Everi Holdings Inc.

Hello, everyone. Thank you for standing by, and welcome to Every Holdings' 2022 Fourth Quarter and Year-End 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 go ahead and turn the call over to Bill Funds, Senior Vice President, Investor Relations. Please go ahead, sir.

Thank you, operator. Let me begin with a reminder that our Safe Harbor disclaimer, which covers today's call and webcast, contains forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those discussed on today's 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, March 1, 2023. We will refer to certain non-GAAP financial measures. such as adjusted EBITDA, adjusted EPS, free cash flow, and net cash position. A description of each of these non-GAAP measures and a reconciliation to the most directly comparable GAAP measure can be found in our earnings release and related 8 today, as well as in the investor section of our website. This call is being webcast and recorded. A link to the webcast and a replay of today's call can be found in the investor section of our website. On our call today are Randy Taylor, Chief Executive Officer, Mark Labai, Chief Financial Officer, Kate Lowenhardt-Fisher, General Counsel, Dean Ehrlich, GAINS Business Leader, and Darren Simms, our FinTech Business Leader. I would like to take this opportunity to also introduce Jennifer Hills, who recently joined Every as Vice President, Investor Relations. Jennifer has wide-ranging experience as an analyst both on the sell and buy side, and made the transition to IR several years ago. She has extensive IR experience, and in the coming months, she will quickly learn about our great industry and the exciting long-term prospects we have here at Every, as well as working to meet many of you on the call today. While I have not yet set a firm departure date, I will increasingly be transitioning the day-to-day IR responsibilities to Jennifer over the coming months. I plan to remain part of the Every Family for some time, but in a more limited advisory role starting later this year. Additionally, Steve Kopchow, who has been in IR during the last two years, has been promoted to vice president and is working full-time with Mark Labai on everything financial, from FP&A to acquisitions, to continuing to assist with IR. So welcome, Jennifer, and best wishes to you, Steve, for your added responsibilities. Now I will turn the call over to Randy. Thank you, Bill. Good morning and thank you all for joining us. I'd like to add my personal welcome to Jennifer and we look forward to a very successful journey together. I'd also like to add a huge thank you to Bill. He stepped up our game in IR and has been a pleasure to work with. I'm not saying goodbye as I intend to keep Bill here as long as possible to ensure a seamless transition and leverage his years of experience. Now on to the business at hand. Our fourth quarter 2022 performance reflects the balance and diverse strengths across our operations, games and digital gaming, fintech, loyalty, and our growing mobile capabilities. Against a strong fourth quarter comp last year, our operating income increased 8% and adjusted EBITDA increased 5%. Our improvement in revenues and operating earnings drove free cash flow of 42 million in the fourth quarter, capping a year in which we generated an all-time record $187 million in free cash flow, which is equivalent to just over $1.90 per diluted share. Total revenues for the quarter increased 14% year-over-year, with organic revenue up 9% and acquisitions contributing an additional 5%. Revenues from our high-margin recurring revenue streams represented approximately 70% of our total revenues or $143 million in the quarter. While we continue to execute on our growth priorities with our usual discipline, we expect to benefit in 2023 from several new initiatives that will provide incremental growth opportunities for every. Over the last six quarters, we have leveraged our cash flow growth into steady increases in investments for internal, new product initiatives, and attractive second acquisitions. We expect these investments to collectively generate growth in both revenues and adjusted EBITDA over the course of this year and even further benefits in 2024 and beyond. With the Intuit code acquisition, we add a developer team well-seasoned with the technology platform nuances of historical horse racing. The addition of this talented team accelerated our internal HHR development efforts. We expect to launch the first of every new HHR gaming machines and the initial expansion of our deep library of content onto Fatuco's proprietary cabinets toward the end of the first quarter. This will expand our addressable market and give us entrée into a new growing category that we expect will benefit our quarterly ship share over time. Acquiring the assets of Atlas Gaming provided us with a base for geographic expansion into Australia, the world's second largest slot market after the U.S. Atlas also established a foundation to form a new game development studio in Australia. Our first game themes from this studio for the US market are anticipated to debut this fall at G2E, and we expect to launch new games into the Australian market sometime in 2024. In the second quarter, we expect to begin shipping the new Dynasty View video gaming cabinet. The View is the first in our lineup of new next generation cabinets. It is another key step in our efforts to continue growing our unit ship share, particularly in the video category, where we remain underpenetrated. Importantly, the replacement market for video slots is estimated to be three to four times the size of the mechanical rail category, giving us plenty of runway to grow our share. Beyond Dynasty View, we expect to debut additional new cabinets in the Dynasty line at G2E. Currently 2024 may be over the horizon for most investors, but I would point out that our development efforts also include a planned entrance into the North American BLT market in early 2024. While no jurisdictions appear to be prepared to legalize iGaming in the near term, we expect to achieve steady year-over-year revenue growth in 2023 from our digital iGaming operations. This will reflect the benefit of additional iGaming operator sites, such as the recent launch of our content onto CSER's Sportsbook and iGaming Casino platform, along with the further expansion of our game themes portfolio. We will continue to leverage our historical library of successful land-based titles in addition to new introductions from our development studios. Furthermore, with the US currently representing less than 5% of the total global market, a portion of our increased internal iGaming development effort is positioning us to take our player-proven content into larger and more mature international markets. We expect to be licensed in the UK in the coming months, which would then allow us to begin the integration process of our Spark remote gaming server with iGaming operators. This should lead to being live with our first customers in the UK toward the end of this year. Within our FinTech segment, we have focused our strategy on leveraging our strength in financial access to expand our digital neighborhood, adding new layers of products and enhanced features. We have created incremental sales opportunities by improving casino operators' cost efficiencies with such products as Jackpot Express, Pit Express, and Meters Express. We are also placing heavy emphasis on mobile-first applications, including our ongoing Cash Club wallet effort and growing our state-of-the-art loyalty and rewards mobile platform. Our mobile-first strategy leverages consumers' preference to increasingly spend more time on their mobile devices to access information and engage with their favorite entertainment, including gaming, sports, and dining. From our customer's point of view, mobile self-service engagement for loyalty and other actions helps them improve productivity and save on labor costs. Our acquisition of Venutize is a very complementary fit with our internal mobile-first development efforts. With a broad base of about 200 already established third-party app integrations, Venutize will enable us to bring added skills, capabilities, and experience into the gaming space including for entertainment venues beyond the gaming floor such as concert and sports arenas. For the first time, we now also extend our addressable market for products like our mobile wallet and loyalty technologies into new gaming adjacent markets such as sports, entertainment, and hospitality venues on a global basis. And with the ever-widening reach of sports betting, Every's gaming-licensed payments wallet and loyalty products are moving toward the intersection of sports betting and sports business. As we move through 2023 and into 2024, we expect the combination of Every and Venutize will open up new avenues of additional growth worldwide. We have previously shared our success at the new Sky River Casino in Northern California as clear evidence of the synergies and cross-selling opportunities that we can generate by providing operators with a full suite of our slot products, financial access services, loyalty and rewards, and RegTech compliance solutions. As we've always believed, every is greater than the sum of its parts. I'd also like to highlight another notable element of our success, which is our development of SkyRiver's white-labeled mobile patron app, which included embedding our wallet and loyalty technologies. SkyRiver has been so successful, they are already making plans for expansion, and we're proud to be part of their exciting success story. While I mentioned the Atlas acquisition for supporting our initial growth for games segment in Australia, Our eCash acquisition also provides growth opportunity for our FinTech business. Their kiosks for smaller pubs and clubs facilities, which are the mainstay of the Australian market, provide us with a new growth avenue in the U.S. We expect that in the second half of 2023, we will launch eCash kiosks into the U.S. distributed gaming market which includes route operators who place BLTs, BGTs, and other gaming machines in smaller, high-frequency locations, such as truck stops in Pennsylvania or BGTs in Illinois. eCash also provides us with an entry point to bring our AML and cashless solutions into the Australian market. We have completed a number of acquisitions over the last few years that have expanded our product capabilities and allowed us to enter new markets. The core principle underlying each of these acquisitions is that they represent an opportunity to scale up a leading solution that is under-penetrated in the respective marketplace. By plugging these products into our development and distribution system, we leverage our expertise with the respective product capabilities to drive very positive results. These positive results include scaling up those business lines, but also integrating them into our product capabilities to drive product innovation. In this way, we are very confident we will generate an attractive ROI and cash flow over the long term and provide multiple levers for growth. Obviously, these exciting incremental growth prospects must be tempered against the uncertainty of current macroeconomic conditions and its possible impact on the gaming industry. While the gaming industry has historically been more resilient than other discretionary consumer spending industries, we do not have a crystal ball that tells us if that dynamic will be similar this time around. However, the uniquely balanced strengths of our businesses, games and iGaming, fintech, loyalty, and mobile, and the very high percentage of recurring revenues we generate, all coupled with our improved balance sheet and strong cash flow generation, provide us with a solid foundation to effectively manage through any change in macroeconomic conditions. This proved out with the success we achieved as the industry rebounded from the depths of COVID, and we believe an uncertain economic environment may even provide us with new opportunities. Given our successful track record, our significant recurring revenue base, and our solid balance sheet, we are confident in our expectations for continued free cash flow generation. We will continue to prioritize the use of our free cash flow on high-value internal product development initiatives and capital projects, such as our new, efficient, built-to-suit production facility under construction, along with attractive tuck-in acquisitions and opportunistic stock repurchases. Now, let me turn the call over to Mark, who will provide more insight into our expectations for 2023. Thanks, Randy, and hello to everyone on the call today. Before turning to our current year outlook and the guidance we provided in our earnings release, I'll start by briefly highlighting the strength of our balance sheet, which is better than ever. Over the years, many of you have measured our progress through our efforts to deliver. Today, because of our consistent operating execution, our continued prospects for high return investments, and our ongoing growth, total net leverage is 2.4 times trailing adjusted even time. With our total leverage currently below our target range and an expectation for growth in earnings combined with our periodic debt principal payments, we should remain at or below that range throughout 2023. As you review our fourth quarter income statement, I would remind you that net income in last year's fourth quarter included a $64 million or $0.62 per share non-cash tax benefit from the reversal of certain deferred tax asset valuation allowances. For better comparability with the current year, if you exclude that one-time non-cash tax benefit, last year's fourth quarter earnings would have been 26 cents per diluted share. We continue to expect to utilize our net operating loss carry-fors, and at the end of 2022, the remaining gross value of our federal NOLs was approximately $116 million. we believe this should continue to provide a cash-stack shield for our pre-tax income in 2023 and possibly into early 2024. Moving on to our outlook. As noted in our earnings release, we expect 2023 net income to be within a range of $88 to $100 million. This is down from our net income in 2022 due to the expected higher interest expense associated with rising interest rates and an increase in non-cash depreciation and amortization from the growth in our business and the purchase accounting impact of our recent acquisitions. Our range for adjusted EBITDA is $384 to $396 million, which represents growth of approximately 3% to 6% over 2022. We expect to generate free cash flow of between $150 and $160 million. Using approximately 95 million diluted shares outstanding throughout 2023, that equates to approximately $1.55 to $1.65 per diluted share. This reduction from 2022 includes the expected impact of higher cash interest expense and approximately $15 million for the cost of tenant improvements for our new build-to-suit production and warehouse facility. This new leased building will consolidate the assembly and warehouse facilities of our slot machines and fintech kiosks into one streamlined operation here in Vegas. Based on our current projections, we anticipate the transition will most likely begin in the third quarter, but most of the costs will occur in the fourth quarter of this year. We have also planned for approximately $18 million in incremental cash spend related to discrete capital projects in 2023. These projects are largely focused on upgrading certain portions of our internal IT and data center infrastructure, as well as our ERP systems. This is a little more than double what we spent for comparable projects in 2022. The largest portion of our capital expenditure budget remains focused on maintaining and growing our gaming operations install base. I will highlight that while our capital spending for gaming operations is expected to be comparable to 2019, This is despite our install base increasing by more than 22% or a growth of an additional 3,200 gaming machines over the last three years. With our balanced revenue generating sources across games and digital gaming, fintech, loyalty and mobile, we expect to see continued total revenue growth in 2023. Obviously, the extent of our growth may be impacted by the overall growth in the gaming industry. But the uniqueness of our business model is that slower growth in one category due to variable timing of product launches is offset by gains in another category. This reinforces our confidence in the ability for us to grow our total top-line revenues. Similar to 2022, we expect that the growth in sales of gaming machines and fintech hardware will outpace the growth of gaming operations and financial access services. Due to our improved ship share as operators capital spending on total gaming machines and our fintech hardware rebounds towards pre-COVID levels, we expect our revenue mix from gaming machine and hardware sales will trend a bit higher than pre-COVID levels. Our revenue mix in 2023, therefore, should be in line with the revenue mix we experienced in the fourth quarter of 2022. We expect that the full year growth in the sale of gaming machines will be driven by the introduction of new games for historic horse racing, the launch of our new Dynasty View cabinet, and increases in overall capital spending by our casino customers. We expect revenue growth in gaming operations. This includes the revenues from our installed base of gaming machines, our digital or online gaming, and the New York Lottery operations. While financial access transactions are currently tracking upwards on a same-store basis in the first quarter of 2023, we would expect this growth of the balance of the year to correlate to the growth in the industry's growth gaming revenues. Given the continued high-level demand and ongoing customer discussions regarding their interest in our cashless digital wallet, we expect to see the continued rollout of our white-labeled Cash Club Wallet technology to new locations in 2023. We also expect to see continued growth and new market expansion from our RegTech products, as demand remains steady for these software solutions, as recently evidenced by the purchase and upcoming installation of our AML solution by British Columbia. Similar to the levels in the third and fourth quarters of 2022, we expect our R&D expense to remain in a range of 8% to 8.5% of total revenues in 2023. We expect operating expenses, the percentage of total revenue, to be slightly higher in 23 as compared to the average of the second half of 2022. This reflects the impact for the added expenses of our acquisitions, the cost of rising labor, overall price inflation, and our other growth initiatives. We expect this percentage to average lower than the 30% experienced in 2019 and 2018. I'd also note a couple of additional housekeeping items related to our 2023 annual guidance. As noted at the end of our earnings release, we expect depreciation and amortization to rise. This largely reflects the impact of purchase accounting on our acquisitions, which allocates a significant portion of the purchase price to amortizing intangible assets, and therefore increases our non-cash amortization expense. With a large balance of net operating loss carry affords, we expect our cash taxes paid in 2023 will remain minimal, similar to 2022. And we expect to record income tax provision for GAAP purposes in the range of 23 to 24% of pre-tax income. Again, this is consistent with the prior year. In the press release today, we also included supplemental information on interest expense for 2023. I would make note that this interest includes both interest on our debt and the cost associated with certain commercial agreements where we contract with third parties to provide the cash for ATMs at certain customer locations. And with that, let's now conclude our prepared remarks and turn the call over to the operator for questions.

At this time, we will be conducting a 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 star 2 if you would like to remove your question from the queue. We ask that you limit your questions to one and a follow-up so that others may have an opportunity to ask questions. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Our first question comes from David Bain with B. Riley Securities. Please proceed with your question.