Q1 2021 Everi Holdings Inc Earnings Call
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Michael.
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Please proceed sir.
Thank you for standing by this is the conference operator welcome to the every holdings incorporated first quarter 2021 earnings Conference call.
As a reminder, all participants are in listen only mode and the conference is being recorded.
After the presentation, there will be an opportunity to ask questions to join the question queue. You May Press Star then one on your telephone keypad should you need assistance during the conference call you may signal, an operator by pressing star and zero.
I would now like to turn the conference over to Bill Pfund Senior Vice President Investor Relations. Please go ahead.
Thank you operator welcome everyone.
Let me remind everyone of our safe Harbor disclaimer that covers today's call and webcast. Our call will contain forward looking statements and assumptions, which inc.
Risks and uncertainties that could cause actual results to differ materially from those discussed during our 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 web.
Site at every dot com we.
We do not intend and assume no obligation to update any forward looking statements, which are made only as of today may five 2021.
You are also cautioned not to place undue reliance on such forward looking statements. We will also refer to certain non-GAAP financial measures such as adjusted EBITDA free cash flow and net cash position.
A description of each non-GAAP measure and a reconciliation to the most directly comparable GAAP measure can be found in our earnings release and related 8-K as well as from the investors section on our website.
This call is being webcast and recorded a link to the webcast and a replay of today's call can be found from the investors section of our website joining.
Joining me on the call today are Mike from both our Chairman and Chief Executive Officer, Randy Taylor, President and Chief operating Officer, Mark Lamb.
Chief Financial Officer, Kate low and higher Fisher General counsel, the narrow like games business leader in Darren Simmons, our Fintech business layer also joining us today is Steve Copco, who recently joined every and will be assisting market me on finance and IR projects.
Now, it's my pleasure to turn the call over to Mike Bumbles.
Well, Thank you Bill and good afternoon, everyone and thank you for joining us.
Before I begin today I would like to take a moment to thank.
Myles Kilbourn, who will be retiring from the board effective at this year's annual shareholders' meeting.
He has served on our board since the IPO in 2005 and miles has been our chairman since 2013.
At the board level. He has been instrumental in advancing the evolution of every and promoting our growth initiatives.
This is valuable insights and we all want to wish him well in all of his future endeavors. Thank you miles.
Now let me begin our review today by sharing a few highlights and observations from the first quarter.
Our record results demonstrate the substantial progress that we continue to make with our organic growth initiatives.
And the ongoing recovery in the gaming industry.
North American gaming has benefited from a tailwind of pent up demand and easing of capacity restrictions.
Increased vaccination rates.
Due to the impacts of COVID-19 on the casino industry in both 2020 and lingering into 2021, we believe our financial performance is best when measured against 2019.
And as you might imagine our first quarter of 2021 compares very favorably to 2019 first quarter, even though parts of our business such as the gaming unit sales have not recovered to pre COVID-19 levels.
On a consolidated basis, our revenue set first quarter record and reflecting our improved margins. We set all time quarterly records in net income adjusted EBITDA and free cash flow.
In fact operating income was up 55% over the first quarter of 2019, while our adjusted EBITDA was up 23% over the then record 2019 first quarter.
Yeah.
On an operational basis.
Outstanding performance is reflective of a variety of factors.
And these were some of the examples.
Complementary balance between our games and Fintech segments has never been stronger.
Our focus on developing innovative products has resulted in an increasing demand from customers since our products help them build stronger relationships with their patrons and at the same time improves their operating efficiencies.
Also we have developed a track record of consistent operating execution that gives our customers confidence that we deliver the products and services that they expect and finally.
Most importantly, our worldwide every team whose commitment to collaboration and excellent excellence has made all of this happen.
Our common to both our Fintech and games businesses is a large component of high margin recurring revenues.
I'll focus my remarks today on the success of these revenue streams and why we continue to believe in the long term sustainability of our recent performance levels.
The investments that we've made in the few years prior to the pandemic have supported the resiliency of our recurring revenue operations.
In the games business. It has been our ongoing investments in developing player popular games in multiple product categories with our differentiated cabinets strategy.
Those investments are driving increased placements and higher daily win per unit in our gaming operations as well as fueling the ship share gains that we've achieved in the for sales side of the market.
The success of our premium games has been the primary growth driver of our class II and class III installed base and continues to drive our revenue growth from gaming operations.
Premium units have increased every quarter for the past 11 quarters, including throughout the pandemic impacted quarters in 2020.
As a result of this steady growth our installed footprint of premium games has more than doubled over the last two years.
Today premium units comprised 42% of our base compared to.
22% at the end of the 2019 per quarter.
Our premium unit growth has been broad based reflecting increased placements of class three units and tribal casinos and our growing growing rather penetration of commercial casinos.
For example, in California, a large tribal jurisdictions our base of premium units has increased nearly 100% since the first quarter of 2019.
Our base in Nevada, or large commercial jurisdiction is up about 200% in that same time period.
But very recently, we've added two new premium game themes to our portfolio drag.
Dragon Kingdom on our Empire, $55, 27 cabinet and a monster verse themed wide area progressive game on our Empire VCX dual curved cabinet.
Our monster verse game joins the mask and Karate Kid games that are already available as wide area Progressives.
Furthering our progress in the wide area category. We recently received approval to place linked units in Nevada, and New Jersey.
With our record of ongoing success in the tribal casinos. We are confident in the continued success of our wide area progressive units as we now expand our market opportunity and begin to compete in the class III market against the best of the best in this category.
Given our history of growing our installed base a record daily win per unit are growing ship share for unit sales and our pipeline of new products under development I am confident that we have the right elements in place to continue to propel the ongoing growth of our games business.
As I turn now to our Fintech business, you'll note that we have changed the naming conventions of our revenue line items within the Fintech segment to better represent how our business has evolved.
The cash access services line has become financial access services.
Reflecting the wide range of both cash and cash was integrated financial service solutions.
Within the key performance indicators of financial access services.
M has been renamed funds dispense to reflect the actual cash dispensing transactions occurring from all of our devices.
In addition, cash advances has become funds advance as it will include both cash and cash flow operations completed in a self service fashion either through our digital wallet.
Self service kiosks or completed by our customers' personnel at a casino cage.
Of all years ago, our original business may have been principally based on supplying ATM machines into customers' casinos. The majority of our business today is facilitating financial transactions that provide more than just standalone ATM type operations.
As we continue to evolve our digital solutions the power of patrons performing their own enhanced movement of value into around and back out of the gaming ecosystem in a self service environment will further cement this definition of our products and services.
We have also replaced information services and other with software and other.
Now that revenues from loyalty software sales and subscriptions and from our Red check software for regulatory compliance comprise the largest component of revenue within this line item. We believe this change is more descriptive of the revenues generated.
And finally hardware replaces equipment and is made up of revenue from the sale of our kiosks together with those additional efficiency enhancing hardware pieces that we sell for use in casino operations.
Turning to financial access services revenue grew 25% sequentially over the fourth quarter and we're only about 5% below the record revenue of the 2019 per quarter.
We are seeing increased casino activity best reflected in the sequential rise in our financial access revenues each month during the first quarter.
These increases resulted in our March revenues, turning positive on a same store basis, when compared to the same period in 2019.
Since the pandemic halted our 'twenty one quarter streak of consecutive same store revenue increases it is particularly gratifying to have same store sales increase over 2019 levels.
With about 5% of the U S. Casinos currently close essentially all Canadian casino still closed and international travel to destination markets like Las Vegas, virtually nonexistent, we expect to benefit from further recovery. In addition to the underlying growth trends that are driven by new customers.
Contracts.
Our growth in software and other revenue has also been tremendous.
Our revenues have doubled from the 2019 first quarter.
This reflects both our entry into the loyalty products category through acquisition and the incremental organic growth since we acquired those assets.
Unlike financial access services, our revenue from software rig tech products and annual software maintenance and support services have a large recurring revenue component.
The recurring revenue portion represented 72% of software and other revenues in the first quarter, while initial or other onetime sales accounted for 28% of Q1 revenue.
With several new loyalty and rig tech related products under development. We are focused on continuing to expand this category to generate long term growth.
Now, let me turn the call over to Randy for some additional color.
Thank you, Mike and Hello, everyone, we hope you're all doing well.
While our core recurring business operations are providing strong growth and profitability in today's environment, we continue to invest to ensure the sustainability of our growth.
Our R&D investments are focused on promoting internal development and product enhancements that will drive ongoing longer term organic growth.
As the year progresses and business volumes continue to recover we also expect that operating expenses will begin to increase as normal business activities resume and we incur more of a marketing and other costs that support our customer relationships. However, I'll highlight that as a percentage of total revenue. We do expect total expenses will trend.
Lower than pre pandemic levels, thus supporting some margin improvement as compared to prior years now.
Now I would like to share with you some more details about two of our exciting growth opportunities for the future debt leverage our strengths.
Vs are growing digital business, that's applied slot content to other gaming operators.
Revenues more than doubled in the first quarter on a year over year basis and were up 50% sequentially from the 2024th quarter.
A major factor of that growth was due to Michigan gaming going live midway through January and then ramping up.
For the Michigan opened we went live with six of the nine operators today, we are live with 711 and preparing to go live for several others.
Our digital growth is also powered by expanding the number of online operators to whom we provide slot content and previously open markets, such as New Jersey, Pennsylvania, and Canada, We recently expanded into British Columbia in Manitoba for an agreement with the British Columbia Lottery Corporation.
Another growth driver comes through expanding the number of games available to I gaming operators, we can draw upon our large library of successful land based casino games, while also leveraging our development of new land based player popular games by adapting them for the online world.
One added focus is creating customized games for our operators with strengthened our relationship with some other countries fastest growing IBM operators.
Another very exciting opportunity is the significant interest in the commercial and travel casino operators and our cashless enterprise wide mobile wallet or digital cash club wallet.
Importantly for operators, our cash club wallet platform is fully customizable to meet their differing needs and can be white label to carry each casinos on branding.
Our flexible system operators can choose the level of experience they want to offer their patrons and the speed at which they move forward.
We believe we are at the very beginning of a significant transition that will enable our customers to deliver an integrated digital cashless experience alongside existing cash solutions cash.
Cash club wallet advanced enterprise wide platform integrates operators investments in infrastructure with our casino banking as a service capabilities, allowing our digital wallet to act as a central hub for payments across the entire breadth of the casino enterprise from the gaming floor to food and beverage to.
Our retail and hotel and resort amenities importantly, our unique strength enabled us to provide a casino operator with a single wallet, where the product can be used across their multiple properties and across multiple jurisdictions.
Property for operators with online offerings, such as gaming and sports Wagering cash club wallet also provides funding to bridge a patrons online experience with their land based experience our solution complements our financial access services and is fully integrated with our loyalty in Reg Tech offerings. It as a next step towards offer.
In convenience for players and significant cost efficiencies for operators.
Cash club wallet fits seamlessly into casinos, Inc.
Existing backup house processes and controls and meets the needs of the relevant banking and other financial regulators at the state and federal level as well as the extensive need of gaming regulators.
In addition to the cost efficiencies that come from reducing the need for cash operators also see significant advantages in the data and intelligence gathered on their patrons spending across the casino property through our wallet.
<unk> operators with the opportunity to extend their relationship and connection time with our guests through integration with our player loyalty applications. We believe we are truly at the forefront of the convergence of financial access services and loyalty in the digital Casino World.
With the stringent compliance requirements that we meet and our history of player funding capabilities, we offer the industry a truly differentiated high value solutions we.
We are seeing substantial interest by operators and the initial response from casinos patrons has been positive.
Based upon the initial transaction activity from the casinos patrons, our expectation remains that cashless transactions will increase the total number of transactions performed by patrons, providing another growth driver for every in the years ahead.
However, given the early stage of deployment, we are not yet at a point, where it's appropriate to share specific data and project future growth potential.
As our cashless solutions go live at additional casinos in the upcoming months and a user base expands we expect to share further insights about these trends with you.
Now I'd like to turn the call over to Mark to share his perspective on our free cash flow and outlook Mark.
Thanks Randy.
Discussing our outlook I would like to provide some thoughts for the significant increase in our free cash flow and how we are looking at our capital structure.
Our free cash flow more than doubled compared to the year ago period that was essentially equal for the free cash flow we generated in all of 2019.
This growth represents a significant flow through of the record adjusted EBITDA, we earned in the first quarter.
The reported free cash flow also benefited from a more modest level of capital expenditures for the quarter.
This free cash flow improves our balance sheet by further bolstering our near term liquidity.
As the uncertainty surrounding the recovery of the macroeconomic environment and our industry continues to diminish.
This added liquidity may ultimately position us to reduce our leverage more quickly than we had originally expected.
While the pandemic may have slowed our momentum towards reducing leverage in 2020. It did not change our goal of reducing total borrowings and achieving lower net leverage ratio.
We recognize there is currently a favorable environment surrounding the debt capital markets.
As the year progresses, and assuming the current level of stability in our operations continues.
I would expect that we would look to take advantage of any attractive options that preserve or enhance our liquidity strengthen.
Strength in our overall balance sheet and optimize our capital structure prospectively.
In terms of modeling as you think about the components of free cash flow for the rest of the year with more than $450 million of accumulated federal net operating loss carryforwards, we do not expect to pay meaningful cash taxes, this year and for several years to come.
Regarding capital expenditures I believe the run rate of capital expenditures in the first quarter could represent quarterly low watermark in 2021.
To date, we've managed our capital spending to match our customers' recovery.
Further recovery continues I would expect to see an increase in our quarterly spend as we undertake and complete certain previously delayed or deferred capital projects.
But I would not foresee annual expenditures meaningfully creeping above the levels. We spent in 2019.
It's important to note that in the event that the recovery slows or salt, we expect to have the ability to pull back on our spending to match the level of free cash flow our business to generate.
As you review your models for free cash flow for the second quarter and for the full year I would remind everyone that we still have two noteworthy cash expenditures that we expect will occur in the second quarter.
These are not part of our cash flow free cash flow computation.
This includes up to $10 million for the contingent consideration earned by the sellers of the loyalty assets from atria.
And the $5 million final installment payment of the purchase price related to the assets acquired from MDT.
Turning to our outlook for adjusted EBITDA throughout the first quarter casino activity has clearly increased.
To frame out the puts and takes other macro revenue drivers are first quarter results likely benefited from rising vaccination rates across the U S.
Limitations on casino capacity easing and casino activity picking up due to pent up demand.
As a result, our first quarter results.
<unk> receded added benefit that we might not continue to see as competition increases for consumers discretionary dollars from the reopening of other entertainment options throughout the year.
With some customers still impacted by some degree of capacity restrictions are like those in Canada and other international markets, where the casinos are still closed we do believe there is still an opportunity for further recovery.
However, in our discussions with customers many still remaining capital conservation mode.
Their capital spending plans are focused on the next 60 to 90 days instead of through year end.
Given this wide range of variable revenue drivers and our outlook that operating expenses will begin to increase throughout the year as operations continue to return to more normalized levels. We believe the second quarter adjusted EBITDA will remain well ahead of the second quarter of 2019.
It could be comparable to slightly below our first quarter 2021 performance.
We expect free cash flow will remain strong, but with our semiannual interest payments on our notes due in June and an expectation for an increase in capital expenditures this should be less than the record $43 $5 million generated in the first quarter.
We do not expect a further significant ramp in quarterly performance in the back half of the year without a corresponding and sustained improvement in the overall gaming industry.
With competing choices for entertainment dollars, becoming more available.
We believe a more gradual industry recovery is likely as more of the population becomes vaccinated and some of the typical demographics that make up the larger portion of our customers best players return to their favorite casinos.
With that being said and barring any further macro setbacks.
We would expect our adjusted EBITDA in the second half of the year will exceed the then record results we reported in the second half of 2019.
With that I'll turn the call back to the operator for questions.
Thank you we will now begin the question and answer session to join the question queue. You May Press Star then one on your telephone keypad.
Your tone acknowledging your request.
You are using a speakerphone please pick up your handset before pressing any keys to withdraw your question. Please press Star then two we will pause for a moment as callers join the queue.
The first question comes from David Bain from B Riley. Please go ahead.
Great. Thank you and congratulations on a very strong quarter clearly.
Michael or Darren.
When we talk kimbro rollout ticket in ticket out.
It kind of happened relatively fast when you compare the technology benefits that Randy outlined.
What the digital wallet and the Capex for casino.
Similar to our new suspend.
To roll this out relative to Tito is there any reason to believe that proliferation shouldn't at least match that transformation.
Well, let me I'll turn it over to Darren David but.
Let me just let me just address the question of commercial jurisdictions in particular.
There tends to be.
I'm sorry.
I'd now like to turn the tenant there.
There tends to be.
Sure.
And tribal jurisdictions, the casino operators are working with us and with the regulators on a fairly regular basis on all of the different technologies that we can produce.
That's not necessarily the case in commercial jurisdictions, where oftentimes you'll find multiple different vendors offering multiple different technology into the regulatory system and you're subject to their ability to.
Both test and time their agenda is so that you can get approval. So we have been.
Looking for approvals in multiple commercial jurisdictions will move forward with that but I would still expect the rollout to be somewhat faster and tribal jurisdictions than commercial at this point in time, and then Darryl do you want to address the debt versus quick ticket.
Well for for Tito So David I guess youre referencing win but Tito got launched in gaming and remember I was probably still in diapers when that happened but.
As Mike Gaming friend, Dean says that actually took years right, but it kind of felt like it happened overnight and so IC and kind of.
The pivot to digital and cash flows to be and again I think I've said this before somewhat revolutionary and some components and somewhat evolutionary and other components. So we're going at the pace of.
Of our customers and the adoption of their patients. So again I think I feel good about it.
Sort of the early data that we have with our rollouts.
But I think it's in terms of the pace, that's really at the operators from what they need to do operationally to to bring the technology and and as Mike said, certainly jurisdictional eight between commercial and tribal there are some differences in terms of how that will rollout.
As I've said in previous calls.
Certainly our regulators in different jurisdictions are have been looking at this we've been engaged with them in terms of educating about what it is what it looks like and what the opportunity is and I think everybody feels good debt.
Cash flow and a digital pivot is where they want to go so.
We're really at the pace of <unk>.
Our customers and.
It's.
I would say the pace is very high in general for US we have we have a lot of projects in flight with it so.
Okay Fantastic and then my second question again on the game side I mean clearly.
I think when we're finished with all the reports from from competitors and.
We will see some some ship share gains.
I don't know if thats.
10% or what but is.
Is there any reason to think that that would not be sustainable as volume returns to normalcy.
In terms of buying activity or is there.
And at a dynamic I guess tickets there.
Yes, I don't think Theres any reason not to believe that it with debt.
We would be able to sustain whatever games, we've been able to make and ship share.
As the as the capital budgets are.
Our finalized and released in our and our customers' operations.
So I don't yes, I mean, there is nothing that I see that is systemic that would stop us from from realizing those gains and continuing them.
Is there anything you can think of.
Alex for me it's too.
Proportional.
Customers are buying.
Ex amount of games and then it becomes backs plus we should be able to hold our.
Hold our ship share percentage, if we do our jobs and continue to provide a compelling product that we've been providing.
Okay, Great alright, thanks, guys.
Thanks, David.
Our next question comes from Jeff Van <unk>.
Sure from Stifel. Please go ahead.
Great. Thanks, operator afternoon, everyone. Thanks for thanks for taking our question.
I just wanted to start on <unk>.
Peter ship succession plans and with that also formally say congratulations Michael on being appointed Chairman of the board I think everyone. On this call. It's truly relieved to see staying deeply evolved even after you do hand, the rainfall for years. So, let's just start with first and foremost.
Congratulations.
Thank you.
And on that note I wanted to get your updated thoughts here on the succession plans.
The background or experience of the board looking for and their ideal candidate and just any other color on the search the kind that you could provide would be appreciated.
Yes.
Yes.
Little reticent to lay out the debt.
Necessary elements of our resume.
This quarter, but but let me address the low number a little bit let me I'll try and give you I'll try and get you to where you are trying to go Jeff if that's possible.
The board has been looking at succession planning now for well over two years for the CEO position and that's been an ongoing.
Reviews.
Narrowed the field somewhat too to both.
Internal and external candidates that debt.
They are well aware of and I would assume will be.
Getting more deeply involved in the selection process here over the next several months.
So there can be an easy handoff, but.
I mean, I think first and foremost theyre looking for.
C suite experience in companies that are.
In one or the other or both of our businesses.
And have some understanding certainly of the gaming industry, obviously, a senior executive in this kind of a business has to be prepared for all of the licensing and regulatory requirements that come with the position.
And for.
For somebody coming from outside the gaming or the Fintech in gaming universe, that's often a very surprising.
Reality to be hit.
To suddenly be asked to fill out hundreds upon hundreds of.
Licensing applications and basically.
Just room in front of regulators financially and show them everything that you've done for years.
And that oftentimes limits the pool of candidates I would say we have had.
An excellent pool of candidates that the board has been looking at and I think that they will narrow it and come to a choice here fairly quickly.
Okay, great. Thanks, that's really helpful and I appreciate your operating color and the context from a limitation what you all other segment.
Switching gears here over to the cash club wallet.
Meet with new potential customers for this solution I'm just curious how frequently do your discussions also include the prospect of layering the wallet into the customers' online offering as well.
I guess I'm, just trying to get a sense for how many operators with omnichannel aspiration for.
Starting off with more of a two pronged approach for the wallet for the time being online versus brick and mortar versus how many are striving to integrate the two right off the bat.
Yes.
Aaron why don't you why don't you take that.
Okay.
With Darrin on new current on mute.
Maybe I'll jump in.
I would say, it's really customer by customer if they have an online presence I think we are.
That's one of the first thing that comes out.
The discussion from a sales side. So I think customers are very interested in it they do launch.
A product that will allow their bricks and mortar to transfer over to <unk>.
Online so I think.
It's hard for me to say how that happens each time, but I would say there's not a there's not a meeting that we don't have when we're talking to other they are renewing their their cash access or games that are sales force is not in front of them and talking about the wallet because I think it's very much at the forefront of the discussions.
And they.
They look at all different pieces and I think it goes back to what Darren was talking about it's really what the casino wants to do some other may not want that just yet they wanted just only show it to VIP et cetera.
And with that I'll, let Darren a ticket.
Yes, I was talking about mute sorry, so I would say to Randy's point, yes.
It's a it's a discussion that is key to sort of the overall I would say digital wallet strategy casual strategy that that operators have from a brick and mortar standpoint.
They do want to connect.
Again, we talk about.
Our wallet being multi jurisdictional multi property, but its also I'm also a multi platform. So they do definitely want to connect the brick and mortar to to the online president whether that'd be through sports or whether that be gaming or or whatever else.
Their online presence might be so yes, it's part of the discussion and yes.
The operators are thinking very strategically about how to tie that together because again, having that full view of their player in their patriot net engagement across multiple platforms.
As a real critical part of their overall strategies as they as they move as they pivot to digital.
Okay, great helpful. Thanks for all the color everyone and congrats on a really strong quarter.
Okay. Thank you. Thank you.
Our next question comes from David Katz from Jefferies. Please go ahead.
Hi afternoon, everyone. Congrats on a per.
Pretty strong quarter.
I wanted to go back to the.
<unk> digital wallet.
If you could discuss.
Qualitative terms or some structural way.
How we should think about how you get paid for that.
And how you sort of earn off of it and if there is any sort of upfront installation cost or anything on your side.
Okay.
And sort of paint us a picture of how that works.
David I'll start and then I'll turn it over to Darren.
It's kind of.
I know, we keep saying this but customer by customer, but clearly there is a transactional piece to it.
Because again, it's consistent with our cash access which are transactional fee and there are other fees in the digital environment that we can also.
Take advantage of as in pushing money back to someone's account, Alex and Theres other costs that are incurred as far as developing it because again as we talked about these are very specific customer by customer and therefore, there is development cost and then there is a cost with software and maintenance, but Darren.
<unk> gone a little bit more but it's again, it's hard to give you very specific about how it is because each one will be will be different in my view.
Yes, I think maybe David the easy way to think of it as obviously today.
Revenues are transactional right, so theres transactional fees that debt.
Garnered through the transactions that we support whether that be the cash dispensing transactions or.
Other cash advance transaction, so as we move towards digital right. This this to US is just another transaction type that's got transaction fees associated with it so.
It does come with obviously a premium from that standpoint.
But also we've got sort of SaaS software associated sort of software modules associated with it.
And annualized support.
But remember also we're connecting this into other components of the Fintech business and other products. So it's just not a one trick pony. Okay. This is integrated into loyalty, it's integrated into compliance products. So a lot of a lot of that kind of goes along into these discussions.
So it's just not it's just not binary in terms of all your now transacting through a digital wallet. Nonetheless, there is other components that are contributing to the revenue opportunity for us. So we see increased transaction volume.
As we pivot towards.
Little Wallets and then.
As Randy mentioned, we are introducing new transaction types associated with the wallet. So we expect that we monetize those as well so right now we've got transaction.
Fees associated with funds coming in as we bring money into the operator, but we also are going to be opportunity for players to bring money out of out of the ecosystem and put it back into their bank accounts, if they've had it at their wallet and so theres fees associated with that also so.
Greater greater transaction volume.
And new transaction types that we support and then other products and services that we'll be able to inc.
<unk> as a part of the service that we provide as it relates to our wallet, including loyalty and compliance.
Got it.
And just to be clear I think part of what I was getting at is there isn't some sort of upfront lump costs on your on your side.
Net.
If we had 15 customers.
Adopt this.
Next quarter hypothetically alright.
Alright.
Yes, so in terms of what we would charge to a customer and theres potentially some some.
Customized development that maybe could come into play here.
But obviously, we would do this case by case with our customers. So.
Nothing again, our infrastructure is kind of built out it's more of the customization that we have got a detail for our customers.
Perfect and I wanted to just ask one other detail.
Mark.
The term loan for 125 that was put in place second quarter of 2020 can you just help us recall that becomes callable in two years for is it.
Yes, <unk> got make whole interest you pay any interest through April of 2022, and then there is a soft call on there for six months thereafter.
For 1% got it.
Got it okay. Thank you very much.
Thanks, David.
Our next question comes from Barry Jonas from <unk> Securities. Please go ahead.
Thank you.
Guys I wanted to start with the games.
Segment daily win per unit.
Distribution side was well ahead of where we were thinking could you maybe give a little more color, what's driving that growth and then also as we think about.
The cadence of results throughout this year are those levels level sustainable just any thoughts on seasonality also it would be helpful. Thanks.
Yeah, Let me let me give you just a couple of Quickbooks, and then I'll turn it to dean to particularly to tell you why it's sustainable but.
Barry the remember the Bay.
<unk> has been growing throughout 2020, and it has been a larger premium.
Growth there has been just the standard games, you should expect that our premium games.
Our planed.
By more customers and that those games deserve a greater.
Fee, whether it's a flat for you or whether it's in participation fees because of the play that it generates.
So that's a portion of that and as long as we continue to grow our base and we continue to grow our premium games.
As a faster portion of the growth of that base.
I personally think that that will continue but let me turn it over to being that they can give you the insight baseball answer.
I don't know if I could talk to what you just put out there Mike.
On your premium installed base growth substantially over the last couple of years and they continue to perform in a variety of product categories that we have out there.
To me, it's sustainable we've got five different product categories.
The premium sector.
Between for.
<unk> fusion or.
Skylines evolved from Dcs or arena.
<unk> been renovated at this point and we just launched.
We've seen the price reluctance and I'm really really well.
A lot of areas return to growth.
That can continue the sustainability so.
I'm very comfortable with our product for us in terms of.
Covering each of those categories.
Obviously, you've just got to continue to.
Hit the dates in la for products that we expect to rollout.
We should be looking pretty good.
Great Great and then as a follow up question just shifting over to Fintech.
Updated thoughts on the kiosk replacement cycle.
In general and timing.
Wonder does that get tied up with the same capital present reservation commentary.
Related to the games segment.
Yeah, It really total Darren here.
It does.
Yeah go ahead Mike.
And you're going to hear the same thing from Randy.
These kiosks.
Core revenue generating products, either so when customers have to make a choice between replacing a revenue generating piece of capital expenditure like a game on the floor or something that works fine right now that is getting a little longer in the tooth that supports our operations is a critical I don't want to diminish in its importance. They are still making those choices today towards more revenue focused stuff as opposed to.
Cost containment of our operating efficiency kind of devices.
Yes, I think I think we've had some bright spots in terms of <unk>.
Expansion and our new casino openings that we've had success with but I still think there is some a little bit of capital constraint that we're seeing and again, maybe that turns for the second half, but I don't know if we have a.
A tremendous amount of foresight, we're still kind of again.
Coming off of.
For the operators and how they're viewing second half, which is which is net.
Not totally clear, but certainly.
I think theres still some capital constraints there.
Alright, great. Thanks, everybody.
Thanks Barry.
Our next question comes from John Davis from Raymond James. Please go ahead.
Hey, guys.
Good evening guys.
Mark I'll start on the margins.
Book versus two.
2019, I think we're up for a 500 basis points.
Net and made some points of the pandemic debt.
The structural margins could be a little bit higher.
But im guessing for a 500 basis points is probably the upper end of that range. So maybe just talk a little bit about how you think margins will kind of trend for the rest of the year level ex that you would continue to invest for growth.
But just any commentary there the 54% was quite a bit better than expected this quarter.
Yes, I think.
We've talked about this on the prior calls and really there is the biggest contributor here is the mix shift these higher margin recurring revenue streams that have come back strong and come back. Most quickly are certainly contributing to the improved margin that you are seeing on a quarterly basis as capital sales for our customers aren't buying as much equipment right now.
We're exhibiting record revenue in things like gaming operations, where we're seeing growth that all flows through to the bottom line results in the higher margin I think.
Our belief is capital still face constrained as we continue through 'twenty, one and start getting into 'twenty. Two it starts getting back to that more normalized levels, but the higher recurring revenue base that we're generating today and that keeps being additive to it should keep those margins probably higher in terms of go forward or I'll call. It a normalized levels once we get.
Passed all of the pandemic periods.
Okay.
Sustainably higher call it 200 basis points margins versus pre pandemic.
Those basis doesn't seem.
Out of the realm of reality.
Yes.
Okay.
And then quickly obviously yet from market heard your comments in the prepared remarks about leverage.
Organically here.
<unk> given the strong performance from <unk> and what you guys have alluded to in <unk>.
By my math kind of day level organically down to the mid <unk>. So just curious.
It's about reducing leverage like how do you guys think about steady state.
Leverage and where youre comfortable.
Getting to and can you just get there organically.
Over the next several quarters just curious how you think about actual leverage targets and where you guys with Michael operator on the online business.
Sure we've talked about debt, we definitely pre pandemic wanted to be below four times. It really had to go closer to three times for for overall total leverage we felt that was a good comfortable level that allowed us flexibility if we needed to to look at other things organically internally or externally to for acquisition that gave us maximum.
Flexibility on that front.
To your point as earnings grow clearly, that's one way to deal with the leverage ratio. The other way is paying down debt.
To the extent, we can afford to do that it may make sense to debt. The troubling piece right now on the balance sheet as we have the incremental term loan thats at L. Plus $2 50, I clearly wouldn't want to leave that on the balance sheet.
Yes.
The margins or the EBITDA is improving and we're in a better position, we could probably at worst replace that with something better at some 0.1 other time makes sense.
Okay, and then just on that thought for mine.
Thank you.
Youre a step down in April for the $7.
Percent bonds in December.
Want to make sure all day.
That's correct every December so there.
There is a premium is up just under 4% now in a step down to just under 2% in December.
Okay.
And then I don't know.
If this is for for Randy micro market and you guys can take this if I just look I appreciate that the <unk> was significantly better than I think everyone's wildest dreams.
Where we sat a couple months ago can you guys reported.
But as we go into Q2, historically, you've seen kind of a 3% to 5% step up sequentially at more vaccinations I appreciate that maybe have some more comp.
Competition for entertainment.
Want to talk about the puts and takes and why you guys think that it can be kind of flat to slightly down.
I appreciate the conservatism, but just trying to make sure that I'm catching everything is there any sort.
Sort of.
Comp issues or any kind of pull forward you had <unk> just give maybe the puts and takes as we go from <unk>.
Yes, John.
Mike.
And I'll, let Randy chime in if they want to.
Say that you.
You really are just hearing our conservatism.
We don't want to get we don't want to get ahead of our skis here.
I can dream pretty wild and maybe in mobile the screens I thought we might be here, but.
I certainly didn't expect it.
And we're trying to talk about expectations and since we Havent got clarity yet from our customers on exactly what their budgets are going to be on the on the capital expenditure side, and even where they think their.
Casino floor business is going to be.
In the second half of the year Directionally. They believe it's going to be higher and we agree with that but how high is that visit.
Does it grow to the Sky.
I have some debt so I think youre hearing more than anything else just us being careful that we don't get ahead of our customers and the rest of the industry.
Always reserving at.
At the same time the possibility of.
Additional shutdowns in certain states I mean, there are still casinos that have not yet reopened.
There may be casinos as we see this virus spike here and there that may have to shut for a while and so we're just trying to be to be cautious I think more than anything else, but I will let Randy earmark.
Their thoughts.
Hey look Jon I think again, what we've seen interest in our own internal data as we started in the month of April compared to March March was just an extremely strong month for us and what we've seen as well April still a positive month for us as we go through there and we haven't finished the closed process.
It wasn't as strong as March so it's hard for us to tell just how how much.
Settling if you will in terms of the revenue there is that we should be thinking about to Mike's point that we are uncertain on the revenue there is still lack of visibility there, but we talked about in the prepared remarks that we also know that as our customers are coming back to normal themselves are our personnel are able to visit the casinos now and get in there more so just some of our operating expense.
Naturally are going back and rising.
Customers are having visitation. So travel costs are up that where there is marketing expenses things like gaming show, they're starting to come back on and we're starting to attend these things again.
As you get into back half of the year <unk> is going to happen again, and there is a big cost for us in the industry. So so operating expenses arising are uncertain on the revenue side of things. So to Mike's point I think we're trying to be measured and suggesting look I think Q1 was really strong, but there is opportunities here, where with rising net expenses slightly rising expenses.
Maybe a little softening on the revenue.
<unk> still is positive, but it just might not.
John I Hope you didn't I hope you didn't Miss the fact that we did say that we are going to beat 2019.
And just John just so I totally disagree with Mark and Mike.
Sorry share because you know how aggressive I am.
Look I think I think I.
I think you're reporting more to Q2, and I think we said comparable and so.
Is there upside, yes, I think theres upside in Q2.
But I think to Mike's point, we're just trying to say look we want to be.
I guess you can call it conservative, but I think it's reasonable which says low Q1 was more than anybody else stock and Thats us included.
And to Mark's point, where things are we're just going to see how April may and June come out, but our initial thought on Q2 as its comparable and to have a comparable Q2 to Q1, I mean, that's going to be a significant beat on on <unk>.
Second quarter of 2019, we hit the back half of the year, that's where there's just more uncertainty and so I don't think we're at this point feel good feel good but we're not ready to really give anything more than hey, we feel we're going to beat <unk>.
19 members of real question is how much so I think.
That is and Thats us.
That's why I disagree with Mike and Mark complete.
Alright.
Is it conservative Randy of things Theres upside take it for the bank.
So quickly.
Quickly.
Canada just from minus obviously, that's pretty much completely shut down at this point can you remind us like if you go back to 19 or something like what percentage of revenue or EBITDA, Canada was because obviously that will come back at some point those basically zero at this point.
We haven't provided that kind of level of debt.
But it's not it's not a I'll call. It is not a significant enough sub debt or a division that we would carve it out from a concentration risk in the financial so you can venture to say its probably.
Less than 10% of our.
Other volume, but it still contributes so I don't want to diminish that its important sales and.
It's going to contribute more for future because of some contracts that we're now going through various provinces.
It's just hard to other number on that one.
Got it.
That's fine Okay, alright, thanks, guys.
Thank you Tom.
Our next question comes from Chad Beynon from Macquarie. Please go ahead.
Hi, Good afternoon, guys. Congrats on a great start for the year. Thanks for taking my question.
Thanks, Jeff for just one for me.
So I've covered a lot of ground and I guess this is probably in your.
In your 2021 and expectations, but just wanted to drill a little bit more into the commercial gaming Wap opportunity you mentioned that the regulators just approved.
Your web links in Nevada, and New Jersey, you've obviously had a ton of success with.
With the lapse outside of these markets.
Just trying to frame out I guess, how quickly you can start to get some success here and if you've already had some some product or trial product with some of the operators in these markets.
<unk>.
If they are well aware of the productivity that you are pushing out just trying to understand how to think about this in the back half of the year and then beyond that thanks.
Sure sure Dan do you want to do you want to add the color for that.
Sure do you want to start or do you want me to take that no no no no go ahead.
You've been intimately involved in the process.
I would probably devolve into the.
Field trial, only allowing us very limited.
Games out in the fact that we don't make any money from them, but other than that.
I believe it for you.
Okay.
Chad.
And a wide area progressive side. It is what I would call a slow methodical.
Paul.
It's not a it's not a strength to get two huge footprint.
Because it is the toughest model that's out there and through our class II wide area progressive in our class III tribal wide area progressive.
Hi.
Ended up increments right. If you look through its inception to now we've just continuously raised our number of units to get to a certain point I expect the same thing to happen on the commercial side.
<unk>.
Really good success with the product for the field trial there.
Proven and the other links and half from sustainability.
So tons of confidence there I got tons of confidence in the roadmap that.
Following the current products that are out there.
I can't I'm not going to give you a number where I think we can get to.
But I would say expected from the two reasonably ramp up.
And.
As we go throughout this calendar year I think be a bigger part of 2022, I think it would be fair to say.
Yes, I think thats right.
Okay perfect. Thanks, guys nice quarter I appreciate it.
Thanks, Chad.
Okay.
Our next question comes from George Sutton from Craig Hallum. Please go ahead.
Thank you, while I always hoped to hear smoking hot Wicked wheel out of the mouth for Randy Taylor I never expect to hear the word aggressive so that was those entertaining.
I also heard the words sea bass or the term casino banking as a service, which is a term I have not heard used for four and I'm. Just curious if that was something Randy created and hopefully trademark.
But dean I'm, sorry, Derek relative to your.
Offering of the cash club wallet I know one of your.
Customers today initially served predominantly the whale customers and I'm just curious as we see will customers migrate from one casinos from another operator and they are used to using these apps just like everything consumers are doing today using an app for one thing if the other player does.
Didn't have an app.
Very quickly recall and I'm wondering if you think that could really accelerate the progress for.
For this offering.
What's interesting is kind of when we looked at the demographics of the utilization again, it's still very early in the data is again, it's not huge datasets. So I think it's interesting because it's fairly widespread obviously as we expected.
Some of the higher spend is in those in those and those kind of $4 50, plus age groups.
I think there certainly is those aspects of.
Digital and mobile technology that debt people like and are getting more and more used to.
And so certainly there is I would say that competitive pressure and we're even hearing our customers sort of talk about they want to make sure that they are leading and they want it they want to get out ahead of this and start to really transform their business.
Towards cashless opportunities for their for their for their patrons and again, it's kind of the interconnectivity that they want to start to bridge between.
Their land based gaming operations. They are land based non gaming retail entertainment hotel food and beverage and then again into the into the from land based into the AI gaming digital sort of sports betting and order.
In our gaming platform. So so they're looking at this very strategically in and so I would say, yes, that's going to be a driver certainly from a competitive standpoint by having having this technology that certainly is attractive to again the demographics are fairly widespread which is to me it's great.
Just tells you that debt.
It's not just where they're just not worried about 20 or 30 year olds adopting this technology in the 40%, 50% even at $60. So.
Thank you.
It's really going to be about at the end of the day I think the operators and the player experience that they are providing is what's going to get that adoption.
Speaking for the more mature part of the market Dean you did get called out earlier for your industry maturity.
Remind you of that.
But as we look back just a couple of years to 2019.
And we look at the market than in the market now in 2019, you had an incredible breadth of offerings you were.
Starting to see some pressures on engineered costs.
Capex budgets were getting better that was the environment then since a lot of this call is looking back for 2019 and comparing can you talk about 2021 relative to that.
I think Mike Mike hit it initially in terms of our performance.
Our footprint in the premium sites that much more substantial so the investments that we made in 2019 and 20.
We do our job from a product side of it and we continue to have offerings for each of the platforms that we're putting out in the field on one thing you should be spending less money as you go for this traditionally how it's supposed to work and right now currently it's playing to that we basically.
<unk> set the foundation to be able to have this thing run.
And when you have that kind of growth and you have.
Success in the product in each of the product categories, especially in the premium side.
<unk>.
That helps.
That helps get there.
I don't want financing.
Did I Miss that or was there something else I know your churn rate for 2021 to 19, but I can answer more from New Jersey.
Sure.
George This is Randy are you talking more towards development costs, because I would say and what we're paying for.
The development talent.
<unk> produced because I would say, if thats, where youre going I think <unk> done a great job and the pandemic did.
Terribly tough times, but we have kind of reset and believe we have the right people in place and we have the right staffing and still it is competition out there we're seeing some of that but I think deans and a great job there and we've been able to ensure that the people that we we need to continue the success, we're having are onboard.
So.
Right now, we're feeling a little bit of pressure there for a little bit of pressure from.
Just just there is a lot of need for those type of developers, but we feel really good where we're at right now and I think dean feels really good about hitting his roadmap and being able to continue the success.
That's very helpful that answers the question thanks, guys.
Okay. Thanks George.
Okay.
This concludes the question and answer session I would like to turn the conference back over to Randy Taylor for any closing remarks.
In closing as we look to the year ahead, we expect to continue to maintain our focus on achieving sustainable growth strengthening our balance sheet and building long term shareholder value. We look forward to providing you with an update on our next quarterly call.
Thanks for joining us.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.
Okay.
Okay.
Yes.
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Sure.
Yes.
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Okay.