Everi Holdings Inc.

Greetings and welcome to the Every Holdings First Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to our host, Bill Fund, Senior Vice President, Investor Relations. Thank you. You may begin.

Thank you, operator. Welcome, everyone. Let me begin with a reminder of our safe harbor disclaimer, which covers today's call and webcast. Our discussion will contain forward-looking statements that involve risks and uncertainties, which 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 investor section of our corporate website at every.com. Because of the potential risk, you are cautioned not to place undue reliance on forward-looking statements. We do not intend and assume no obligation to update any forward-looking statements, which are made only as of today, May 10, 2022. 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 8K today and in the investor 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 investor section of our website. On our call today are Randy Taylor, Chief Executive Officer, Mark Labai, Chief Financial Officer, Kate Lowenhar-Fisher, General Counsel, Dean Ehrlich, Games Business Leader, and Darren Simmons, our FinTech Business Leader. Now, I'm pleased to turn the call over to Randy Taylor. Thank you, Bill. Good morning, everyone, and thank you for joining us. This is my first call as CEO of every and I am excited to share with you my views on the momentum and opportunities that lie ahead for the company. Before doing that, I would like to thank Mike for his incredibly successful six years as CEO. He is an outstanding leader and a great mentor to me personally. I look forward to our continued collaboration in the coming years as we continue to grow. During the last several years, we have built a solid foundation to achieve steady growth and operating success. Looking forward, we expect to execute on the priorities that have been so successful for us and continuing our focus on what we can control. We have an expanding portfolio of products and services that are increasingly at or near the industry's gold standard. Our portfolio includes established, core profit-driving products, and early-stage growth technologies and products, such as our digital iGaming business and cashless products, including our Cash Club Wallet. We have layered on exciting growth opportunities through accretive acquisitions, such as eCash Holdings and Intuicode Gaming, as well as new software solutions like Zuby and Meters Express, and even new development teams and resources like those acquired from Atlas Gamers. We have a deep and growing bench of talented and dedicated people with a corporate culture focused on innovation and collaboration. This enables us to execute consistently and to drive new technology adoption in the casino industry. Importantly, our tremendous success has enabled us to transition from a highly leveraged company using our cash flow only to serve a step, to one that now generates substantial free cash flow available to further invest in our business for growth or to return to our shareholders. Our revenue base is comprised of a large and growing proportion of recurring revenues and we continue to focus substantial development and sales efforts on maintaining this profile. In 2021, recurring revenue exceeded $500 million or roughly 76% of our total revenue. In the 2022 first quarter, recurring revenues increased by 23% compared to the year-ago period, even as our non-recurring revenues grew 38%. We have significant operating momentum in our businesses as we continue to consistently gain share and grow revenues in both our games and fintech segments. Now let me share a few highlights and observations from the first quarter that provide some perspective. In our game segment, gaming operations revenues continue to grow, driven by an increase in our installed base of gaming machines and expansion of our digital iGaming operations. Every is one of only two major suppliers who have grown gaming operations revenue compared to 2019. Our period end installed base is up 18% since the end of 2019, having increased sequentially every quarter since then. This growth rate is the highest of any major supplier during that time. Our continuing focus is on growing total revenues and adjusted EBITDA from gaming operations by expanding the total installed footprint of games. While daily win per unit is an important metric which has grown substantially since 2019, it is not our primary metric on how we manage and evaluate the business. We take actions to maximize overall unit performance by taking into consideration both longevity and win per unit. Our installed base is our primary driver of sustainable recurring revenues and profitability. We evaluate each of our opportunities based against the return and cash flow potential before committing capital, recognizing that some units may earn more than others, but all should be generating a positive return. I'll highlight that on a quarterly sequential basis, total gaming operations revenue was up from Q4 2021. An important driver of the growth in our install base is the increase in premium units, which grew by 21% year over year and by 239 units on a quarterly sequential basis. We expect to continue to grow our footprint of premium units as we have only an estimated 10% of all premium units in North America, and we have a significant pipeline of new premium products. This year, we expect to launch 30% more premium titles as compared to 2021, and our development plans support a further increase in 2023. We also expect to successfully leverage our library of content through our latest acquisition in the historic horse racing space. Taking our player proven content into a new market will add incremental recurring revenue growth opportunities. Every gaming machine sales increased by 531 units or 56% in the 2022 first quarter. We believe this represents both an increase in our ship share of the total market and an improving industry replacement sales trend. I would remind everyone that our unit sales for the full year 2021 were an all-time record. And notably, we were the only major supplier to sell more units in 2021 than in pre-pandemic 2019. This quarterly unit sale is our second highest ever and I expect we will have an opportunity to set a new record as we continue to execute on our plan to grow our ship share and as operators become increasingly comfortable with releasing additional capital for game purchases. Similar to our development plan for new premium games, we also have a robust pipeline of new game themes for sale throughout 2022. I'd like to highlight that at quarter end, we installed the first placements of our new Player Classic Signature mechanical reel cabinet, which was displayed at G2E last October. We already have a healthy backlog of orders for this new cabinet in the second quarter. Our digital iGaming division revenues increased by 129% over the prior year period and were up 34% on a quarterly sequential basis. Subsequent to quarter end, we were one of the very few suppliers to go live in Ontario when the market opened April 4th. We were featured on six sites out of the 12 sites on the first day and we expect to go live with several other sites this quarter. We also expect to significantly expand the number of games we have available to operators in Ontario by the end of June. In our FinTech segment, our core financial access business set a new quarterly record by delivering more than $10 billion of funding to our customers' casino floors. This was driven by a record number of transactions, which were up 12% year-over-year and up 2% on a quarterly sequential basis. Of the $10 billion in funding, cashless activities, including those through our Quick Ticket and Cash Club Wallet solutions, represented almost $350 million, or about 3% of total funds delivered, which is more than double the total from the prior year. Mark will provide some additional insights into our cashless progress in a few minutes. We have entered Australia, the second largest market after the U.S. in terms of slot machines, through the acquisition of eCash Holdings, which is the leading provider of voucher redemption kiosks in that market. We expect to achieve growth through integrating and upselling more of our capabilities available in the US, such as anti-money laundering or AML software, and our loyalty products into Australia, while also selling their smaller kiosks into US markets, such as distributed gaming. While our maintenance services and central credit form the core of our software and other revenues category for many years, It was our successful track record of acquiring complementary products and businesses that has been the major driver of our success. New Ways and Resorts Advantage formed our RegTech software services, while Atrient and MGT moved every into the player loyalty category. As we brought these standalone products onto our platform and we integrated them with the rest of our comprehensive product portfolio, we built a powerful recurring software as service element to our business. The almost 18 million in revenue we generated in Q1 is more than double the total we generated in the first quarter of 2019 when we began acquiring our loyalty products. Most recently, we acquired a software license from Zuby, which adds an AI-powered analytics engine to our loyalty capabilities. We strive to build complete products for the gaming industry that include the most powerful marketing, promotions, and loyalty capabilities. As with our digital neighborhood in general, the integration of new products and product enhancements across our platform injects added cost efficiencies and benefits for casino operators. Applying our strategic growth model more broadly, we expect to continue with our three-pronged strategy. First, we will support the internal development of new products and product enhancements that expand and extend our portfolio in both games and fintech. second we will expand geographically into markets where we have not had a historical presence or where we are currently under penetrated and third we will continue to pursue the acquisition of tuck in assets and businesses that add new products product categories and geographies to grow our total addressable market now let me turn the call over to mark thanks randy let me begin with the financial overview overall We had a strong quarter. January started off a little slow as Omicron impacted patron visitation and gaming revenues for our customers. February and March saw an improvement in volumes and a concurrent steadying in all of our recurring revenue streams. We exited the quarter with same store increases in financial access volumes that have carried through April and into May, which is consistent with recent operator commentary on the strength of their player base. On a consolidated basis, we set first quarter records in total revenues, recurring revenue, net income, earnings per share, and adjusted EBITDA. In addition, free cash flow generated in the first quarter was $52 million, an 18% increase over the first quarter of 2021. I should also note that as a result of the refinancing we completed last summer, the timing of our semi-annual interest payments on our unsecured notes shifted to the first and third quarters, whereas previously they had been paid in the second and fourth quarters. This means that the first quarter of 2022 included $10 million of cash interest payments on our unsecured notes, while the prior year first quarter did not have a similar payment. Our core businesses continue to perform well, and our early stage growth opportunities continue to demonstrate attractive growth prospects. Let me provide some focus on one of these new rising stars, our success in driving the evolution of cashless technology. In the first quarter of 2022, $346 million of funding was delivered to our casinos' customers' floors from our cashless options. This includes both our quick ticket cashless solution offered through our fully integrated self-service kiosks, as well as digital funds provided and managed through our Cash Club Wallet technology. In casinos that had at least one of our cashless options for more than a year, cashless volumes are running at approximately 8% of the total funds delivered to the casino floor, with one of our customers averaging as high as 22% of total funds over the last 12 months. Looking specifically at the digital cash club wallet solution, which is a newer and therefore smaller subset of our total cashless offering, 19 casinos across six jurisdictions are live today with our technology. That is an increase from 16 casinos in four jurisdictions at the beginning of the year. These 19 casinos have more than 35,000 slot machines in operation. This level of market penetration for our digital wallet combined with the total volume of cashless activity processed and the positive feedback we receive from our customer base supports our position as a leader in cashless solutions for the gaming industry. Because of the early stage nature of the digital wallet solution, our pool of customers and the number of patrons utilizing this product is still relatively small, though it is constantly growing. Therefore, analyzing year-over-year metrics is not yet entirely useful. However, let me share some of our more interesting early observations. Of the cumulative total signups, 14% of all unique wallets are held by individuals over the age of 60. And 61% of the unique wallets are held by individuals over the age of 40. As you would expect, the older cohorts who typically have more disposable income drive an even higher level of funds loaded. When we look at the data from our wallet users who have previously been known to use our services to obtain funding and we exclude the handful of whales who by their nature can distort the averages, we've seen an increase in total transaction dollars delivered to those individual patrons after they switched to the cashless wallet. As we expected, the amount of the average transaction size was smaller for a cashless transaction, but it would appear that the convenience factor is driving a 39% increase in the average number of transactions performed. It's also satisfying to note that from a responsible gaming aspect, the majority of transactions continue to come from patrons' cash accounts via debit card, which is roughly in line with our overall transactional data. While our current wallet customer base has utilized varying strategies on how actively they market the wallet to patrons, these customers are all seeing new users added daily. For casino operators who choose to not actively promote the wallet, about 3% to 5% of daily wallet users on average are new wallet signups. while operators with a more active marketing program see 10 to 15% of new wallet users using the wallet each day. On a same location basis, from January 1st to March 31st of 2022, the number of unique wallet users increased by approximately 50%. While the evolution of our cashless space is still relatively early, we are seeing customer advancements across a broad front. Currently, we have more than 100 casino locations that offer our quick ticket product, and we are now working to implement our wallet at another 18 casinos at 12 new jurisdictions. We expect these new wallet implementations to go live by the fall, assuming they all receive the required regulatory approvals. It is important to note that many of these new locations are for properties with new customers that we are not currently at liberty to name just yet. While I specifically address the early success of our CASAS efforts, it's important to point out that we also have additional new products planned for launch in the coming months. This should give us new growth opportunities across both our games and fintech businesses. Moving on to our outlook. Today, we raised guidance for adjusted EBITDA to a range of $368 to $378 million. This is an increase from the prior range of $368 to $376 million. While it's still early in the year and we are continuing to address a challenging macro environment, we remain confident in our growth prospects. This is particularly true for our ability to generate free cash flow. Our recent acquisition of Intuicode Gaming should only add to the potential opportunity in the back half of the year. As we look to the second quarter, we expect that revenues, net income, adjusted EBITDA, and free cash flow will be in line with or exceed the record results of last year's second quarter. This is despite the difficult quarterly comparison arising from the white hot casino activity we saw last year resulting from government stimulus, vaccine proliferation, and other quarterly specific financial benefits, including the above average gaming machine and hardware sales from new casino openings occurring in the second quarter of 2021. Let me now share some of the opportunities and challenges that shape our outlook. We believe our robust pipeline of new games will contribute to ongoing growth in our installed base of gaming operations. We expect that the return and steadying of casino visitation, combined with the ongoing growth in our installed base footprint, to result in further revenue growth. as well as our daily win per unit remaining healthy at around or above the $40 range for the full year. We do continue to expect some variability in the quarterly rate throughout the year, as we always do, which reflects the impact on casino traffic due to normal seasonal influences. We expect to generate sequential growth in the sale of gaming machines, driven by a combination of our improved ship share, the recent launch of our newly released Mechanical Cabinet, the Player Classic Signature, and increases in capital spending by our casino customers. We will continue our efforts to address the procurement challenges throughout the global supply chain that is being experienced by the entire equipment supplier industry, as well as other industries. To date, our inventory procurement and hardware engineers have done an absolutely terrific job at managing through this ever-changing landscape. With the breadth and complexity of global supply chains, we expect these issues will continue to rise throughout the remainder of the year. Our team is very focused on creating solutions that help us navigate through these challenges, even as our suppliers also work to improve their component delivery capabilities. We do not believe our exposure is any greater than the rest of our industry. For FinTech, through April and into May, we have seen continuing positive momentum in our same store volumes. even as we comp against strong growth from 2021. We expect this trend of positive financial activity to continue at levels similar to our pre-pandemic levels of historic year-over-year growth. The continuing expansion of cashless products, including the rollout of our digital wallet to new customers, is expected to provide incremental growth in our volumes. We believe continued demand for our software and other products and services primarily driven by the steady stream of new and enhanced products we plan to introduce in coming quarters, will drive growth in revenue, as well as increasing demand for equipment sales from contract renewals and new contract wins. We expect operating expenses, exclusive of non-cash compensation, to remain in line with revenues, so that as a percentage of total revenue, operating expenses should remain consistent with current levels of between 25% and 26%. We expect R&D expense to be in the range of 7% to 7.5% of total revenues for the full year, which is slightly higher than our historical range but remains in line with our guidance we provided at year end. This higher level of spending reflects our increased focus on investment in internal new product development. As we noted last quarter, we expect to see R&D expense trending toward the higher end of this range as the year progresses. In regard to our capital expenditures, we expect to spend between $124 and $130 million for the full year. Finally, I'll end by highlighting that Every's board recently approved the new share repurchase program that will enable us to acquire up to $150 million of our shares over the next 18 months. We believe that our current valuation does not appropriately recognize the strong net income, adjusted EBITDA, and free cash flow that we have been generating, nor the strength and balance of our recurring revenue. And we believe that our current enterprise value multiple does not give us appropriate credit for a company that has been growing as consistently as we have been growing and as we expect to continue growing. We have a very strong balance sheet. We ended the quarter with a net cash position of approximately $120 million, and we generated more than $50 million in free cash flow in the first quarter. In the coming quarters, we expect to continue generating incremental free cash flow. This provides us more than adequate liquidity and flexibility to continue allocating capital to support the business operation and investments in our future growth. While also executing on share purchase in an opportunistic manner and at prices we believe will continue to build incremental shareholder value. With that, I will now turn the call back to the operator for questions.

Thank you. And ladies and gentlemen, at this time we will conduct our question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press the star key followed by the number 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Once again, to ask a question, press star 1 on your telephone keypad. One moment, please, while we pull for questions. And our first question comes from Jeff Stanchel with Stifel. Please go ahead.