Everi Holdings Inc. (NYSE:EVRI) Q1 2023 Earnings Call Transcript May 10, 2023

Everi Holdings Inc. beats earnings expectations. Reported EPS is $0.3, expectations were $0.22.

Operator: Hello, everyone. Thank you for standing by, and welcome to the Everi Holdings 2023 First Quarter Earnings Conference Call. During today’s presentation, all parties will be in a listen-only mode. Following the prepared remarks, we will open the call 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.

Jennifer Hills: 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 Investors section of our corporate website at everi.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, May 10, 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 bound in our earnings release and related 8-K today, as well as in the Investors 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 Investors section of our website. On our call today are Randy Taylor, Chief Executive Officer; Mark Labay, Chief Financial Officer; Kate Lowenhar-Fisher, General Counsel; Dean Ehrlich, Games Business Leader; and Darren Simmons, FinTech Business Leader. I would also note that even though he’s counting the weeks until he just dials into these calls, Bill Pfund is also still with us today.

Now I will turn the call over to Randy.

Randy Taylor: Thank you, Jennifer. Good morning, and thank you all for joining us. The year has gotten off to a solid start with first quarter 2023 revenues increasing 14% to $200.5 million, adjusted EBITDA rising 3% to $92.5 million, and free cash flow of $37.1 million, despite the impact of rising interest rates throughout 2022 and into 2023. These metrics were in line with our expectations. We continue to see solid organic revenue growth throughout the quarter across, both our Games and FinTech businesses. Overall, Games revenue grew 9% year-over-year and FinTech revenues rose 20%. Our prior investments in R&D drove organic revenue growth of 10%, with acquisitions completed in 2022 adding 4% to our revenue growth. While macroeconomic uncertainties still cloud the near- to medium-term horizon, we remain well positioned for consistent growth due to our investments in internal R&D to develop new gaming content, broadened our bandwidth for the introduction of several new cabinets and add new product enhancements and features across our FinTech portfolio.

Additionally, our recent acquisitions have expanded our addressable market, while also enabling us to leverage our existing product development capabilities and distribution to scale these products for future growth. In our Games segment, revenues from gaming machine sales increased 15% year-over-year. As expected, we experienced a quarterly sequential decline as some operators opted to delay purchases until the launch of our new Dynasty Vue video cabinets, which took place at the very end of the first quarter. To Vue is the first cabinet in our new Dynasty lined and is a lower profile cabinet with sight lines comparable to a dual-screen cabinet. Initial shipments began on schedule, with the first installation at Yaamava Resort and Casino in California, quickly followed by several other casinos in April.

Initial feedback is highly encouraging and we expect sales momentum to continue to build. Even with the often-discussed increased competition among our peers, we expect the introduction of our added content and new differentiated cabinets throughout this year and next will help us maintain our longer-term market share growth momentum. Driven by our increased spending for game development and engineering, we expect to dramatically expand our portfolio of cabinets and content on our next-generation Dynasty platform. We anticipate the debut of two new premium cabinets in the third quarter with several additional new cabinets to be showcased at G2E, including both standard for sale and premium cabinets. In March, we shipped the first Everi gaming machines on the Exacta Systems platform for Historical Horse Racing to the Boston Billiards Club and Casino in New Hampshire.

Our Intuicode acquisition provided us with experienced development talent and an existing base of installed games that helped accelerate our entry into the HHR market. HHR machines are an exciting opportunity for us to leverage our proven gaming content across a new category for Everi, one that is rapidly growing and one in which we previously had zero ship share. Within the FinTech segment, the full integration of ecash Holdings continues to progress. Revenues in Australia contributed approximately $4 million in the first quarter. Our digital wallet is already in test at one property in Australia, while work on integrating anti-money laundering, loyalty and mobile capabilities for the Australian gaming market is also moving forward. We expect these enhanced digital features and new products to the Australian market to provide incremental growth in 2024.

We also expect to introduce the ecash kiosks into the U.S. distributed gaming market later this year, which will complement our planned entry with VLT, VGT gaming machines early next year. Our entrance into the VLT market as well as HHR allows us to leverage our compelling player-proven gaming content across additional channels that, in aggregate, represent an estimated 11% to 12% of the total installed slot machine base across North America. These are significant categories in which we previously had zero ship share and which will help drive additional growth and incremental ship share as we continue to progress towards our 15% target. Our asset acquisitions of Atlas Gaming and Venuetize have also provided additional opportunities for future growth.

We expect to debut our first Australian studio developed North American games this fall at G2E. In 2024, we expect to launch a full array of every products into the Australian market, the second largest slot market after the U.S. For our Venuetize platform, we continue to build and expand relationships, including recent enhancements for Churchill Downs Racetrack that enabled an app specifically for the legendary Kentucky Derby. Additional developments and enhancements recently expanded our relationships across the major professional sports leagues in North America, such as teams with Major League Baseball, the NBA, the NHL, MLS and CFL, along with a growing international presence with multiple venue deployments. We believe there is a great opportunity to leverage Venuetize’s strengths with our cash wallet and loyalty capabilities to provide enhanced and seamless patron engagement at gaming and non-gaming sports and entertainment venues.

Another early phase growth opportunity is the launch of our unique Vi branded on-property mobile digital gaming platform, which offers casino operators an all-in-one mobile gaming experience that includes a digital wallet and loyalty capabilities on player’s own devices. We launched Vi at the Indian Gaming Show in late March to a very positive reception as many tribal operators look for opportunities to utilize mobile technology, further their guests gaming experiences and grow revenue. With Vi players could use their mobile device to play Everi’s Class II and Class III digital games, as well other third-party content on-premise, including off the casino floor with a geo-fenced location or jurisdiction. In our digital gaming business, while we continue to expect 2023 to be a relatively quiet year as far as the state-by-state expansion of legalized iGaming into new jurisdictions, we continue to build out our digital business and offerings.

In April, we expanded our real-money iGaming offering to multiple operators serving the regulated provincial market in Alberta, Canada. Everi Digital’s player popular game content is now featured at just over 80 real-money online casinos and is also available on more than 40 social casinos worldwide. In addition, we recently received a U.K. license and now are working towards a launch in the U.K. by year-end. Most recently, last week, we completed the acquisition of the assets of Video King, a leading provider of integrated electronic bingo gaming devices, providing us with an additional digital gaming growth channel. We expect to be able to provide average digital game content, wallet and loyalty products to our Video King customers in the near future, further extending our digital neighborhood.

This will improve revenue and margin opportunities for our customers and for Everi. With our additional digital offerings, we believe there is a longer-term opportunity to leverage our sales force and our relationships, particularly with tribal operators to further grow the business. Within our FinTech digital neighborhood, our digital wallet remains an area of exciting long-term growth. The adoption of our wallet technology is largely progressing as expected, the pace of which is primarily driven by our casino operator customers. We continue to expect the tribal and regional operators will be the early adopters because of their heavier dependence on frequent repeat customers. Currently, our single solution digital wallet is installed or pending installation at 43 casinos covering 22 jurisdictions in 17 states.

In casinos where we have historical data prior to the implementation of a patron’s cash wallet, we have seen an increase in both the number of transactions per month and overall dollars spent by a casino customer. Excluding extremely high-value customers which can distort averages, transactions for rated players have increased by 1.5 times to 2 times their prior activity, while the average amount funded per month has increased between 20% and 35% over pre-wallet adoption. As you would expect from overall casino demographics, close to 60% of the wallet users are 40 years of age or older, and they account for nearly 75% of the overall funds on wallets. While the majority of volume today is driven by repeat patron usage, we continue to see a steady growth of new wallet users every day.

You contemplate the growth potential of our digital opportunities, you quickly realize that we have a strongly focused strategy across both our Games and FinTech businesses on providing an omnichannel presence to casino operators, leveraging our development efforts and our existing product strengths. Given the high number of growth initiatives underway, we expect to continue to invest in internal R&D at current levels. In the first quarter, R&D expenses were about 8% of revenues, and we expect to continue to be at or about that level through the remainder of the year. Having significantly expanded our addressable markets during 2022 and most recently with Video King, we are focusing our near-term attention on integrating these acquisitions.

As we expect to generate strong free cash flow in successive quarters, we will continue to be on alert for any attractive acquisitions. However, we plan to prioritize the majority of our ongoing free cash flow to opportunistically repurchase our shares. To that end, we announced today that our Board approved a new 18-month $180 million share repurchase program that replaces the previous $150 million program, essentially adding approximately $115 million to the remaining $65 million in buyback authority. Before I wrap my prepared remarks, I want to acknowledge that the progress, achievements and future growth of our company is a direct result of our outstanding employees. I want to welcome our new employees from Video King and thank all of our existing employees for their dedication and hard work.

They drive our collaborative culture and are the primary reason for our success. We are proud to continue to be recognized as an employer of choice and to be included for a second consecutive year in the Top Workplaces USA 2023 based on independent employee engagement surveys. This is our 16th top workplace honor received over the past three years. Now, let me turn the call over to Mark, who will provide more insight into our first quarter financials and current outlook for the remainder of the year.

Mark Labay: Thanks, Randy. Our first quarter was another quarter of consistent growth that benefited from our overall portfolio of diversified products and services. Although the impact of Omicron on patriot visitation in early 2022 provided an easier comparison for the first quarter, we continue to generate growth throughout the quarter due to our balanced business mix. In this morning’s press release, we introduced adjusted earnings per share. This measure provides a supplemental view of our earnings that more closely resembled normalized operating EPS without unusual or non-recurring operating items as well as removing the amortization expense associated with purchase accounting related intangible assets from our acquisitions.

Adjusted EPS was $0.43 in the first quarter, flat with a year ago. A lower tax provision and a decrease in our diluted shares outstanding, primarily from our share repurchase activity to date, offset the higher net interest expense due to rising interest rates. On a consolidated basis, we reported year-over-year revenue growth of 14%, driven by 9% growth in Games and 20% growth in FinTech revenues. Our core businesses performed well, delivering 10% organic growth, and acquisitions contributed an additional $7 million year-over-year or 4% to consolidated revenues in the quarter. Our recurring revenues increased 11% and accounted for 74% of the total revenues in the first quarter, while one-time sales grew 25%. The small decline in gross margin percentage was primarily driven by a change in mix as lower-margin gaming equipment and FinTech hardware sales grew more rapidly.

Adjusted EBITDA of $92.5 million was up 3%. And as a percentage of revenues, adjusted EBITDA was 46% compared with 51% a year ago. This change primarily reflects the revenue mix shift and the investment in our future, coupled with the impact of acquisitions and higher wages. As we continue to lap the changes in revenue mix and the impact of higher R&D and acquisitions, we would expect adjusted EBITDA as a percentage of revenue to remain relatively flat in the mid to high 40% range throughout the remainder of this year. Free cash flow generated in the quarter was $37 million compared to $52 million a year ago. The decrease primarily reflects an $11 million increase in cash interest from rising interest rates along with increased capital expenditures.

As Randy noted, we, in the near term, expect to focus the majority of our ongoing free cash flow on share repurchases. Within the Games segment, total revenues increased 9%, while adjusted EBITDA was $54 million compared with $55 million a year ago. In gaming operations, as expected, the daily win per unit improved on a quarterly sequential basis to $38.37, and was down compared with the prior-year quarter. The installed base declined 134 units on a quarterly sequential basis, while growing 513 units year-over-year. We expect to experience a short-term headwind in the installed base growth ahead of the launch of our two new premium lease-specific cabinets. We have accelerated our launch plans for these new cabinets and expect to begin showing them to customers later this month and for them to hit slot floors by the end of the third quarter.

At G2E this year, we will also showcase even more premium cabinets, along with a new standard for-sale portrait cabinet. We expect these new unique form factors to be commercialized by the first half of 2024. As a prudent steward of capital, we plan to maintain our disciplined approach to capital spending. We will balance the replacement expenditures of our installed base using our Flex Fusion and DCX cabinets with the availability of the new cabinets and content. Within the FinTech segment, first quarter revenues increased 20% over our prior year, of which 16% was organic growth. This drove 14% increase in adjusted EBITDA to $39 million. FinTech revenue growth in hardware sales was 34%, benefiting partially from a full quarter of ecash revenues in Australia.

Software and other revenues rose 35%, which included the benefit of rolling out our AML software into new customers. Financial services revenue grew 13%, primarily driven by a 13% increase in transactions. Looking at the impact of interest rates on our operating results. I’d first remind you that we have $400 million of unsecured notes due in 2029 with a fixed rate of 5%. This equates to roughly $20 million of annualized expense, which is paid in the first and third quarters. Additionally, after prepaying the $6 million of annual required payments on our term loan during the first quarter, we now have $586.5 million of secured term loan outstanding. That debt floats currently at LIBOR plus 250 basis points or roughly $45 million to $48 million of annualized interest expense.

We also have commercial arrangements to maintain cash at our ATM machines located in certain customer locations. This commercial vault cash arrangement incurs a variable rate, cash usage fee that is based upon the Fed’s funds target rate. The daily average balance fluctuates throughout the year. But as our financial funding services grow, our estimated annualized expense is expected to be in a range of $18 million to $20 million for 2023 compared to $9 million in 2022. At current rates, with an end of quarter weighted average borrowing rate of 6.4% and our expectation for strong free cash flow, we remain comfortable with our current level of debt and our current cash interest costs. As of the end of the first quarter, our total net leverage was 2.4 times trailing adjusted EBITDA, which is below our target levels.

Even with our recent Video King acquisition, which we funded entirely from our cash balances on hand and our expectation for continued share repurchases, we would expect to remain at or below the target throughout 2023. Moving on to our outlook. Historically, while the gaming industry has not been altogether recession-proof, it has been relatively resilient, driven in part by the significant aging of the American population. The number of people over the age of 55 in the U.S., which is the prime demographic for gaming has increased by more than 65% since the year 2000 and is projected to continue to grow both as a percentage of the U.S. population and in absolute numbers by the year 2025. Reflecting the in-line first quarter results, our balanced business and maintaining our conservative outlook on the year, we today reaffirmed our annual guidance for 2023, which was provided in March when we reported our 2022 fourth quarter results.

Our expectations for adjusted EBITDA of between $384 million to $396 million and for free cash flow of between $150 million to $160 million are unchanged, and that’s inclusive of our Video King acquisition. As you can see from our guidance of 3% to 6% adjusted EBITDA growth, we believe it’s prudent and reasonable to plan for some slower growth this year even with the benefit from the launch of new products and our recent acquisition. We raised the bottom end of the range for net income, primarily benefiting from a reduction in the expected provision for taxes on a GAAP basis. This change also increased our outlook for adjusted EPS. We now expect annual net income of $92 million to $100 million and adjusted EPS of $1.58 to $1.66 per diluted share.

This adjusted EPS is based on the number of diluted shares outstanding at the end of the first quarter and does not reflect the potential reduction from additional buyback activity. And with that, I’ll now conclude our prepared remarks and turn the call over to the operator for questions.

Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from the line of David Katz with Jefferies. Please proceed with your question.

Operator: Thank you. Our next question comes from the line of Jeff Stantial with Stifel. Please proceed with your question.

Dean Ehrlich: Anecdotally, it’s doing very well, but it is early on. But I’d say the key note that I’d bring out is that backlog is very robust. And there is a, I’d say, a higher anticipation even than I would expect, and I always expect the high expectation of an initial backlog. So, we’re looking forward to seeing those units go out. Plenty of themes to come out behind our initial launch product and look forward to seeing how this all plays out.

Operator: Thank you. Our next question comes from the line of Barry Jonas with Truist Securities. Please proceed with your question.

Operator: Thank you. Our next question comes from the line of John Davis with Raymond James. Please proceed with your question.

Operator: Thank you. Our next question comes from the line of Chad Beynon with Macquarie. Please proceed with your question.

Operator: Thank you. Our next question comes from the line of Edward Engel with ROTH MKM. Please proceed with your question.

Operator: Thank you. Our final question this morning comes from the line of George Sutton with Craig-Hallum Capital Group. Please proceed with your question.

Operator: Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I’ll turn the floor back to Mr. Taylor for any final comments.

Randy Taylor: Just to say thank you for joining us today. We appreciate your interest in Everi, and we look forward to providing you with an update in — on our Q2 call in early August. Thanks for joining us.

Operator: Thank you. This concludes today’s conference call. You may disconnect your lines at this time. Thank you for your participation.