Everi Holdings Inc.

Hello, everyone, and thank you for standing by. Welcome to the Every Holdings 2022 Third Quarter Earnings Conference call. During today's presentation, all parties will be in a listen-only mode. Following the prepared remarks, the call will be open for a question and answer session. As a reminder, this call is being recorded. Now let me turn the call over to Bill Fund, Senior Vice President, Investor Relations. Please go ahead, sir.

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 potential 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 risks, 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, November 8, 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 gap 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, GAINS Business Leader, and Darren Simmons, our FinTech Business Leader. Now, I'm pleased to turn the call over to Randy Taylor. Good morning, everyone, and thank you for joining us. Building on the strong results of last year and the momentum of this year, both our third quarter consolidated revenues and adjusted EBITDA reached all-time quarterly highs. The top-line improvement reflects the wide-ranging demand for our diverse product and service offerings and was driven by ongoing growth in our recurring revenue streams and an even faster pickup in revenues from the sales of FinTech hardware and gaming machines. This strength in revenues carried through to the bottom line as both net income and adjusted EBITDA increased over the prior year. The third-quarter increase in net income and the all-time quarterly record in adjusted EBITDA is inclusive of our continued investments in R&D as we continue to fast-track additional development of new games and fintech products to power growth next year and beyond. A combination of top-line growth and focus on operational excellence drives strong free cash flow, which is perhaps the most compelling evidence of the successful execution of our growth and capital allocation strategies. With $145 million of free cash flow generated year-to-date, we are on track to generate a 20-plus percent increase in free cash flow this year compared to last year. Our strong free cash flow continues to benefit from the momentum in our core businesses, the launch of newly developed products and services, the successful integration of acquisitions and their acquired products, and the overall complementary nature of our games and fintech portfolios. With our solid balance sheet, this tremendous free cash flow provides the capital to drive future growth through investment in our own internal new product development initiatives and the acquisition of complementary businesses. At the same time, we are well positioned to return value to shareholders who share repurchases. The positive customer feedback that we received at G2E last month reinforces our confidence in our strategic focus on new games and products. We unveiled our new dynasty view cabinet, the first installment in the new next generation dynasty family of video cabinets. The dynasty view cabinet is expected to launch in the second quarter of 2023 with for differentiated family of game content that brought us offering at any cabinet launch we've done. With its unique look and feel, the Dynasty View will complement our existing cabinet lineup and provide customers with an exciting optionality to expand and diversify their footprint of every product. Feedback from our customers has been extremely positive, as for some time, many customers have been asking for a differentiated, lower-profile cabinet that contains all the feature-rich functionality of the latest video cabinets. This new for sale cabinet is just one of the many tools in our arsenal that we plan to leverage as we strive to grow toward our stated goal of a 15% ship share. Each of our new cabinet launches is supported by our development teams ability to create original engaging content that will be available for distribution across class to class three central determination and historical horse racing markets. At G2E, we displayed a broad sampling of the nearly 90 new themes that are planned for launch in 2023. This will be an almost 40% increase over 2022. It's not just about the number of games, but more importantly, the diversity of our content offering. Our commitment to the development of original and innovative games provides customers with the confidence to invest in average products. We protect their investment with a robust pipeline that supports both our new and existing cabinets. Avery's expansive game pipeline also supports our rapidly growing digital iGaming business by providing an extensive library of proven land-based game content from which we can curate the best performing games into new and existing iGaming markets. Recently, Every was recognized by Eilers and Kryjec as the number one provider of new digital content with our latest game significantly outperforming the major competitors. Turning to our FinTech segment, two major trends emerged at G2E. The continued interest in our expanding portfolio of products and services that offer productivity and cost efficiencies for casino operators and the expanding range of mobile capabilities. Our digital cash club wallet was again a focal point for customers and investors. Demand for our cashless solutions remains high with inbound interest from tribal, commercial, and regional customers alike. As cashless interest continues to evolve and grow within the gaming space, we are steadily pulling away from the competition. We believe we are well positioned with our cashless options and view our offerings as a natural, seamless extension of our existing cash-based financial access services. Operators are taking note of every multiple integrated cashless and cash-based solutions, not just our digital wallet, but also the advantages of partnering with the industry's gold standard for cash access. A notable example of this was the recent opening of the Boyd Managed Sky River Casino just outside of Sacramento, California. Not only did we garner a 15% allocation of their slot floor, but the new property purchased a comprehensive suite of our FinTech products and services. We created for them a custom mobile loyalty app integrated with our Cash Club wallet technology. Considering Boyd is not presently a financial access customer, it's encouraging to know that when given the choice in today's competitive environment, we were selected to by their management team to be SkyRiver's comprehensive fintech solution provider. Another start at G2E was the mobile first solutions on display from Venutize. This recent addition to the Every family is an extension of Every's core mobile offering that expands our addressable market beyond casino gaming for the first time with an established customer base in several sports, entertainment, and hospitality venues. This technology-based, customer-focused acquisition aligns perfectly with our capital allocation strategy. Venue Ties provides a complimentary product portfolio that is extensible to our current customer base. It extends an enhanced guest experience beyond the casino floor while offering significant opportunities to profitably scale and drive growth in new markets with the advancement of our loyalty and payments offerings. As we integrate our two businesses every is at the very Center of the convergence of sports business and sports betting, but they consumer appealing mobile first solution that offers enhanced guest engagement and new revenue opportunities. are both also featured gaming voucher redemption kiosk from our cash business in Australia. The eCash Premium CRT and Mini CRT small footprint self-service kiosks received a lot of attention from operators in distributed route and charitable gaming markets. Two verticals where our current larger kiosks do not have a presence. Well, these are just a few of the many products highlighted at G2E. Our team's passion and enthusiasm were on full display. All the excitement coming out of G2E could not have been accomplished without the amazing team here at Every. I'd like to take a moment to thank the entire Every team for their continued dedication to excellence and their relentless pursuit to lead the gaming industry with innovative and original products. It's their efforts and passion that have allowed our organization to be this successful. As we move forward with a strong balance sheet and ample liquidity, we will continue to pursue a capital allocation strategy focused on maximizing shareholder value and simultaneously solidifying our position as a premier provider of games and fintech solutions to the gaming industry. At its core, our capital allocation strategy is aimed at creating shareholder value through high return internal investment, accretive bolt-on acquisitions, and returning capital to our shareholders. Internally, we look to leverage our best-in-class development teams to expand and improve our existing product offerings, while we look externally to evaluate opportunities that will enable us to acquire and scale up new products and expand into new jurisdictions. Finally, with our strong cash flow, we will continue to invest in every and opportunistically repurchase our shares through our share repurchase programs. Now let me turn the call over to Mark to provide a bit more insight into our operational successes. Thanks, Randy. I'd like to begin my financial overview by noting that we had another strong quarter. On a consolidated basis, we set all-time quarterly records in total revenues, recurring revenues, and adjusted EBITDA. Our operating momentum from the first half of the year has continued in the third quarter. with incremental placements of our highly profitable gaming machines, as well as same-store increases in financial access volumes. Our total revenues were up 21% to $204 million, driven by record recurring revenues and non-recurring sales. We generated growth in every category in each of our business segments. Our core businesses continue to perform well, and we are benefiting from our recent accretive acquisitions as well as our early-stage growth operations. Non-recurring revenues, which primarily include the sale of gaming machines and fintech hardware, were up 64% year-over-year. As Randy noted, our year-to-date free cash flow is running nicely ahead of the record amount we generated in 2021. Although free cash flow was down compared to the third quarter of 2021, I'll note that this was the 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 as compared to the second and fourth quarters. This means that the third quarter of 2022 included $10 million of cash interest payments on our unsecured notes. while the prior year third quarter did not have a similar payment. To further put things into perspective, while year-date free cash flow is up only 4% over the prior year, we expect to surpass the amount of free cash flow generated in 2021 by 20-plus percent in 2022. A key contributor to our strong cash flow generation is the consistent strength of our core recurring revenue operations. With growth in both business segments, third quarter recurring revenues grew 9% over the third quarter of 2021, and we're up 43% over the 2019 third quarter. Within our game segment, drivers behind the growth in our recurring revenues include the expansion of our install base, the growth of our digital iGaming operations, and our entrance into this historical horse racing market. I would note that our domestic install base has increased every quarter for more than three years. We ended the third quarter with 17,735 units, which is up over 1,300 units year over year and is up 271 units sequentially. Further contributing to our gaming operations growth was the $1.3 million, a 34% increase in digital iGaming revenues. Through our Spark remote game server, we have been successful in leveraging the development investments of our land-based content. Our ability to quickly take our proven content and add enhanced features, such as progressive jackpots, has generated consistent growth in this high-margin recurring revenue base. Gaming machine sales also continue to improve as we sold 1,841 units in the third quarter. This is 665 units, or 57% more compared to last year. Over the last 12 months, we have sold more than 7,100 units. This represents the highest number of unit sales for any 12-month period in our history. And individually, each of the last four quarters represents our four highest quarters of unit sales. Although visibility into longer-term operator capital spending remains limited, our backlog of orders for the remainder of the year and into early 2023 remains solid. And we are on track to continue our unit sales momentum. Within the game segment, the percentage of adjusted EBITDA to revenue was unfavorably impacted by the changes in revenue mix. as well as an increase in direct product costs associated with game sales and increased investment in R&D. The rapid growth of our game sales far exceeded the 5% growth in our higher margin gaming operations, while the gross margin percentage on sales of gaming equipment declined by over 400 basis points year over year, primarily due to rising component and freight costs. In addition, as Randy noted, we place great emphasis on our internal investments and remain laser-focused on the development of original content to drive future placements and defend our existing share. Our stepped-up investment in game development resources to support our future growth initiatives is the primary driver of increased games R&D expense, and this investment includes the resources we acquired through our recent acquisitions. Our FinTech segment had a phenomenal quarter, with revenues up 27% year-over-year, leading to all-time quarterly record adjusted EBITDA of $39 million. Excluding the $4 million of revenue contribution from our acquisition of eCash, organic revenues were up 21% year-over-year and 34% over the 2019 third quarter. Driven by constant share gains and increased activity on a same-store basis, This was the third consecutive quarter in which our core recurring financial access business delivered more than $10 billion in funds to customers' floors. This recurring high return business is a key contributor to Every's foundational strength as it provides consistent performance and drives significant free cash flow to fuel future growth. Financial access services revenues increased 15% over the prior year to $53 million, with same-store transactional volume up mid to high single digits throughout the quarter on a 2% year-over-year increase in total transactions completed. Helping to drive this performance has been the return of international players to U.S. casinos. Although it's important to note that this international transaction volume is not yet back to the activity levels from pre-pandemic periods. Contributing to the financial access services growth is the ongoing success of customer and patron adoption of our cashless alternatives to fund gaming experiences. Currently, these cashless alternatives represent less than 5% of our overall financial access transaction. And as adoption increases, we expect a smaller base of cashless to grow more quickly than our cash-based same-store transactional volumes. Even though we remain exceedingly early in its deployment, our Cash Club wallet continues to receive significant interest from new and existing customers. Today, we are live or in deployment with seven customers at 38 sites in 14 jurisdictions, which is twice as many locations as we had at the end of our second quarter. With each new location, we deepen our expertise and further establish Every as the gaming industry's leader in mobile funding. Our software and other revenues grew 30% year-over-year, driven by the continued success of our subscription-based services and the benefit from one-time rank tech and loyalty sales to new casino openings. Our recurring subscription-based loyalty products remain a key contributor to this growth. as we execute on improving and scaling this acquired technology into our digital neighborhood. Our software solutions have a large recurring revenue component, which for the third quarter represents 69% of software and other revenues. I'd like to remind everyone that generally a company with new one-time sales in software, we typically see a corresponding increase in future recurring revenues. as these customers later engage in subscription-based support and maintenance services after investing in Every's RegTech and Loyalty's solutions. Our fintech hardware revenues benefited from new casino openings as well as sales growth with existing customers, increasing 81% to $16 million. This growth includes $2.8 million in sales of voucher redemption kiosks, from our recent acquisition of Australia-based eCash. Organically, we grew almost 50% compared to the prior year. The all-time quarterly record operating income and adjusted EBITDA for the fintech segment benefited from our strong top-line revenue growth. And while total fintech adjusted EBITDA grew more than 20%, The percentage of adjusted EBITDA to FinTech revenues declined slightly due to the change in revenue mix coupled with higher equipment cost of revenues and higher R&D expense. Supporting our increased investment in our internal new product development, FinTech R&D expense as a percentage of FinTech revenues in the third quarter increased to just over 6%. Updating you on our share repurchase program. During the third quarter, we purchased just under a million shares of our common stock for $16 million. And since the inception of our buyback program in May, we have now repurchased 2.9 million shares. As of September 30th, this leaves us with approximately 100 million of available buying power under our existing share repurchase authorization. Moving forward, We expect to continue to balance capital allocation between internal investments, attractive tuck-in acquisitions, and opportunistic share repurchases. Based upon our year-to-date results and the steady momentum expected in the fourth quarter, we narrowed our full-year guidance this morning. Notably, our adjusted EBITDA has been tightened to the middle of the previous range, while free cash flow has been narrowed toward the high end of the prior range. As we enter the fourth quarter, I'd also like to remind you that our net income for the fourth quarter of 2021 was positively impacted by the reversal of valuation allowances on certain deferred tax assets that resulted in $63.5 million of quarterly tax benefits. While this will create a comparison difficulty with reported net income for Q4 of 2021, The impact on cash taxes has remained minimal as a result of our ability to utilize our extensive net operating loss carry forward. With that, I'll turn the call back to the operator for questions.

Thank you. And I'll be conducting a question and answer session. If you'd like to be placed in the question queue, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to move your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing star one. One moment, please, while we poll for questions. Our first question today is coming from Jeff Stanchel from Seeple. Your line is now live.