Everi Holdings Inc.

Good morning, and thank you for standing by. Welcome to the Every Holdings 2024 First 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 open for a question and answer session. As a reminder, this call is being recorded. Now, let me turn the call over to Jennifer Hills, Vice President, Investor Relations. Please go ahead.

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 our 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 8, 2024. We will refer to certain non-GAAP financial measures, such as the Just to Leave a DAO 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 8K 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 Wallenhauer-Fisher, General Counsel, Dean Ehrlich, Game Business Leader, and Darren Simmons, Bintec Business Leader. Now I will turn the call over to Randy.

Thank you, Jennifer. Good morning, and thank you all for joining us today. First, I would like to provide a few more details, where possible, regarding our plan to merge every with IGT's Global Gaming and Play Digital Businesses, which was announced on February 29th this year. While we continue to make progress on our proposed merger, we have no specific update regarding antitrust or regulatory matters at this time. As we have messaged in the past, we still anticipate closing the merger in late 2024 or early 2025. We are extremely excited about the opportunity to bring together the best of both of our businesses. While Evra has experienced tremendous success and growth over the past few years, we recognize the ability to accelerate our revenue growth by combining our complementary products and more rapidly enter new jurisdictions. Over the past several years, we significantly increased our investment in research and development and expanded the number of studios to diversify and increase game content. We have also been successful in expanding our product lines by leveraging our game content into new channels. Combining these businesses will provide greater resources and give us more opportunities for success over a product lifecycle. Additionally, we believe IGT's established global distribution network in both land-based and digital will enable every content to enter new global jurisdictions more quickly with less risks. We believe this combination with our game segment will provide more stable, long-term growth opportunities for the combined business. On the fintech side, we will be able to combine our fintech with IGT's gaming systems business. Upon closing, we will be able to work more closely with IGT's system to provide products and services that reduce friction for casino operators and their customers. And as they do today, IGT's casino management systems will continue to interface with fintech products from multiple providers. We will also continue to work with all gaming system providers to improve the expansion of cashless solutions to our casino customers by providing a positive, seamless transaction for their patrons. Additionally, combined, we believe we will be able to offer a complete suite of products from games to systems, financial access, red tech, and loyalty. The structure of the merger provides for shared equity ownership with modest pro forma net leverage at closing between 3.2 to 3.4 times and the ability to generate strong free cash flow. We believe this sets the combined company up well for the future. The estimated $75 million in cash synergies and estimated $10 million in capital savings are driven by leveraging efficiencies that can be gained primarily through procurement productivity, streamlining the assembly processes, and real estate optimization. They are not based on rationalizing existing product lines in the games business, which is where we believe previous supplier mergers have failed to deliver planned synergies. Additionally, revenue growth opportunities will come from leveraging global networks and a combined product offering. As part of the merger agreement, there's also an opportunity for a special dividend to be paid to every shareholders as of a record date prior to the close of the transaction. This dividend is essentially the free cash flow generated from the signing of the transaction, plus our merger related expenses and other adjustments for the agreement. The final amount of this dividend will be impacted by the time it takes to close and the transaction related expenses we incur. Therefore, it is difficult to determine the amount of the special dividend, if any, at this point in the process. Turning to the business performance in the first quarter, while the transition to our new family cabinets and game content has been slower and more challenging than expected, they're starting to see the green shoots appear. In the last four months of 2023, we had 34 new games approved, and an additional 18 have been approved year-to-date. We are in the early stages of installing this new content, but several of the new titles are starting to be recognized in industry surveys. In the April Eilers report, the for-sale Dynasty Soul ranked number three in top indexing cabinets in the portrait slant category, and the two versions of Dynamite Pop on this cabinet both reached the top 20 indexing games in the core low-denomination video reel category. Our Player Classic Signature Cabinet that was introduced in 2022 has performed well, and this performance is expected to continue with the recent introduction of several new game themes that have yet to be captured by EILER's survey results. The launch of the lower-profile Dynasty View Cabinet last spring was initially hampered by limited content at launch. There are currently 15 titles that have been approved, and we expect to have introduced all of these titles into our install base by the end of Q2. We expect to see performance improvements on the views of these new titles, which should positively impact both for-sale and lease units. The Premium Dynasty SoulSync was launched late in the first quarter with the mask, and our newest theme, Smoke and Hot Stuff Link, has just been approved. We expect installation of this new theme to begin this month. Additionally, four new families of titles are scheduled to be released for this cabinet by year-end. The Dynasty Dynamic Premium Cabinet was launched at the end of the third quarter with Hot Stuff Spin Frenzy, and our newest theme based on our proven proprietary brand, The Vault, is being rolled out now. There are also two more families, Cash Machine Inferno and Zolpar Master of Mysteries, planned for later this year. Finally, the Player Classic Reserve was launched at the end of last year's third quarter with great success. This premium cabinet launched with Jackpot Wheel Games, Casper, and Hot Stuff in the Class 3 WAF category. This quarter, we plan to launch the first content fully developed by our Australian studio. The first two themes to be deployed are Thunder and Lightning and Mighty King. We believe these investments in new cabinets and new content will drive improvements in the second half of the year. Although these improvements are taking longer than anticipated, we remain confident in our overall strategy. In terms of new product segments, we are in the final stages of the approval process necessary to enter Illinois with VLTs. This has been a multi-year investment that opens a 50,000 unit opportunity to us, and we expect to have sold our first units in the second half of 2024. Meanwhile, our core FinTech cash access services business continues to be a steady grower as we again processed more transactions and delivered more dollars to our customers' operations during the quarter than we have in any previous quarter. Consistent with many of the operator's reports, our financial access services were negatively impacted by some bad weather in January, but we saw improvement in February, and as we exited the quarter, we've returned to low to mid-single-digit same-store growth. April has been a little stronger and we expect this trend to continue over the remainder of the year. While we experienced some challenges in the first quarter, I believe that building blocks for our return to growth are present. I remain excited about the opportunities ahead and expect our growth initiatives to show improvement primarily in the second half of 2024. I want to end my remarks by acknowledging the strong team we have built here at Every. It is based on a culture of innovation and focused on the needs of our customers and the experiences of their patrons. I want to thank all our employees for their dedication and for making Every a top workplace, as once again recognized by the Top Workplaces USA for the third year in a row. Now let me turn the call over to Mark. Thanks, Randy. Let me begin by adding a little more color on our first quarter and our outlook for the remainder of the year. During the first quarter, as we expected, our games business continued to experience headwinds as we are transitioning to the new family of cabinets and introducing new content to support these cabinets. Revenue for both gaming operations and gaming equipment and systems declined year over year and was relatively flat with the fourth quarter. The experience declines in both our installed base and our quarterly unit sales. While our installed base declined by 595 units from year-end, approximately half of this decline was a result of strategic decisions to not use capital to replace cabinets in lower-performing locations where recovery of the capital would not have met our internal return hurdles. The remainder of the decline is attributable to the additional churn in our older cabinets. To address this, we now have three new cabinets with a deep pipeline of themes rolling out. The Player Classic Reserve and Dynasty Dynamic, which were rolled out late in the third quarter, are performing to our expectations. As of March 31st, we have installed a combined total of 661 units in over 75 locations. The Dynasty Soul Sync, our newest premium video cabinet, was just launched in the first quarter and is in the early stages of being placed on casino floors. Near term, new cabinet installations will mostly replace existing cabinets, but as these cabinets and gains gain traction, we expect to add incremental placements. Daily win per unit of $34.51 was down slightly from the fourth quarter, but we expect daily win per unit to improve as we roll out new cabinets and new content. In the first quarter, recurring revenues of $5.6 million from video king operations and increased revenue from our digital segment offset about half the decline in revenues from the installed base. First quarter gaming equipment and system sales were essentially flat with the fourth quarter. Gaming unit sales were below our expectations for the quarter as we sold 1,021 units at an average selling price of $20,827. With limited initial content available, the early performance of the Dynasty View has not been as strong as we anticipated. However, with additional themes being rolled out, now we expect performance of the cabin to improve. We introduced the Dynasty Soul in the fourth quarter and are still in the early stages of the rollout. Its acceptance is building momentum with our customers, and from launch through the end of the first quarter, we have sold 525 units. As Randy mentioned, Dynamite Pop on the Dynasty Soul is off to a strong start and is recognized in the April Eilers Games Report as a top-performing new game. Moving on to fintech, revenue declined 1% year-over-year as revenue growth in financial access services and software and other was offset by declines in hardware sales. Financial access services revenues grew 2.1% from the prior year first quarter as we processed a record 39 million transactions and delivered a record $12.4 billion of funding to customers' operations. While we did see some weakness in financial access in January due to weather issues, which is consistent with what operators have been disclosing, the trends improved as we exited the quarter and has helped steady thus far into the second quarter. Software and other revenues grew from increased kiosk maintenance revenue, compliance revenue, and central credit and other revenue, but was partially offset by a decline in new software sales from loyalty. The decline in loyalty revenue is a timing issue related to our customers' readiness to accept inflation. We did experience some hardware sale declines in certain foreign jurisdictions related to our ticket redemption kiosks in the first quarter of 2024. Loyalty key sales also decline, reflecting a decline in new installations of loyalty software. As we have discussed previously, loyalty sales can be lumpy. They typically tend to be larger initial unit sales and are generally tied to the timing of new financial access contracts or contract renewals. While the timing of revenue recognition can be delayed due to the operator's readiness for acceptance of the loyalty software and equipment, they are generally not lost, just deferred to later orders. For the quarter, consolidated gross margin expanded by approximately 80 basis points to 80.9%, primarily due to revenue mix shift to higher margin gaming operations and financial access services revenue from lower margin gaming equipment and hardware sales. Moving on to operating expenses, we incurred $15.7 million in one-time professional fees employee retention awards, and other costs related to the planned merger with IGT's Global Gaming and Play Digital businesses. These costs have been excluded from adjusted EBITDA, but skew our reported operating expense trends from a GAAP basis. The decline in adjusted EBITDA for the quarter to $80.3 million from $92.5 million in the prior year quarter is reflective of the lower revenues and higher operating and R&D expenses. The decline in adjusted EBITDA for games to $46.6 million for $53.7 million in the prior year first quarter was a result of both lower revenues and higher expenses, while the decline in adjusted EBITDA for fintech to $33.7 million from $38.8 million was primarily due to higher expenses. Net interest expense in the first quarter was $18.8 million, an increase from $18 million in the prior year. As a reminder, we have $400 million of outstanding unsecured notes at a fixed rate of 5%, and approximately $581 million of term loan that has a variable rate of interest. At the end of the quarter, our weighted average borrowing rate was approximately 6.7%. Also included in interest expense is the cash usage fee on our ATM vault cash arrangements. Our expense for the vault cash was $4.8 million compared to $4.3 million in the prior year first quarter. We ended the quarter with total net leverage at 2.6 times trailing adjusted EBITDA, which remains at the low end of our 2.5 to 3 times target range. Free cash flow generated in the quarter was $14 million, compared with $40 million a year ago. The decline was primarily the result of an increase of $13 million in cash paid for capital expenditures and the $12 million decline in adjusted EBITDA. We believe the increased investment in capital expenditures is important to refresh our installed base, and we expect this spending to return the installed base to growth and improve daily win per unit over time. Moving on to our outlook, our current expectations are that we will return to revenue growth in the back half of the year, assuming that our new cabinets and content resonate as expected with casino patrons. Daily win per unit rebounds and unit sales improve. We expect fintech revenues to return to growth over the remainder of the year, driven by increasing financial access volumes, improved software and other revenue, and a return to growth in our hardware sales. Turning to expenses, we expect higher operating expenses due to our investment in people and products, as well as the costs incurred related to the proposed merger. With $6 million in term loan repaid in the first quarter, we do not have any significant debt repayments due for the remainder of the year. With $400 million of our debt fixed at 5%, our net interest expense will depend primarily on what happens to interest rates this year. We expect our effective tax rate to be in the 22% to 25% range for the year, and our full-year cash taxes to be between $15 and $20 million. Adjusted EBITDA is expected to decline from the prior year, primarily reflecting the near-term headwinds that are impacting the game segment. But we expect to see improvement in the second half of the year as new cabinets and content hit casino floors and gain traction with customers, and we begin to provide product in new categories like BLT and international gaming. Capital expenditures are expected to be flat to up slightly from $145.1 million in 2023, as we primarily invest in replacing older cabinets and building out our installed base. Free cash flow is expected to be down from the prior year, but will remain strong. And with that, I will now conclude our prepared remarks and turn the call over to the operator for questions.