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spk02: 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.
spk12: 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.
spk02: 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.
spk09: Hey, good morning, guys. Thanks for taking the questions. And Randy, congrats on your inaugural earnings call here. You know, I wanted to start on sort of, you know, consumer trends, call it Q2 to date, you know, a hot topic this earnings season just within the state of the low-end consumer amidst the inflation, higher gas prices, and kind of that laundry list of macro headwinds that are well publicized at this point. Just curious to get your thoughts here, given you've got a pretty good 10,000-foot view with your financial access business. Are you seeing any softness whatsoever really across any of your markets or just curious for your perspective there?
spk12: Yeah, Jeff, look, I'll start it and Mark or Darren can add in because really we see a lot through our, as you say, through our fintech side. And to date, we're seeing still very strong numbers in comparison to You know, last year, even given how strong Q2 started off with, you know, as we talked even in the remarks with stimulus money and vaccines out, we're still very pleased with how the numbers are showing, at least on the cash access side. So nothing yet that would, you know, give that indication.
spk10: Yeah, I'd agree, Randy. Great Q1, Q2 looks strong.
spk09: Perfect. That's helpful and encouraging. Maybe hanging on the financial access business for a second, I think you called out total volumes up 2% quarter on quarter. That's slightly higher on a dollar amount basis. If you look at the state reported data, clearly this is outpacing, call it commercial casino GGR trends. Just curious what you think the driver of that outperformance really is. Is that new customer wins, new properties opening up? Is that maybe better penetration overall of consumer wallets or budgets that they bring to the casino? Just curious on what you see as the key driver of outperformance there relative to the same store casino trends that we all track in the state reported data.
spk12: Sure. I'm going to turn it over to Darren. But again, I think you got to remember, we continue to win what we believe is a good share of renewals that come up. And that does help our growth overall. But Darren, anything to add there?
spk10: Yeah. I think, look, we got strong renewals. Historically, we continue to do that. There are decent expansions that have been out there, new openings. So Again, we're winning our share as we normally do, and so I think that's certainly contributing to the volumes, and we expect that to continue as there are some new openings and expansions through the rest of the year. Understood.
spk04: That's very helpful. Thank you both. We'll pass it on.
spk02: Thanks. Our next question comes from Barry Jonas with Truist. Please go ahead.
spk07: Hey, guys. Thanks for taking my questions. Wanted to start with gaming. As you think about that 15% market share target, can you maybe talk about the potential path to get there? Any color on how you see the sub-segments shaping up, whether that's mechanical, video, or now maybe HHR? That'd be really helpful. Thanks.
spk12: Sure, Barry. I'm going to turn it over to Dean and let him answer that one for you.
spk13: I think it's all of the above in terms of new markets that we have an EnerJet and a robust product pipeline. Literally the latter is how we're going to get there. We've built up our product development efforts to attain this 15%. Obviously, it's a long-term goal. but we continue to track in the right direction. The introduction of our new player classic signature cabinet will help allow us to continue to gain share in that particular category. And also just a video lineup coming up. I feel very, very good about it. And, you know, just to really kind of give you a data point and how many more themes we're we're putting out there that we have significantly ramped up. I'm not going to throw an exact percentage, but if you look at the 2019 pre-pandemic to what our output is this year with themes, we are increasing significantly above that.
spk07: Okay, great. And then, apologies if I missed this, but what exactly drives the guidance raised at the high end? Is this flowing through the Q1 beat? Is Intuit code in there? Maybe just specifically what drives that?
spk12: Yeah, I think while some of the analysts' cadence might have been a little off for the full year in the individual quarters, certainly the Q1 beat The strength we saw coming out of Q1 and the strength we've seen coming into Q2 helps us get some confidence in our core business. The addition of Intuicode, which really was not reflected in our year-end numbers, also helps to give us a little more confidence in raising that top end of the range as well. So it's kind of a combination of both factors that led to the top end raise.
spk07: Okay, so the bead and Intuicode drive. Okay, perfect. Thank you so much, guys.
spk02: Thanks, Barry. Our next question comes from Chad Bannon with Macquarie. Please state your question.
spk00: Hi, good afternoon. Thanks for taking my question. Randy, you mentioned one of the goals is to not just have us, well, for you guys and for us to not just focus on the yield. Growing the footprint is obviously important. There's still a lot of white space out there for you guys to grow that. I was wondering if you or someone on the team could expand a little bit just in terms of opportunities. I know in the past you've talked about hhr i'm guessing that's more of a for sale market but anything else just on the recurring side that could that could be a boon for the back half of the year and into 23. thanks well i don't know that there's anything i can say to that to you know 22 i mean i think 23 and out you know we are looking to get into
spk12: some other markets distributed gaming, but that's a little farther out. But we believe that Q1, we were right in our target level. We believe we're going to continue to grow our install base. As I said on the comments, we've only got about 10% of an install base, that whole universe. with the performance of our premium units and even our core units, we believe we can grow that installed base and continue to grow that revenue stream.
spk00: Okay, great. And then you said you're still interested in a number of tuck-ins. You talked about how loyalty has really become such a major contributor from a recurring standpoint and just a revenue and EBITDA standpoint. Are there still pieces of the neighborhood that you believe you could kind of bolt on to really kind of increase just what you offer to your partners? Or is it more just geographic specific, maybe getting into some other markets like you did with eCash in Australia, where you don't have as big of a presence? Thanks.
spk12: I mean, Chad, I think it's both. I mean, I think there are other pieces, you know, Zuby is an example of it, right? I mean, we don't a lot of times really talk about those, but again, an AI analytics piece that we think we can bolt on and provide through fintech, whether it's, you know, through regtech or through loyalty. We believe there are other pieces out there, and if we can get them at the right price, we think it, you know, can add to, you know, that revenue stream. And then, again, we'll continue to look outside. We think that eCash gives us a a nice ability to even bring some of their products here to the U.S. and allow us to take some of our products to Australia and maybe other regions. So I don't think we're out yet. It's just finding the right ones and Darren and his team really executing on it, which he's shown he can do. But definitely we're not done there.
spk00: Great. Thank you very much. Appreciate it.
spk10: You got it.
spk02: Thank you. Our next question comes from John Davis with Raymond James. Please go ahead.
spk11: Hey, good morning, guys. I wanted to drill in on some of the cashless stats that I think you gave Mark. I think 22% at the customer that has the highest adoption. I just want to understand better what's driving that level of adoption versus the 8% average. Is it they're just marketing it more, rolling it out more aggressively? Just trying to understand how we should think about the pace of what that cashless adoption would look like over a multi-year period, and any kind of color there would be helpful.
spk12: Yeah, I'll start, and then I'll let Darren give a little more color since he'll have a little more in-depth on there. I mean, certainly, you framed it outright. It's a combination of factors. As our operators are focused on promoting this more to their patrons, clearly there's a little better acceptance rate, and
spk10: uh the one customer in particular is keenly focused on trying to drive a lot of cashless volume so so that really helps drive things along a little bit and you know if they're expecting to let him kind of add some more color to adoption rate yeah certainly we've got different profiles of customers in terms of jurisdictions and number of locations so uh you know you're going to see sort of variances of their approach but i would say you know as they move into you know new jurisdictions new new commercial jurisdictions And then, you know, ramp up the marketing efforts. You'll see it continue to grow. And, you know, we've got a number of other casinos in the pipeline that we'll be launching. through the rest of the year. So again, it's a combination of going at their speed, but certainly we're supporting their efforts in terms of how they want to market and how they want to get their customers up to speed as quickly as possible with the product. So a lot of different approaches, but we're supporting them. And so far, you know, I would say, you know, very happy with the results. Customers are very happy with the results and it's just going to continue to grow as more adoption increases every day.
spk11: Okay, that's helpful. And then quick follow-up from Mark, just margins. You know, I think the guide implies similar margins to the first quarter. Is anything to call out from a cadence or how you expect those to either ramp or, you know, just kind of stable through the quarters? Any call-outs that would particularly drive a margin or is it really just going to be a result of mix? And at this point, the 51-ish number is your best guess for the full year.
spk12: You know, again, I'm hopeful that the margin percentage actually drops. Again, not a number I focus on. For us, the mix is a big driver in terms of where we go with EBITDA margin. The more equipment sales we have, that's what has a little bit of what some might call a downward pressure on that margin percentage, but it's all additive in terms of total EBITDA. So when I say I was hoping that number comes down, that means equipment sales would have to be pretty strong and we're expecting to see strength continuing throughout the year as we progress along. So that could cause that margin percentage to drop, but again, it'll all be additive. We expect to see growth in all those recurring revenue lines as well as equipment sales. But I think the equipment we believe is going to grow a little bit faster. than the recurring just because of the deferred nature of capital spend of our customers over the last couple of years.
spk11: Okay, that's helpful. And then, Randy, bigger picture capital allocation question. Obviously, with the softness of stock in the broader market, I think most people would agree that the valuation doesn't really make sense. So how does that play into your decision whether to be more aggressive on the buyback? You guys have done a couple of small acquisitions but nothing significant. really material from a dollar perspective. So there's a situation where you look at a stock and say, you know what, it's a great opportunity. There's no better company to buy than our own. And so that takes priority. How much does the stock price play in whether it's M&A or buybacks? And how aggressive do you think you would be on this $150 million?
spk12: Yeah, I mean, it's a great question, John. I would say, look, we're still focused first on internal use of our cast to develop products. Second, acquisitions. And, you know, there are things out there. So it's hard for me to say, hey, you know, we're going to flip the switch and go after, you know, just stock repurchases. But to your point, given the price that we're seeing and how we just feel we're undervalued, given how we've grown. the recurring nature of our revenues. It's going to be a lever that we pull, John, and that's why we had the board authorize the amount. And how aggressive is hard for me to say right now, but it's still going to be in kind of that order, which is we're going to invest internally. We're then going to look for the acquisitions, but this is definitely now going to be a significant part of how we look at capital allocations when the authorization, like I say, on that 18-month period is really only about half of our expected free cash flow. So it's going to be one of the major points of what we look at on a daily basis on how we're going to allocate it. And John, I would just add, from an M&A perspective, when we look at M&A, we look at Companies that are growing well, that can throw off a nice amount of free cash flow that are accreted to our business. I mean, if it wasn't us looking at ourselves, I would say our business meets all those checks in this box for us today. So right now, it is a very compelling acquisition for us to be buying those shares at the levels that they're at.
spk11: Okay, obviously, and Randy kind of alluded to this, it's not mutually exclusive given the free cash flow generation, but maybe just going back to, you know, the leverage comfort, you know, any change to two to three times, like would you potentially take leverage over three times if you're going to aggressively buy back your stock plus there was a deal that moved the needle? Would you go to three and a half or just any change there? You know, you can obviously do both.
spk12: Yeah, it's early to say there, John, I'm not looking to move leverage up to buy back stock. I think we've got plenty of free cash flow to be able to do that. And, you know, and look, I just don't know what type of acquisitions come along that we may want to do. So I would say, you know, look, I'm not looking to go lower than we are right now. I like where we're at in that two to three times. But, you know, I think we're going to aggressively look at, you know, using our free cash flow if we can't find anything. But I don't I don't see us going out and doing something that would change that and go out and borrow at this time, John, I would say. We're going to use free cash flow, and we got a significant amount of it. And as Mark said, we feel our price is a great value for us to go out and look at. John, we're sitting with the net cash position on March 31st of over $120 million. And again, we generated $50 million in free cash flow in the first quarter. While that could be timing of interest payments, it impacts that number as we go forward. you know, we believe we'll be able to fund that $150 million from cash on hand plus the free cash flow we generate and not have to borrow anything to fulfill that full requirement plus leave ourselves adequate liquidity for the business and adequate cash flow to continue to invest in the business and find these acquisition targets. So we feel we're in a great spot and it'll only be accretive as we progress forward.
spk11: Okay. Appreciate all the color, guys.
spk12: You got it. Thanks, Sean.
spk02: Thank you. Our next question comes from David Katz with Jefferies. Please go ahead.
spk06: Hi. Good morning, everyone. Thanks for all the detail and thanks for taking my question. I wanted to just discuss the slot machine side or the gaming machine side where you've invested some stuff in historical racing of late. Do you find the competitive landscape in general more or the same – probably not less competitive you know today than where it was and you know what are you expecting 12 months from now you know randy we we know each other a while i and and you know i am and i expect you are just the right amount of paranoid about you know making sure that the momentum continues um you know what are you seeing out there and what do you expect
spk12: I want to make sure I'm understanding your question completely, David. Just in the overall competitive market in slots, are you saying, in total?
spk06: Well, let me be more specific. Some of the larger players in there are gearing up and are open about their intent to try and take more share. whether that's in, you know, premium participation or whether that's in the for sale category. Um, you know, how do you sort of stay comfortable or get comfortable that you can keep the momentum rolling along?
spk12: Okay. Gotcha. Um, look, I feel like, um, it's, it's all content, right. And, um, you know, clearly we've, you know, we're starting to expand out. We've gone to pick up a studio in Australia. And we have invested heavily in our own studios here in the US And so I look I think we're doing the same thing that the other suppliers are we know it's content We know it's that's how you you maintain your position and that's how you grow it So I think I'm very comfortable with Dean and what he's done over the last several years I think he's really beefed up the studios and I feel like, you know, he's got a roadmap for the new content he wants to bring out for both premium and for sale. Uh, so I, you know, you know me well, David. So, um, you know, I'm, I'm as, as bullish as I can be here, which is, look, we've got great teams. Uh, and I think Dean's got a great roadmap and I'll, I'll let Dean throw a few things in, uh, because I think he also, uh, would, would point to some of his, his hardware that he's working on.
spk13: Hey, David. So, Definitely content is king. It's been competitive for back as far as I can remember. It's not going to change. But, you know, those that have the best content will drive their ship shares up. And we feel very confident with the lineup that we have, the amount of dollars that we continue to invest and grow, not only domestically, but as Randy talked about in some of these other tuck-ins that will allow us to get in these other verticals that we're not playing in right now, to be able to continue to grow the business, plain and simple. That plus new hardware cadence as we continue to go through quarter after quarter, we feel that we're in a great position to be able to continue to grow. It's as simple as that. But if your question is the competitive landscape, the answer is it's been there, it will continue to be there, and if we think it's not going to be there and get better, then that would be a giant mistake on our part. So we're ready for it, and we're going to put our best foot forward and feel very excited about it.
spk06: Got it.
spk04: Uh, thank you very much. Appreciate it.
spk02: Our next question comes from George Sutton with Hallam. Please go ahead.
spk08: Part of it. So Randy, I've known you for a long time and I know you well, and I know you don't like to spend money. So the fact that the share repurchase program came out, I thought was quite compelling. Uh, but that's a comment, not a question. So on the question side, question for Darren, As you're getting some of these metrics in, for example, the 39% increase in average transactions for the wallet user, I'm wondering if we're getting to the point where in your pipeline operators are starting to realize that a customer can walk in Casino A that has a wallet, leave, and be very happy with the things that they can do with their wallet. They go across the street to Casino B that doesn't have that wallet, And it's a very different experience. Are we getting to that point in the competitive mix and the sort of market dynamics, in your opinion?
spk10: Yeah, it's probably a little early to say that. I mean, look, at the end of the day, I think, you know, an operator having a wallet is sort of one tool that they have to be able to actually create an experience for a player. At the end of the day, it's what that operator has on their floor. It's their people. It's their products. that are really going to drive that customer experience. And having a wallet is just one of those tools, one of those arrows in the quiver that will help certainly facilitate that experience. But obviously, again, the early data points to that this is certainly an opportunity for them to create some opportunities for loyalty engagement, right? Because you're using an app that's got their loyalty components associated with it. And, you know, the data points in terms of transactions and how it's, you know, increasing, you know, play and time on devices is going to be an important part of how any operator would look at this.
spk08: Gotcha. A clarity question for Mark. I appreciate you mentioned the continued momentum into May, but then you said you expect similar levels to pre-pandemic levels. I wasn't sure if you were referring to growth rates terms of cash-to-the-floor dynamics. What exactly were you trying to say there?
spk12: Yeah, that's exactly it. I wanted to, you know, highlight that as we start comping and lapping strong periods that those year-over-year growth rates should start mirroring kind of how we were pre-pandemic, not, you know, the double digits we've been talking about on the last several calls as patrons were slow to come back and not fully back in the environment.
spk04: Perfect. Thanks for the clarity. That's it for me.
spk02: Thank you. Our next question comes from Edward Engel with Roth Capital. Please go ahead.
spk01: Hi. Thank you for taking my question. Quick question on HHR. How quickly are you able to start going to market in that segment with every content? Is it going to take some time to kind of repurpose some of your legacy games, or is the conversion pretty seamless?
spk12: Yeah, I'll turn it over to Dean real quickly. But look, I think, you know, we just acquired it. So I think there's going to be a little bit of time there. But I'll let Dean give a little bit more depth there.
spk13: So we've been working with Exact and then Tool Code on placing our cabinet out in HHR for a while now. So we believe that in the back half of the year, you'll see in every cabinet in HHR, But even more so than that, we will work with Intuico to place some every content onto their install base that's out there. Plus, we'll also port what I would call their APIs into our every platform and start distributing some of our additional cabinets in AHHR by the end of the year. And then there'll be a smooth runway from that point forward. So expect a lot more traction and sustainability come towards the end of the year.
spk01: Great. Thanks for the color. And then one of your peers just recently talked about incremental cost inflation within the EGM sales segment. I know that you're getting this question on every call, but any update on inflation you're seeing for certain parts or inputs impacting your gross margins there?
spk12: Yeah, well, look, I think if you look at the supply chain in general, the costs around it, delivery of components, none of that is new to us now. We've been talking about it for the last several calls. Our competitors have been talking about it, and we've all been trying to navigate through this, and we've been managing it. this process very well over the last several quarters, and we expect to continue staying in front of it. I would tell you, you know, we do have a strong pipeline for our products in terms of deliveries. Our customers want our products, so certainly having more unit sales coming through the pipeline is a good thing for us, but adds some pressure. But we continue to manage that, and, you know, component prices change, and we deal with those, but nothing material has really come through our numbers. It's not seeing there already, or nothing material is changing yet. I would just add, look, I'm really excited and pleased at how our team has done to manage this. So I think on both sides of the business, they've done a tremendous job trying to work on this, and I think they'll continue to do that. So that's about all I can add there.
spk01: Yeah, that's perfect. Thanks for the color.
spk02: Thank you. Our next question comes from Ricardo Chinchilla with Deutsche Bank. Please state your question.
spk03: Hey, guys. Thanks for taking my question. I was wondering if you could please comment on how your discussions with the rating agencies have evolved over the last year since your last upgrade. I believe that one of the criteria is for them for a further upgrade was to keep leverage below three turns, and very soon your guidance and even consensus expectations, you're well below that threshold. So, any color there would be very helpful.
spk12: It's hard for me to speak to what the rating agencies ultimately are going to decide and do. Certainly, as you pointed out there, they do have certain, I'll say, hard measures for when they consider the next break point and where a company is. I believe that our proven record of earnings growth and our ability to continue to pay down debt is working to drive our leverage down significantly. I think, you know, total leverage, not just senior security, which is our covenant, is less than two and a half times at the end of the March quarter. And as we continue to growing and seeing growth in our numbers, That number will only come down. So I feel like we're in a great position with respect to how the rating agencies would look and evaluate our debt. And, you know, we continually work with them to try to tell our dream and story and talk about the direction of where the company is going and get them just as excited about the story as we are. Yeah, I would say, look, Mark and Bill and the IR team have done a great job working with the rating agencies. But to Mark's point, you know, they run by their own rules. But I think the strong performance that we have shown over these last quarters hopefully will do nothing but benefit us in that arena.
spk03: Great, thank you. I may have a follow-up. Have you guys considered giving the current break environment to switch the mix of fixed and variable depth in your cap structure, or are you guys happy with the current kind of mix?
spk12: You know, when we redid the whole capital structure last year, we really looked at the overall structure of the debt and knowing that earnings could help us pay down certain pieces of it. We certainly were very much, obviously when interest rates are very low, the variable rate results in limited interest costs, and even as rates rise. We only have limited exposure in our viewpoint as rates rise. Every 100 basis points is less than $6 million of annual interest. So we're pretty comfortable with where we are in terms of the mix of variable and fixed rate debt right now. And if our viewpoints change, we can always do other things around the variable debt to get it fixed without changing the composition of the type of debt. I like the secured where it's at and the flexibility that it provides us. I would support that 100% behind Mark, which is luck. We just did it. We have a period of time in which we couldn't even change it. We're probably coming up to that. But I think there's other things we could do if we don't like that mix. We've paid a lot to get to where we are, and I think we like the mix where we're at right now.
spk03: Perfect. Thank you so much for the color.
spk02: Thank you. There are no further questions at this time. I'll turn the floor back to management for closing remarks.
spk12: Thank you for your interest in Every, and I would like to reiterate that despite the current macro environment and how it involves in the near term, we remain focused on what we can control, developing great games, providing fintech and loyalty services and products that offer casino operators productivity and cost-efficient solutions, and managing our cash flows and expenses. We believe this will help us achieve sustainable growth and build long-term shareholder value. We look forward to providing you an update on the next call. Thank you.
spk02: Thank you. This concludes today's call. All parties may disconnect. Have a good day.
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