Q1 2022 Everi Holdings Inc Earnings Call
Greetings and welcome to the every holdings first quarter 2022 earnings conference call at.
At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.
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Now I'll turn the conference over to our host Bill Pfund Senior Vice President Investor Relations. Thank you you may begin.
Operator welcome everyone. Let me begin with a reminder of our safe Harbor disclaimer, which covers today's call and webcast. Our discussion will contain forward looking statements that involve risks and uncertainties, which could cause actual results to differ materially from those discussed in our call. These risks and uncertainties.
These 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 every dot com.
Does have 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 2022.
We will 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 today and in the investors section.
Our website. This call is being webcast and recorded a link to the webcast and 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 Lab by Chief Financial Officer, Kate loan higher Fisher General Counsel Dean are like games business leader and Darren Simmons, our Fintech business leader now I'm pleased to turn the call over to Randy Taylor.
Thank you Bill good morning, everyone and thank you for joining us.
This is my first call as CEO of every and I am excited to share with you my views on the momentum and opportunities that lie ahead for the company.
Before doing that I would like to thank Mike for his incredibly successful six years as CEO .
He is an outstanding leader and a great mentor to me personally.
I look forward to our continued collaboration in the coming years as we continue to grow.
During the last several years, we have built a solid foundation to achieve steady growth and operating success.
Looking forward, we expect to execute on the priorities that have been so successful for us and continuing our focus on what we can control.
We have an expanding portfolio of products and services that are increasingly at or near the industry's gold standard.
Our portfolio includes established core profit driving products in early stage growth technologies and products.
Such as our digital gaming business and cashless products, including our cash club wallet.
We have layered on exciting growth opportunities through accretive acquisitions, such as E cash holdings, and Intuit coat gaming as well as new software solutions like zoom be meters Express and even new development teams and resources like those acquired from Atlas gaming.
We have a deep and growing bench of talented and dedicated people with a corporate culture focused on innovation and collaboration.
This enables us to execute consistently and to drive new technology adoption in the casino industry.
Importantly, our tremendous success has enabled us to transition from a highly leveraged company using our cash flow only to service debt to one that now generates substantial free cash flow available to further invest in our business for growth or to return to our shareholders.
Our revenue base is comprised of a large and growing proportion of recurring revenues.
And we continue to focus substantial development and sales efforts on maintaining this profile and.
In 2021 recurring revenue exceeded 500 million or roughly 76% of our total revenue.
The 2022 first quarter recurring revenues increased by 23% compared to the year ago period, even as our nonrecurring revenues grew 38%.
We have significant operating momentum in our businesses as we continue to consistently gain share and grow revenues in both our games and Fintech segments.
Now, let me share a few highlights an observation from the first quarter that provide some perspective.
In our games segment gaming operations revenues continue to grow driven by an increase in our installed base of gaming machines and expansion of our digital gaming operations.
<unk> is one of only two major suppliers, who have grown gaming operations revenue compared to 2019, our period ending installed base is up 18% since the end of 2019, having increased sequentially every quarter. Since then this growth rate is the highest of any major supplier during that time.
Our continuing focus is on growing total revenues and adjusted EBITDA from gaming operations by expanding the total installed footprint of games, while daily win per unit is that is an important metric which has grown substantially since 2019. It is not our primary metric on how we manage and evaluate the business.
We take actions to maximize overall unit performance by taking into consideration both longevity and win per unit. Our install base is our primary driver of sustainable recurring revenues and profitability, we evaluate each of our opportunities based against the return and cash flow potential.
Before committing capital recognizing that some units may earn more than others, but all should be generating a positive return I'll highlight that on a quarterly sequential basis total gaming operations revenue was up from Q4 2021.
An important driver of the growth in our installed base is the increase in premium units, which grew by 21% year over year and by 239 units on a quarterly sequential basis.
We expect to continue to grow our footprint our premium units as we have only at an estimated 10% of all premium units in North America, and we have a significant pipeline of new premium products. This year, we expect to launch 30% more premium titles as compared to 2021, and our development plans support a further.
Increase in 2023.
We also expect to successfully leverage our library of content through our latest acquisition in the historic Horseracing space.
Our player proven content into a new market will add incremental recurring revenue growth opportunities.
<unk> gaming machine sales increased by 531 units or 56% in the 2020 to first quarter. We believe this represents both an increase in our ship share of the total market and an improving industry replacement sales trend I would remind everyone that our unit sales for the full year 2021.
Were an all time record and notably we were the only major supplier to sell more units in 2021 than in pre pandemic 2019.
This quarterly unit sale is our second highest ever and I expect we will have an opportunity to set a new record as we continue to execute on our plan to grow our ship share.
And as operators become increasingly comfortable with releasing additional capital for game purchases.
Similar to our development plan for new premium games. We also have a robust pipeline of new game themes for sale throughout 2022.
I would like to highlight that at quarter end, we installed the first placements of our new player classic signature mechanical reel cabinets, which was displayed at <unk> last October .
We already have a healthy backlog of orders for this new cabinet in the second quarter.
Our digital gaming division revenues increased by 129% over the prior year period and were up 34% on a quarterly sequential basis.
Subsequent to quarter end, we were one of the very few suppliers to go live in Ontario, when the market opened April 4th we were featured on six sites out of the 12 sites on the first day and we expect to go live with several other sites this quarter.
We also expect to significantly expand the number of games, we have available to operators in Ontario by the end of June and our Fintech segment, our core financial access business set a new quarterly record by delivering more than $10 billion of funding to our customers' casino floors. This was driven by a record number of transactions.
Actions, which were up 12% year over year and up 2% on a quarterly sequential basis.
Of the $10 billion in funding cashless activities, including those who are quick ticket and cash club wallet solutions represented almost $350 million or about 3% of total funds delivered which is more than double the total from the prior year.
Mark will provide some additional insight into our cash this progress in a few minutes.
We have entered Australia, the second largest market after the U S. In terms of slot machines through the acquisition of E cash holdings, which is the leading provider of voucher redemption kiosks in that market we.
We expect to achieve growth through integrating and up selling more of our capabilities available in the U S such as anti money laundering, or AML software and our loyalty products into Australia, while also selling their smaller kiosks into U S markets such as distributed gaming.
While our maintenance services and central credit form the core of our software and other revenues category for many years. It was our successful track record of acquiring complementary products and businesses that has been the major driver of our success.
New ways and resorts advantage formed our Reg Tech software services, while atrium and MDT moved every into the player loyalty category.
We brought these standalone products onto our platform and we integrated them with the rest of our comprehensive product portfolio. We built a powerful recurring software as service element to our business.
Almost $18 million in revenue we generated in Q1 is more than double the total we generated in the first quarter of 2019, when we get when we began acquiring our loyalty products.
Most recently, we acquired a software license from Zavvi, which adds an AI powered analytics engine to our loyalty capabilities, we strive to build complete products for the gaming industry that include the most powerful marketing promotions and loyalty capabilities as with our digital neighborhood in general the integration of new products.
And product enhancements across our platform injects added cost efficiencies and benefits for casino operators.
Applying our strategic growth model more broadly.
We expect to continue with our three pronged strategy first we will support the internal development of new products and product enhancements that expand and extend our portfolio in both games and Fintech.
Second we will expand geographically into markets, where we have not had a historical presence.
Or where we are currently Underpenetrated and third we will continue to pursue the acquisition of tuck in assets and businesses that add new products product categories and geographies to grow our total addressable market.
Now, let me turn the call over to Mark.
Thanks, Randy let me begin with financial overview.
Overall, we had a strong quarter.
January started off a little slow as omicron impacted patron visitation and gaming revenues for our customers.
February and March saw an improvement in volumes and a concurrent steadying in all of our recurring revenue streams.
We exited the quarter with same store increases in financial access volumes that has carried through April and into May which is consistent with recent operator commentary on the strength of their player base.
On a consolidated basis, we set first quarter records in total revenues recurring revenue net income.
Earnings per share and adjusted EBITDA.
In addition, free cash flow generated in the first quarter was $52 million, an 18% increase over the first quarter of 2021.
I should also note that as a result of the refinancing we completed last summer the timing of our semiannual interest payments on our unsecured notes shifted to the first and third quarters.
Whereas previously they have been paid in the second and fourth quarters.
This means that the first quarter of 2022 included $10 million of cash interest payments on our unsecured notes while the prior year first quarter did not have a similar payment.
Our core businesses continue to perform well and our early stage growth opportunities continued to demonstrate attractive growth prospects.
Let me provide some focus on one of these new rising stars our success in driving the evolution of cashless technology.
In the first quarter of 2000 $20 million to $346 million of funding was delivered to our casinos.
<unk> floors from our cashless options. This includes both our quick ticket cashless solutions offered through our fully integrated self service kiosks as well as digital funds provided and manage through our cash club wallet technology.
And casinos that had at least one of our cashless options for more than a year cashless volumes are running at approximately 8% of the total funds delivered to the casino floor.
With one of our customers averaging as high as 22% of total funds over the last 12 months.
Looking specifically at the digital cash club wallet solution, which is a newer and therefore smaller subset of our total cashless offerings.
19 casinos across six jurisdictions are live today with our technology.
That is an increase from 16 casinos in four jurisdictions at the beginning of the year.
Yeah.
These 19 casinos have more than 35000 slot machines in operation.
This level of market penetration for our digital wallet combined with the total volume of cashless activity processed.
And the positive feedback we received from our customer base.
Supports our position as a leader in cashless solutions for the gaming industry.
Because of the early stage nature of the digital wallet solution, our pool of customers and the number of patrons utilizing this product is still relatively small though it is constantly growing.
Therefore, analyzing year over year metrics is not yet entirely useful however.
However, let me share some of our more interesting early observations.
The cumulative total sign ups, 14% of all unique wallets are held by individuals over the age of 60.
And 61% of the unique wallets are held by individuals over the age of 40 as you would expect the older cohorts, who typically have more disposable income driving even higher level of funds loaded when we look at the data from our wallet users who had previously been known to use our services to obtain funding.
And we exclude the handful of wells, who by their nature can distort the averages we've seen an increase in total transaction dollars delivered to those individual patrons after they switch to the cost as well as we expected the amount of the average transaction size was smaller for a cashless transaction, but it would appear that the convenience factor.
There is driving a 39% increase in the average number of transactions performed.
It's also satisfying to note that from a responsible gaming aspect. The majority of transactions continue to come from Patriots cash accounts via debit card, which is roughly in line with our overall transactional data.
While our current wallet customer base has utilized varying strategies on how actively they market. The wallets patrons. These customers are all seeing new users added daily.
For casino operators, who choose to not actively promote the wallet about 3% to 5% of daily wallet users on average our new wallet sign ups.
While operators with a more active marketing program see 10% to 15% of new wallet users using the wallet each day.
On a same location basis from January one to March 31, 2022, the number of unique wallet users increased by approximately 50%.
While the evolution of our cashless space is still relatively early we are seeing customer advancements across a broad front.
Currently we have more than 100 casino locations that offer our quick ticket product.
And we are now working to implement our wallet at another 18 casinos at 12 new jurisdictions.
We expect these new wallet implementations to go live by the fall assuming they all received the required regulatory approvals.
It is important to note that many of these new locations are for properties with new customers that we are not currently at Liberty to name just yet.
While I will specifically address the early success of our cashless efforts. It's important to point out that we also have additional new products planned for launch in the coming months.
This should give us new growth opportunities across cross, both our games and Fintech businesses.
Moving onto our outlook.
Today, we raised guidance for adjusted EBITDA to a range of $368 million to $378 million.
This is an increase from the prior range of $368 million to $376 million.
While it's still early in the year and we are continuing to address the challenging macro environment, we remain confident in our growth prospects.
This is particularly true for our ability to generate free cash flow.
Our recent acquisition of <unk> gaming should only add to the potential opportunity in the back half of the year.
As we look to the second quarter, we expect net revenues net income adjusted EBITDA and free cash flow will be in line with or exceed the record results of last year's second quarter.
This is despite the difficult quarterly comparison arising from the White Hot casino activity, we saw last year, resulting from government stimulus vaccine proliferation, and other quarterly specific financial benefits, including the above average.
Gaming machine in hardware sales from new casino openings occurring in the second quarter of 2021.
Let me now share some of the opportunities and challenges that shape our outlook.
We believe our robust pipeline of new games will contribute to ongoing growth in our installed base of gaming operations.
We expect that the return and steadying of casino visitation combined with the ongoing growth in our installed base footprint to result in further revenue growth as well as our daily win per unit remained healthy at around or above the $40 range for the full year.
We do continue to expect some variability in the quarterly rate throughout the year as we always do which reflects the impact on casino traffic due to normal seasonal influences.
We expect to generate sequential growth in the sale of gaming machines and driven by a combination of our improved ship share. The recent launch of our newly released mechanical cabinet the player classic signature and increases in capital spending by our casino customers.
We will continue our efforts to address the procurement challenges throughout the global supply chain that is being experienced by the entire equipment supplier industry as well as other industries.
To date, our inventory procurement and hardware engineers have done an absolutely terrific job in managing through this ever changing landscape.
With the breadth and complexity of global supply chains. We expect these issues will continue to rise throughout the remainder of the year.
Our team is very focused on creating solutions that help us navigate through these challenges even as our suppliers also work to improve their component delivery capabilities.
We do not believe our exposure is any greater than the rest of our industry.
For Fintech through April and into May we have seen continuing positive momentum in our same store volumes, even as we comp against strong growth from 2021.
We expect this trend of positive financial exit activity to continue at levels similar to our pre pandemic levels of historic year over year growth.
The continuing expansion of cashless products, including the rollout of our digital wallet to new customers is expected to provide incremental growth in our volumes.
We believe continued demand for our software and other products and services, primarily driven by the steady stream of new and enhanced products. We plan to introduce in coming quarters, We will drive growth in revenue as well as increasing demand for equipment sales from contract renewals and new contract wins.
We expect operating expenses exclusive of non cash compensation to remain in line with revenues. So that as a percentage of total revenue operating expenses should remain consistent with current levels of between 25 and 26%.
We expect R&D expense to be in the range of seven to seven 5% of total revenues for the full year.
Which is slightly higher than our historical range, but remains in line with our guidance we provided at year end.
This higher level of spending reflects our increased focused on investment in internal new product development.
As we noted last quarter, we expect to see R&D expense trending towards the higher end of this range as the year progresses.
In regard to our capital expenditures, we expect to spend between 124 and $130 million for the full year.
Finally, I'll end by highlighting that every board recently approved a new share repurchase program that will enable us to acquire up to $150 million of our shares over the next 18 months.
We believe that our current valuation does not appropriately recognize the strong net income adjusted EBITDA and free cash flow that we have been generating.
Nor the strength and balance of our recurring revenue.
And we believe that our current enterprise value multiple does not give us appropriate credit for a company that has been growing as consistently as we have been growing and as we expect to continue growing.
We have a very strong balance sheet, we ended the quarter with a net cash position of approximately $120 million and we generated more than $50 million in free cash flow in the first quarter.
In the coming quarters, we expect to continue generating incremental free cash flow.
This provides us more than adequate liquidity and flexibility to continue allocating capital to support the business operation and investments in our future growth.
While also executing on share purchased in an opportunistic manner and at prices. We believe we will continue to build incremental shareholder value.
With that I will now turn the call back to the operator for questions.
Thank you and.
And ladies and gentlemen at this time, we will conduct our question and answer session.
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Okay.
And our first question comes from Jeff Stanchion with Stifel. Please go ahead.
Hey, good morning, guys. Thanks for taking the questions and Randy Congrats on your inaugural earnings call here.
I wanted to start on on sort of.
Tumor trend call. It Q2 to date hot topic. This earning season just within the state of the low end consumer amidst the inflation and higher gas prices.
That laundry list of macro headwinds that are well publicized at this point just curious to get your thoughts here given you've got a pretty good 10000 foot view with your financial access business are you seeing any softness whatsoever really across any of your markets or are just curious for your perspective there.
Yes, Jeff look I'll start and Mark are Darren can add in because really we see a lot through our as you say through our fintech.
Fintech side and to date, we're seeing still very strong numbers in comparison to.
Last year.
Even given how strong Q2 started off with as we talked even in the in the remarks with stimulus money and vaccines out we're still very pleased with how.
The numbers are showing at least on the cash access side, so nothing yet that would give that indication.
Yes, I'd agree.
Great Q1, Q1, Q2 looks looks strong.
Perfect that's helpful and encouraging maybe hanging on the financial access business for a second I think you called out.
Total volumes up 2% quarter on quarter that is slightly higher on a dollar amount basis.
If you look at the state reported data clearly this is outpacing call. It commercial casino GTR trends just curious what you think.
The driver of that outperformance really is that new customer win new properties opening up is that maybe better penetration overall of kind of like consumer consumer wallets are budgets that they bring to the casino.
Curious on what you see as kind of a key driver of outperformance there relative to the same store casino trends that we all track and the state reported data.
Sure I'm going to turn it over to Darren but again I think you've got remember we continue to win what we believe is a good share of RIN.
Renewals that come up and that does help our growth overall, but darren anything to add there. Yes, yes, I think look we got strong renewals historically, we continue to do that there are decent expansions that have been out there.
Opening so again, we're winning our share as we normally do and so I think that's certainly contributing to the volumes and we expect that to continue as they are some new openings and expansions through the rest of the year.
Understood.
That's very helpful. Thank you both I'll pass it on.
Thanks. Our next question comes from Barry Jonas with Truest. Please go ahead.
Hey, guys. Thanks for taking my questions I wanted to start with gaming as you think about that 15% mortgage share target can you maybe talk about the potential path to get there.
Any color on how you see the sub segments shaping up whether that's Mechanicals video are now maybe HHR that'd be really helpful. Thanks.
Sure Barry.
Turn it over to Dean.
Answer that one for you.
I think it's all of the above in terms of.
New markets that we have an energetic and a robust product pipeline.
Literally the latter is how we're going to get there.
We built up our product development efforts.
To attain this 15% obviously, it's a long term goal.
We continue to track in the right direction and the introduction of our new player called signature cabinet.
It will help allow us.
To continue to gain share in that particular category.
And also just a video lineup coming up I feel very very good about it.
Just really kind of give you a data point and how many more themes were.
We're putting out there that.
We have significantly ramped up I'm not going to throw an exact percentage, but if you look at.
To 2019 pre pandemic to what we're what our output is this year with themes.
We are increasing significantly above that.
Okay, Great and then.
I apologize if I missed this but what exactly drives that.
Guidance raise at the high end is this flowing through the Q1 beat is into occurred in there maybe just just specifically what drives that.
Yes, I think well.
Well some of the analysts cadence might've been a little off.
For the full year in individual quarters, certainly the Q1 beat.
The strength that you saw coming out of Q1, and the strength <unk> seen coming into Q2 helps us get some confidence in our core business. The addition of Intuit code, which really was not reflected in our year end numbers also helps to to give us a little more confidence in raising the top end of the range as well. So it's kind of a combination of both factors that lead.
The top end rates.
Okay, so the beat and into dry okay.
Perfect. Thank you so much guys.
Thanks Bert.
Our next question comes from Chad Beynon with Macquarie. Please state your question.
Hi, good afternoon, Thanks for taking my question.
Randy you mentioned one of the goals is to not just have us well for you guys and for us to not just focus on the yield growing the footprint is obviously important.
Theres still a lot of white space out there for you guys to grow that I was wondering if <unk>. If you were someone on the team could expand a little bit just in terms of opportunities I know in the past you've talked about.
H R. I'm guessing that's more of a for sale market, but anything else just on the recurring side that could that could be a boon for the back half of the year and into 'twenty three thanks.
Well I don't know that Theres anything I can say to that 22, I mean, I think 23% out we are looking to get into some other other markets distributed gaming that that's a little farther out, but we believe that.
Q1.
We're right in our target level. We believe we are going to continue to grow our installed base.
As I said on the comments, we've only got about 10% of the.
<unk> of an installed base that whole universe, so with the performance of our premium units and even our core units. We believe we can grow that.
That installed base and continue to grow that revenue stream.
Okay.
Okay great.
And then you said you're still interested in.
Number of tuck ins you talked about how loyalty is really becomes such a major contributor from a recurring standpoint, and just the revenue and EBITDA standpoint are there still pieces of the neighborhood that you believe you could kind of bolt on to <unk>.
To really kind of increase just what you offer to your partners or is it more just geographic specific maybe getting into some other markets like you did with the cash in Australia, where you don't have as big of a presence. Thanks.
I mean, Chad I think it's both.
Think theirs.
There are other pieces you know <unk> is an example of it right I mean, we don't we don't.
A lot of times really talk about those but again and AI analytics piece that we think we can we can bolt on and provide through.
Fintech, whether it's through <unk> or through loyalty. We believe there are other pieces out there and if we can get them at the right price, we think it can add to.
Yes.
That revenue stream and then again, we will continue to look outside we think that he cash gives us a.
A nice ability to bring some of their products here to the U S and allow us to take our products.
All of our products too.
Australia and maybe other other regions. So I don't think were out yet, it's just finding the right ones and Darin and his team really executing on it which he has shown you can do.
Definitely not.
<unk> done there.
Great. Thank you very much I appreciate it.
Got it.
Thank you. Our next question comes from John Davis with Raymond James. Please go ahead.
Hey, good morning, guys.
Wanted to drill down on some of the cashless stats I think he gave mark I think 22%.
The customer that has the highest adoption.
Just want to understand better what's driving that level of adoption versus the 8% average is it just marketing it more rolling it out more aggressively just trying to understand like how we should think about the pace of <unk>.
What that cashless adoption would look like over a multiyear period and any kind of color there would be helpful.
Yes.
I'll start and then I'll, let Darren give a little more color since you'll have a little more in depth on there I mean certainly.
You framed it outright comp.
A combination of factors as our operators are focused on promoting this more to their patients clearly, there's a little better acceptance rate and.
The one customer in particular is keenly focused on trying to drive a lot of cashless volumes. So thats really helps drive things along a little bit in <unk>.
That's some more color to the adoption rate, yes. It certainly we've got a different profile of customers in terms of jurisdiction the number of locations. So.
Youre going to see sort of variances of their approach, but I would say as they move into new jurisdictions, new new commercial jurisdictions.
And then it'll ramp up the marketing efforts efforts, you'll see it continue to grow and we've got a number of other casinos in the pipeline.
We'll be launching through the rest of the year. So again, it's a combination of going out there speed, but certainly we're supporting their efforts in terms of how they wanted to market and how they want to get the get the get their customers up to speed as quickly as possible with the product. So a lot of different approaches, but we're supporting them in so far.
I would say very happy with with the results customers are very happy with the results and and it's just going to continue to grow as more adoption increases every day.
Yes.
Okay. That's helpful. And then quick follow up for Mark just margins.
I think the guide implies similar margins for the first quarter is there anything to call out from a cadence or how you expect those see the ramp or kind of stable through the quarters any any call outs that would particularly drive a margin is really just a result of mix at this point the 51 ish numbers.
Your best guess for the full year.
Again.
Im hopeful that the margin percentage actually drops again, not a number I focus on for us.
The mix is a big driver in terms of of of where we go with with EBITDA margin. The more equipment sales. We have that's what has a little bit of what some might call a downward pressure on that margin percentage, but it's all additive in terms of total EBITDA. So what I would say Ed hoping that number comes down that means equipment sales would have to be pretty strong and we're expecting to see.
Strength continuing throughout the year as we progress along so that could cause that margin percentage to drop but again it will all be additive we expect to see growth in all of those recurring revenue lines as well as equipment sales, but I think the equipment. We believe is going to grow a little bit faster than the recurring just because of the deferred nature of capital spend of our customers over the last.
Couple of years.
Okay. That's helpful and then Randy bigger picture capital allocation question, obviously with the salt and the stock and the broader market I think multiple call would agree the valuation doesn't really make sense. So how does that play into your.
Decision whether to be more aggressive on the buyback you guys have done a couple of small acquisitions, but nothing really material from a dollar perspective. So it was a situation where you look at the stock and say you know what.
It's a great opportunity there is no better company to buy their own and so that takes priority like how much does the stock price play and whether it's M&A or or buybacks and how aggressive you think you would it would be on the sort of thing.
Okay.
Yes, I mean, it's a great question.
John .
I would say look we are still focused first on internal use.
Use of our cash to develop products second acquisitions.
There are things out there. So it's hard for me to say, Hey, we're going to flip the switch and go after.
Stock repurchases, but to your point given the price that we're seeing and how we just feel we're undervalued given how we've grown.
The recurring nature of our revenues it.
It's going to be a lever that we pull John and Thats why we had the board.
Authorize.
The amount and how aggressive it is hard for me to say right now, but it's still going to be in kind of that order which is.
We're going to invest internally.
We're then going to look for the acquisitions, but this is definitely now a <unk>.
You're going to be a part of a significant part of how we look at capital allocations when.
The authorization I can say on that 18 month period is really only about half of our of our expected free cash flow. So.
It's going to be at.
One of the major.
Points of what we look at on a daily basis on how we're going to allocate it and John I would just add from an M&A perspective, when we look at M&A. We look at companies that are growing well that can throw off nice amount of free cash flow that are accretive to our business.
Is it us looking ourselves I would say our business meets all of those checks in this box for US today. So right now it is a very compelling acquisition for us to be buying those shares at the levels that they're at.
Okay, Obviously, you Didnt Randy you kind of alluded to this it's not mutually exclusive given the free cash flow generation, but maybe just going back to the leverage comfort any change of two to three times like what you would potentially take leverage over three times. If you are going to aggressively buy back your stock plus there was a deal that moved the needle when you go to three and a half or just any change there.
You can obviously do both.
It's early to say there John I am not looking to move leverage up to buy back stock I think we've got plenty of free cash flow to be able to do that.
And look I, just don't know what type of acquisitions come along that we may want to do so I would say look I'm not looking to go lower than we are right now I like where we're at in that two to three times, but.
I think we're going to aggressively look at using our free cash flow. If we can't find anything but I don't I don't see us going out and doing something that would change that and go out and borrow at this time, John I would say, we're going to use free cash flow and we got a significant amount of it and as Mark said, we feel our prices is a great value for us to go out and look at.
We're sitting with a net cash position at March 31 of over $120 million and again we.
We generated $50 million and free cash flow in the first quarter, while that could be timing of interest payments impact that number as we go forward. We believe we'll be able to fund that $150 million from cash on hand, plus the free cash flow, we generate and not have to borrow anything to fulfill their full requirement plus leave ourselves adequate liquidity for the business and adequate cash flow to.
We continue to invest in the business and part of these acquisition targets. So so we feel we're in a great spot would only be accretive as we progress forward.
Okay I appreciate all the color guys.
Yes, Thanks, Sean.
Thank you. Our next question comes from David Katz with Jefferies. Please go ahead.
Hi, good morning, everyone. Thanks for all the detail and thanks for taking my question.
I wanted to.
Just discuss the slot machine side or the gaming machine side.
Where you've invested some stuff and historical racing.
Right.
Do you find the competitive landscape in general.
More or the same right.
Probably not less competitive.
Today than where it was and what are you expecting 12 months from now you know Randy we we know each other a while.
And.
I am and I expect you are just the right amount of paranoid about making sure that the momentum continues.
Now what are you seeing out there and what do you expect.
I want to make sure.
Im understand your question completely David just just in the in the overall competitive market.
In slots or you think until well look let me be more specific right. Some of the larger players and there are gearing up.
Right.
Our.
Open about their intent to try and take more share whether that's in premium participation or whether that's in the for sale category.
How do you.
Sort of stay comfortable or get comfortable that we can keep the momentum rolling along.
Okay got you look I feel like it's.
It's all content right and.
Clearly, we've we're starting to expand out we've begun to pick up a studio in Australia.
And we have invested heavily in our own studios here in the U S.
So look I think we're doing the same thing that the other suppliers arent we know its content. We know that's how you maintain.
Your position and that's how you grow it so I think I'm very comfortable with Dean and what he has done over the last several years I think he's really beefed up the studios and I feel like he has got a road map for the new content. He wants to bring out for both premium and for sale.
So.
Well David so.
I'm I'm as bullish as I can be here, which is look we've got great teams and I think <unk> got a great roadmap and I'll I'll, let dean throw a few things in because I think he also.
Good point his hardware that he is working on.
Hey, David So definitely content is king.
It's been competitive for as back as far as I can remember, it's not going to change but.
Those that have the best content will drive their ship shares up and we feel very confident with the lineup that we have the amount of dollars that we continue to invest and grow not only domestically, but as Randy talked about some of these other tuck ins that will allow us to get in these other verticals that we're not playing in right now.
To be able to continue to grow the business plain and simple that plus new hardware cadence as we continue to.
Go through quarter after quarter.
We feel.
We're in a great position to.
And be able to continue to grow it's as simple as that.
But if your question is the competitive landscape the answer is.
It's been there that will continue to be there and if we think it's not going to be there and get better than that would be a giant mistake on our part so well.
We're ready for it and we're going to put our best foot forward and feel very excited about it.
Got it.
Thank you very much I appreciate it.
Our next question comes from George Sutton with Hallum. Please go ahead.
Part of it so Randy I have known you for a long time and I know you well and I know you don't like to spend money. So the fact that the share repurchase program came out I thought was quite compelling.
That's a comment not a question. So on the question side question for Darren.
Youre getting some of these metrics in for example, a 39% increase in average transactions for the wallet user I'm just I'm.
I'm wondering if we're getting to the point where in your pipeline.
The operators are starting to realize that a customer can walk in casino a that has a wallet.
<unk> and be very happy with them.
Things that they can do with their wallet. They go across the street to casino B that doesn't have that wallet and it's a very different experience are we getting to that point in the competitive mix in the sort of market dynamics in your opinion.
Yes, it's probably a little early to say that I mean look at the end of the day, I think and operate or having a wallet as sort of one tool that they have to be able to actually create an experience for a player at the end of the day, it's what that operator has on their floor. If there are people. If they are products that are really going to drive that customer experience and having.
Having a wallet is just one of those one of those tools one of those arrows in the quiver that that will help certainly facilitate that experience but.
Obviously again the early data points to that this is certainly an opportunity for them too.
Create some opportunities for loyalty engagement right because youre using an app that's got their loyalty components associated with it and the data points in terms of transactions and in house.
Increasing.
Play and time on device is going to be an important part of any operator would look at this.
Gotcha.
A question for Mark you and I. Appreciate you mentioned the continued momentum into May but then you said you expect similar levels to pre pandemic levels I wasn't sure. If you were referring to growth rates in terms of cash to the floor dynamics, what exactly were you trying to say there.
Yes, that's exactly it I wanted to.
Highlight that debt as we start comping and lapping strong periods that dose those year over year growth rates.
Start mirroring and kind of how we were pre pandemic mapped.
The double digits, we've been talking about on the last several calls.
<unk> were slow to come back and not fully back in the environment.
Perfect. Thanks for the clarity that's it for me.
Okay.
Thank you. Our next question comes from Edward Engel with Roth Capital. Please go ahead.
Hi, Thank you for taking my question quick question on HHR. How quickly are you able to start going to market in that segment with every content is it going to take some time to kind of repurpose. Some of your legacy games or is the conversion pretty seamless.
Yes, I'll turn it over to Dean real quickly.
We just acquired it so I think theres going to be a little bit of time, there, but I'll let.
If you can give a little bit more depth there. So we've been working with.
With exact and then to a code on.
Placed in our cabinet out and HHR.
For a while now so.
We believe that in the back half of the year Youll see in every cabinet and HHR.
But even more so than that.
We will work with them to a code to place them.
Every content onto their installed base Thats out there plus we'll also ports what I would call their API into our every platform and start distributing some of our additional cabinets and HHR by the end of the year.
And then it will be a smooth runway from that point forward. So expect a lot more track.
Traction.
And sustainability to come towards the end of the year.
Great. Thanks for the color and then one of your peers, just recently talked about incremental cost inflation within the <unk> segment. I know that you are getting this question on every call, but just any update on your inflation youre seeing them for certain parts of our <unk>.
What's impacting your gross margins there.
Yeah, well look I think if you look at the supply chain in general the costs around deliberating of components. None of that is new to US now we've been talking about it for the last several calls our competitors have been talking about it and we've all been trying to navigate through this and we've been managing.
This process very well over the last several quarters and we expect to continue staying in front of it I would tell you. We do have a strong pipeline for our products in terms of deliveries to our customers.
One of our products, so certainly having more unit sales coming through the pipeline is a good thing for us, but add some pressure, but we continue to manage that in component prices change.
We deal with has been nothing material has really come through our numbers, it's not seeing they are already a nothing material has changed it yet.
Just to add look I'm really excited and blacks and excited we're pleased at how our team has done to manage this so I think on both on both sides of the business they've done a tremendous job trying.
Trying to work on this and I think they will continue to do that so.
It's not all I can add there.
That's perfect. Thanks for the color.
You bet.
Thank you. Our next question comes from Ricardo Chinchilla with Deutsche Bank. Please state your question.
Hey, guys. Thanks for taking my question I was wondering if you could please comment on how the discussions with the rating agencies.
Over the last year since your last update I believe that one of the criteria for them for a further upgrade was to keep leverage below <unk>.
Peter and Ken Bruce in your guidance and even consensus expectations.
Young well below that threshold, so any color there would be very helpful.
It's hard for me to speak to what the rating agencies ultimately youre going to decide and then certainly as you pointed out there. They do have certain I'll say hard measures for when they consider the next breakpoint, where a company is I believe that our proven record of earnings growth.
Our ability to continue to pay down debt is working to drive our leverage down significantly I think.
Total leverage not just senior secured which is our covenant is less than two five times at the end of the March quarter, and as we continue to grow and seeing growth in our numbers that number will only come down so I feel like we're in a great position with respect to how the rating agencies would look and evaluate our debt.
We continually work with them to try to tell.
Tell our dream and story and talk about the direction of where the company is going and get them just as excited about the story as we are I would say that mark and bill and the IR team have done a great job working with the rating agencies, but to Mark's point.
They they run by their own rules, but I think.
The strong performance that we have shown over these last quarters, hopefully will will will do nothing but benefit us in that arena.
Yeah.
Great. Thank you.
It may have a follow up do you guys consider given the current rate environment to switch the mix of fixed and variable debt and your construction or are you guys.
The current tenant mix.
Okay.
We think the whole capital structure last year, we really looked at the overall structure of the debt and knowing that earnings could help us pay pay down certain pieces of it.
We certainly were.
Very much obviously when interest rates are very low the variable rate resulted in limited interest costs and even if rates rise. We only have limited exposure in RV appointed as rates rise every 100 basis points is less than $6 million of annual interest. So we're pretty comfortable with where we are in terms of the mix of variable and fixed rate debt right now.
Our viewpoints change we can always do other things around the variable that's it.
Yes to get it fixed without changing the composition of the type of debt you know I like the secured where it's at and the flexibility that it provides us yeah, I would I would support that 100% between behind Mark which has left but just did.
We have a period of time in which you couldn't even change it probably coming up to that but I think there's other things we could do if we don't like that mix I'm just.
We've paid a lot to get to where we are and I think we like the mix, where we're at right now.
Perfect. Thank you so much for all the color.
Okay. Thank you there are no further questions at this time I'll turn the floor back to management for closing remarks.
Thank you for your interest in every and I would like to reiterate that despite the current macro environment and how it evolves in the near term we remain focused on what we can control developing great games, providing fintech and loyalty services and products that other casino operator.
That offer casino operators productivity and cost efficient solutions and managing our cash flows and expenses. We believe this will help us achieve sustainable growth and build long term shareholder value.
We look forward to providing you an update on our next call. Thank you.
Thank you. This concludes today's call all parties may disconnect have a good day.