Everi Holdings Inc. (NYSE:EVRI) Q1 2024 Earnings Call Transcript

Everi Holdings Inc. (NYSE:EVRI) Q1 2024 Earnings Call Transcript May 8, 2024

Everi Holdings Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, and thank you for standing by. Welcome to the Everi 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 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 our 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 8, 2024.

We will refer to certain non-GAAP financial measures such as adjusted EBITDA, 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-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. Now, I will turn the call over to Randy.

Randy Taylor: 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 Everi with IGT’s Global Gaming and Play Digital businesses, which was announced on February 29 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 Everi has experienced tremendous success in 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 life cycle. 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 Games 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 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, reg tech and loyalty. The structure of the merger provides for shared equity ownership with modest pro forma net leverage at closing of 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, an 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 less 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 cabinet 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 Sol ranked number 3 in top indexing cabinets in the portrait category and the two versions of Dynamite Pop on this cabinet both reached the top 20 indexing games in the core low denomination video rail 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 Eilers survey results. The launch of a lower-profile Dynasty Vue 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 installed base by the end of Q2.

We expect to see performance improvements on the view to these new titles which should positively impact both for sale and lease units. The premium Dynasty Sol was launched late in the first quarter with the mask and our newest theme smoking 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 received Inferno and Zoltar 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 III WAP category. This quarter we plan to launch the first content fully developed by our Australian studio the first two things to be deployed are Thunder and Lightning and MightyKing. 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 multiyear investment that opens a 50000 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 process 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 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 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 the 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 Everi. 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 Everi a top workplace has once again recognized by the top workplaces USA for the third year in a row. Now let me turn the call over to Mark.

Mark Labay : 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 in the fourth quarter. We experienced 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 a 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 we rolled out late in the third quarter, are performing to our expectations. As of March 31, we have installed a combined total of 661 units in over 75 locations. The Dynasty Sol 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 Games 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 Vue has not been as strong as we anticipated. However, with additional teams being rolled out, now we expect performance of the cabinet to improve. We introduced the Dynasty Sol in the fourth quarter and are still in the early stages of the rollout. Its acceptance is building momentum with our customers and for launch through the end of the first quarter, we have sold 525 units.

As Randy mentioned, Dynamite Pop on the Dynasty Sol 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 was 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 kiosk sales also declined, 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 quarters. 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 gap 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 in 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 2.6x trailing adjusted EBITDA, which remains at the low end of our 2.5x to 3x 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 install base, and we expect this spending to return the install 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 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 million and $20 million. Just Adidas 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 VLT 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 install 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.

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Q&A Session

Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Jeffery Stantial with Stifel. Please proceed with your question.

Unidentified Analyst: Hi, this is Aidan Young [ph] on for Jeff Stantial. Thanks for taking our question. So starting off on the FinTech business, it looks like operating expenses, excluding adjusted EBITDA ad backs, were up fairly meaningfully quarter-on-quarter, both nominally and as a percentage of revenues. Could you have some color on what’s driving that? And how should we think about the right R&D and OpEx levels heading into the remainder of 2024? Thanks.

Mark Labay: Thanks, Ed. Look I think we’re – as we look at operating expenses in R&D we’ve always kind of talked that labor and headcount is probably our largest expense category but still a very tight labor market in terms of how we’re operating today. Typically, there’s annual reviews other impacts that impact our current payroll where we are. We feel like we’re at a pretty good level though, Q1 levels for kind of what you’re looking at from an R&D and OpEx expense from a headcount and investment level are the right levels going forward So in terms of modeling I’d be thinking kind of consistent a lot of those lines. I think in terms of percentage of revenues obviously having a little bit of a decline in the revenues is impacting some of the percentage metrics.

But again we believe we’re investing properly for the long-term growth of the business right now where we are. And as revenue begins to rebound particularly in the second half of the year, we think that will kind of close that gap and kind of get back to those normalized levels that we talk about.

Randy Taylor: Yes. I would add. I think we’re very comfortable on the Fintech side. Again it’s still a business that we believe you have to invest for improved products. It makes us – it provides better products for our customers and continues to help us grow that business. And as Mark said, as the revenue comes back up then we will come back in line.

Unidentified Analyst: Great. Thank you. And it looks like spot shipments were down 34% year-on-year. I’m recognizing there’s a number of moving parts here. Just curious to get your views on to what extent you think the announcement of the merger may be impacting sales. Are your sales reps seeing any confusion from customers on the deal and long-term strategy? Any thoughts here would be great. Thank you.

Mark Labay: Yes. That’s a difficult one, right? Hard to say. I would say look we think we’re – as we said in the remarks we should – we expect to grow again in next quarter sequentially whether or not there’s a real impact right now because of the deal it’s just really hard for us to quantify that. But we just brought our new sole cabinet that came out late in the quarter. It’s doing what we expect it to do. What we think with some of the new themes on view that should hopefully help that our mechanical products are again hitting very well on the Eilers report. So it’s just hard to say. I can’t tell you that there’s not some thought process out there but I’m not going to point right now just early in the stage that it’s being impacted just by the deal.

Unidentified Analyst: Great. Thanks for the color. I’ll pass it on.

Mark Labay: Thank you.

Operator: And our next question comes from the line of Barry Jonas with Truist Securities. Please proceed with your question.

Barry Jonas: Hey, guys. Thanks for all the helpful remarks. Maybe I just wondered dive more. Can you maybe give more color on what gives you the confidence that you think new cabinet momentum will show up in the financials in the second half of the year which starts pretty soon. Thanks.

Mark Labay: Sure, Barry. It’s hard to say specifically, but we’re investing in the capital so we’re getting games out there. We know that we’re getting lift off of new games in comparison to the games that are being replaced. So in the installed base, there is some churn and it’s first going to be to replace the older units. So that’s going to move in the right direction. We think that’s pretty straightforward. The question is how long it hold? And is it really go to a higher win per day than maybe what we’re modeling. So I would say, we’re seeing interest in the soul with the new – the two themes that have hit well in the Eilers reports, right? That’s something new for us. So look there’s green shoots here Barry that would point to the fact that we should improve in the second half of the year.

It’s a difficult one to say how much. But so far the new themes are working well. And we’re seeing – as we’re placing games we’re getting a lift. It’s just that we have a big installed base. And so that takes a little time. It’s a bigger shift to turn but we’re still very comfortable that we’re going to improve in the back half of the year.

Barry Jonas: Great. Great. And then just as a follow-up, look we know you need to run the businesses independently until the deal closes. But is there any early integration work or maybe ways for the two companies to work together between now and the deal close? Thanks.

Mark Labay: Yes Barry, I would say look that’s kind of a topic we’re really not going to cover. You very are limited on what you can do. So I would say, I’m going to stay away from that one because until as we said we’re not going to give an update there. So I would say, I’ll leave it at that Barry. Unfortunately, not much I can give you.

Barry Jonas: Understood. Thank you.

Mark Labay: You bet.

Operator: And our next question comes from the line of David Katz with Jefferies. Please proceed with your question.

Q – David Katz: Hi, good morning, everyone. Thanks for taking my question – providing the detail. I’m just curious, as you sort of progress towards closing on the transaction, what kind of feedback are you getting sort of in the field in terms of opportunities that may be going slower or faster as a result of just the pending deal out there.

Mark Labay: Hi, David. How you doing? I’m struggling a little bit with how to answer your question. I mean I would say, the feedback that we’ve got from customers is positive on the deal. So — but whether or not I can say is there anything that, we’re doing in the interim again as I remarked to Barry, there’s not a lot that you can really do at this stage in the game, until you get through a couple of the processes that we’ve talked about between antitrust and regulatory. We have — we did have a cab or when we bring our customers in a customer evaluation of the products. And I think again, they were favorable to the transaction, right? They still want to see how it goes. We’ve been very clear to our customers that both product lines will continue to be supported, and so I think that’s really what they want to know and I think they’ve been supportive of that.

But there’s not — I guess anything else I can really point to David that says, where we are in this process. And until we are further along and have other information, we’re just — as you said, we’re kind of operating as independent units, with understanding that down the road we expect to come together.

Q – David Katz: Understood. And Randy, your prepared remarks you talked about some of the technology opportunities coming together, which is clearly an exciting part of all this. Notwithstanding the time to meld those two enterprises together, I presume that there may also be some incremental R&D to that end, have you started to look at what the cost of melding those together might be at this stage? Or is that just way too early to get any inside out?

Randy Taylor: David, it’s just way too early. I think the good thing is as I talked on our remarks, before is that, we don’t expect to change R&D, right? R&D is what’s going to drive this company and the success of this company combined. So it’s definitely not going to be in the neighborhood of pulling back in my estimation right now. But specifically, where and in that area David again, it’s just too early to talk about anything of that nature or how we’re going to look at that going forward.

Q – David Katz: Okay. Fair enough. Thank you very much.

Randy Taylor: Appreciate it, David. Thanks.

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

Q – Chad Beynon: Morning. Thanks for taking my question. I wanted to ask about the iGaming or digital side of things. The market here in the US continues to grow quite significantly, and I know that’s been an area of focus for your content here. And then, you’ve also talked about expanding into the UK, Europe and Latin American markets. So can you just kind of give us an update in terms of, how that business that line item is progressing and then opportunities for 2024. Thanks.

Mark Labay: Yes, Chad, I’ll take that one. Look, I think digital continues to be an important part of our business a great avenue for growth again, what we really appreciate about the gaming business is the ability to take proven content that we’ve developed and taken into new channels, and really expand what we’re doing there. And as you mentioned, North America, US market growing has created opportunities and our ability to get into new markets like UK is also something we’re really excited about. Still very early stages of that international piece. But we are live actually in the UK now, and looking to continue to expand what we do in UK and in Europe, with some partners that we have here in the coming quarters. So, great opportunity I think in terms of growth.

We ended the quarter probably, just a little over $7.3 million of revenue, so a nice year-over-year growth probably about 12%, 13% growth on a year-over-year basis in terms of performance there. So it’s again progressing nicely and continue to grow along path with our expectations.

Chad Beynon: Thanks Mark. And then on the FinTech side, you mentioned hardware coming in a little bit light this quarter that’s always been lumpy and kind of harder to predict. Is there a general seasonality in that business? And I know you have a few big improvements and kind of products that are out in the market. Can you just help us with the outlook for that for the rest of the year on the hardware side?

Mark Labay: Yeah, Chad to your point, it is lumpy I would say. We have signed contracts. We have product that we do believe will get placed this year. So we’re very confident that that will ramp throughout the rest of the year. The only — the unknown is customers when they’re ready for it and are they going to take at that point in time. So we had something got pushed this quarter and pushed out. But again these are signed contracts, which are generally tied to a cash access contract. And so it’s just when they want to install them and when they’re ready for it. So we’re still very comfortable that hardware should ramp throughout the rest of the year. But in Q1 just a little bit lower than we had anticipated, obviously, compared to prior year.

Chad Beynon: Thank you very much. Appreciate it.

Mark Labay: Thanks, Chad.

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

Unidentified Analyst: Hey, good morning guys. This is Madison [ph] on for JD. I just wanted to touch on the comments around the decision to not replace some cabinets in lower-performing areas. Is this something that’s just going to be isolated to 1Q? Or is this an ongoing process where you guys are looking at other areas where there could be some bleed over into 2Q in the second half?

Mark Labay: I’ll take that Madison. Look, I think we’re always in the gaming operations team is laser focused on making sure they make smart choices with respect to generating revenue and driving revenue. And if we have low-volume locations that are looking either for increased placement fees or new placement fees in addition to swapping out equipment, we want to make sure we get a reasonable rate of return and hit that hurdle for us in terms to make sure it makes sense. If it doesn’t make sense just to never get your money back or barely make any money over a four, five-year period of time, we’re not going to spend that money. So we’re always evaluating that. I think there were some larger concentrations of use in the first quarter.

Again we talked about of our decline. So over 300 of them are probably those kind of decisions to not replace capital where we had the opportunity to. And I expect over the coming quarters, you’ll see a couple more instances like that maybe not the level that you saw here. But we are making those choices to maximize our yield on the installed base.

Randy Taylor: Yeah, Madison I would point out that those were really related to two customers. So I don’t want you to look at it. This is somehow throughout a far installed base, but there were a couple of customers that just have lower performing units and then there were some other issues tied to it. And we decided that from a yield, it made sense not to go after those. So I don’t want it to look like it’s throughout our installed base but it was just primarily two customers.