all out of G2E.

Michael D. Rumbolz -- Chief Executive Officer

Thanks, Jeff.

Dean A. Ehrlich -- Executive Vice President And Games Business Leader

Thanks, Jeff.

Operator

[Operator Instructions] Our next question comes from the line of Chad Beynon with Macquarie Group. Please proceed with your questions.

Chad Beynon -- Macquarie Group -- Analyst

Hi, Good morning, Thanks for taking my questions. Just wanted to ask a high-level one on the cashless adoption or the digital neighborhood adoption, given some of the results that we've seen from your clients and the operators in the space, most are up 20% sequentially, putting up some really strong margins. Do you think the conversation for them to move to cashless adoption has actually accelerated just in the past couple of months because of the performance that they're generating in the leverage reduction that they're able to see? Just any changes in your conversations with some of the operators in the past couple of months? Thanks.

Randy L. Taylor -- President And Chief Operating Officer

Yes. Absolutely, Chad. Thank you. Actually, I don't think that, that is, in fact, what's occurring. I think what you see with our customers is they're going through a very strong period of demand, and they've been able to reopen their operations -- [Techniquecal Issues]

-- getting both the bang for the buck in terms of not having to move cash and cash equivalents all over the floor, they can do it with digital. And the adoption by patrons, especially those that a lot of people thought weren't going to be able to do it. Those over 50 that people thought, oh, gosh, they'll never use technology has been extremely strong. And so I think that's been driving a lot of it. And I think you'll see over the course of the next six to 12 months, you're going to see a lot more of them. But the one thing I would remind everyone is that ticket in, ticket out, took well over five years to really penetrate the industry to a 90% or greater level. And so as we roll the wallet out, we think some casinos are comparing different offerings. Others are dealing directly with us and it's still sort of a sorting period that's going on right now.

Mark F. Labay -- Executive Vice President, Chief Financial Officer, And Treasurer

Randy, You kind of cut off a little bit. I'll maybe just kind of add-on to that. The cash up discussions, I guess, just to remind you, these are not new. And when we've been talking about this now for several years, we actually -- if I think back even at G2E 2018, we talked about the digital journey. We talked about cashless. We talked about delivering contactless, cashless technologies to customers and what that customer journey is like. And so that's what we've been focusing on the last several years. And I think, look, we talked about this last year, right? The discussions of cashless actually increased, right? So I don't think there's been anything necessarily new in terms of their performance and their desire to go cashless. I think this is part of their strategy. And I think, look, we are in deep with many customers in these discussions and projects. So I don't think there's anything special about what's gone on in the last couple of months. This has been ongoing discussions for a couple of years now, I think, in earnest last year, they accelerated. And so now it's just the operators articulating internally what they want that digital journey and cashless journey to be in terms of their enterprise.

And as I think what we've stated many times in terms of what delivered in terms of our digital wallet technology embedded into what we describe as our digital neighborhood, the features and the attributes, I think ours ticks a lot of the boxes in terms of what the operators want and need at the end of the day. And I think we talk about, again, the opportunities with it in terms of not only the gaming side, right, connecting into slots and tables, but into the iGaming space, the sports space that, as we mentioned earlier on this call, getting into the nongaming space where we certainly have opportunities across what we call our digital abort in terms of the products and services that we have. So I think the discussions are, I would just say, as strong as ever that they've been in the last several months from last year. And so we have lots of projects in the pipelines with customers. So I don't think there's anything especially aggressive on it right now. But I think, again, we're at a pace where we expect to be.

Chad Beynon -- Macquarie Group -- Analyst

Thanks, appreciate it.

Operator

This does conclude our question-and-answer session. I'd like to hand the call back to management for closing remarks.

Michael D. Rumbolz -- Chief Executive Officer

We'd like to thank you all for your interest in Everi. And in closing, I would like to remind everyone that our focus is clearly on maintaining sustainable growth and building long-term shareholder value. We look forward to providing you with an update on our next quarterly call. Thank you.

Operator

[Operator Closing Remarks]

Duration: 57 minutes

Call participants:

William Pfund -- Vice President, Investor Relations

Michael D. Rumbolz -- Chief Executive Officer

Randy L. Taylor -- President And Chief Operating Officer

Mark F. Labay -- Executive Vice President, Chief Financial Officer, And Treasurer

Darren D. A. Simmons -- Executive Vice President And FinTech Business Leader

Dean A. Ehrlich -- Executive Vice President And Games Business Leader

David Bain -- B. Riley -- Analyst

David Katz -- Jefferies -- Analyst

Barry Jonas -- Truist -- Analyst

John Davis -- Raymond James -- Analyst

George Sutton -- Craig-Hallam -- Analyst

Jeff Stantial -- Stifel -- Analyst

Chad Beynon -- Macquarie Group -- Analyst

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