Everi - Q1 2022
May 10, 2022
Transcript
Speaker 0
Greetings, and welcome to the Everi Holdings First Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. Please note this conference is being recorded. I will now turn the conference over to our host, Bill Fund, Senior Vice President, Investor Relations.
Thank you. You may begin.
Speaker 1
Thank you, 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 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.com.
Because of the potential risk, you are cautioned not to place undue reliance on forward looking statements. We do not intend and assume no obligation to update any forward looking statements, which are made only as of today, May 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 ks today and in the Investors section on 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 Labaje, Chief Financial Officer Kate Lowenhauer Fisher, General Counsel Dean Ehrlich, Games' Business Leader and Darren Simmons, our FinTech Business Leader. Now, I'm pleased to turn the call over to Randy Taylor.
Speaker 2
Thank you, Bill. Good morning, everyone, and thank you for joining us. This is my first call as CEO of Evry, 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 6 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 and early stage growth technologies And products such as our digital iGaming business and cashless products, including our CashClub wallet.
We have layered on exciting growth opportunities through accretive acquisitions such as eCash Holdings and Intuaco Gaming as well as new software solutions like Zuvi and MetersXpress 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.
In 2021, recurring revenue exceeded $500,000,000 or roughly 76% of our total revenue. In the 2022 Q1, recurring revenues increased by 23% compared to the year ago period, even as our non recurring 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 and observations from the Q1 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 iGaming operations.
Every is one of only 2 major suppliers who have grown gaming operations revenue compared to 2019. Our period end 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 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 Our installed 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 2 39 units on a quarterly sequential basis. We expect to continue to grow our footprint of premium units as we have only 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 content through our latest acquisition in the historic horseracing space. Taking our player proven content into a new market will add incremental Recurring revenue growth opportunities. EVRI's gaming machine sales increased by 531 units or 56% in the 2022 Q1. 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 We're 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 2nd 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 cabinet, which was displayed at G2E last October. We already have a healthy backlog of orders for this new cabinet in the Q2. Our Digital iGaming 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 4. We were featured on 6 sites out of the 12 sites on the 1st 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. In our FinTech segment, our core financial access business set a new quarterly record by delivering more than $10,000,000,000 of funding to our customers' casino floors. This was driven by a record number of transactions, which were up 12% year over year and up 2% on a quarterly sequential basis.
Of the $10,000,000,000 in funding, cashless activities, including those through our QuickTicket and CashClub wallet solutions, represented almost $350,000,000 or about 3% of total funds delivered, which is more than double the total from the prior year. Mark will provide some additional insights into our cashless progress in a few minutes. We have entered Australia, the 2nd largest market After the U. S. In terms of slot machines through the acquisition of eCash Holdings, which is the leading provider of voucher redemption kiosks in that market.
We expect to achieve growth through integrating and upselling 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 formed 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. NewWave and Resorts Advantage formed our RegTech Software Services, while Atrient and MGT moved every into the player loyalty category. As we brought these stand alone 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. The almost $18,000,000 in revenue we generated in Q1 is more than double the total We generated in the Q1 of 2019 when we began acquiring our loyalty products. Most recently, we acquired a software license from Zuvi, 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 3 pronged strategy. 1st, we will support the internal development of new products and product enhancements that expand and extend our portfolio in both games and FinTech. 2nd, 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.
Speaker 3
Thanks, Randy. Let me begin with the 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 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 have 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 1st quarter records in total revenues, recurring revenue, net income, earnings per share and adjusted EBITDA. In addition, free cash flow generated in the Q1 was $52,000,000 an 18% increase over the Q1 of 2021. I should also note that as a result of the refinancing we completed last summer, the timing of our semi annual interest payments on our unsecured notes Shifted to the 1st and third quarters, whereas previously they had been paid in the 2nd and 4th quarters. This means that the Q1 of 2022 included $10,000,000 of cash interest payments on our unsecured notes, while the prior year Q1 did not have a similar payment.
Our core businesses continue to perform well, and our early stage growth opportunities Continue 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 Q1 of 2022, $346,000,000 of funding was delivered to our casinos' customers' floors from our cashless options. This includes both our quick ticket cash solution offered through our fully integrated self-service kiosks as well as digital funds provided and managed through our CashClub wallet technology. In 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 CashClub wallet solution, which is a newer and therefore smaller subset of our total Cassius offering, 19 casinos across 6 jurisdictions are live today with our technology. That is an increase from 16 casinos in 4 jurisdictions at the beginning of the year. These 19 casinos have more than 35,000 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, Let me share some of our more interesting early observations. Of 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 We've seen an increase in total transaction dollars delivered to those individual patrons after they switch to the cashless wallet.
As we expected, The amount of the average transaction size was smaller for a CASAS transaction, but it would appear that the convenience factor is driving a It's also satisfying to note that from a responsible gaming aspect, The majority of transactions continue to come from Patrons 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 wallet to 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 are new wallet sign ups. While operators with a more active marketing program On a same location basis, From January 1 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 default, assuming they all receive 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 specifically address the early success of our Cassius 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 both our games and FinTech businesses.
Moving on to our outlook. Today, we raised guidance for adjusted EBITDA to a range of $368,000,000 to $378,000,000 This is an increase from the prior range of $368,000,000 to $376,000,000 While still early in the year And we are continuing to address a challenging macro environment, we remain confident in our growth prospects. This is particularly true for our ability to generate free cash Our recent acquisition of Intuitco Gaming should only add to the potential opportunity in the back half of the year. As we look to the Q2, we expect that revenues, net income, adjusted EBITDA and free cash flow will be in line with or exceed the record results of last year's Q2. This is despite the difficult quarterly comparison arising from the white hot We saw last year resulting from government stimulus, vaccine proliferation and other quarterly specific financial benefits, including the above average gaming machine and hardware sales from new casino openings occurring in the Q2 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 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 remaining 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, 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 of 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 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, It 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 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% 26%. We expect R and D expense to be in the range of 7% to 7.5% 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 focus on investment in internal New product development. As we noted last quarter, we expect to see R and D expense trending toward the higher end of this range as the year progresses. In regard to our capital expenditures, we expect to spend between $124,000,000 $130,000,000 for the full year. Finally, I'll end by highlighting that Everi's Board recently approved the new share repurchase program that will enable us to acquire up to $150,000,000 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 120,000,000 and we generated more than $50,000,000 in free cash flow in the Q1. 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 purchase in an opportunistic manner and at prices we believe will continue to build incremental shareholder value.
With that, I will now turn the call back to the operator for questions.
Speaker 0
Thank you. And ladies and gentlemen, at this time, we will conduct our question and answer A confirmation tone will indicate that your line is in the question And our first question comes from Jeff Stancho with Stifel. Please go ahead.
Speaker 4
Hey, good morning guys. Thanks for taking the questions and Randy congrats on your inaugural I wanted to start on sort of consumer trends, call it Q2 To date, a hot topic this earnings season just within the state of the low end consumer amidst the inflation, higher gas prices and kind of 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 10,000 foot view with your Financial Access business, are you seeing any softness whatsoever really across any of your markets? Just curious for your perspective there.
Speaker 2
Yes, Jeff. Look, I'll start it and Mark or Darren can add in because really we see a lot As you say, through our FinTech side. And to date, we're seeing still very strong numbers in comparison Last year, even given how strong Q2 started off with, as we talked even 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 So nothing yet that would give that indication.
Speaker 5
Yes, I'd agree Randy. Great Q1. Great Q1. Q2 looks strong.
Speaker 4
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's slightly higher On a dollar amount basis, just if you look at the state reported data, clearly, this is outpacing, call it commercial casino GGR trends. Just curious what you think the driver of that Is that new customer wins, new properties opening up? Is that maybe better penetration Overall of kind of like consumer wallets or budgets that they bring to the casino, just curious on what you see as Kind of the key driver of outperformance there relative to the same store casino trends that we all track in the state reported data.
Speaker 2
Sure. I'm going to turn it over to Darren. But again, I think you got to remember, we continue to win what we believe is a good share of Renewals that come up and that does help our growth overall. But Darren, anything to add there?
Speaker 5
Yes. Yes. I think look, we got strong renewals Historically, we continue to do that. There are decent expansions that have been out there, new openings. 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 there are some new openings and expansions through the rest of the year.
Speaker 4
Understood. That's very helpful. Thank you both. I'll pass it on.
Speaker 0
Thanks. Our next question comes from Barry Jonas with Truist. Please go ahead.
Speaker 6
Hey, guys. Thanks for taking my questions. 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 mechanical, video or now maybe HHR, that'd be really helpful. Thanks.
Speaker 2
Sure, Barry. I'm going to turn it over to Dean and let him answer that one for you.
Speaker 7
I think it's all of the above in terms of New markets that we have in Enerjet and a robust product pipeline. Literally, the latter is how we're going to get there. And we've built up our product development efforts To attain this 15%, obviously, it's a long term goal, but we continue to track in the right direction. The introduction of our new Player Signature Cabinet 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.
And just to Really kind of give you a data point and how many more themes 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.
Speaker 6
Okay, great. And then, apologies if I missed this, but what exactly drives The guidance raise at the high end, is this flowing through the Q1 beat? Is IntuitCode in there? Maybe just Specifically, what drives that?
Speaker 3
Yes. I think, while some of the analyst cadence might have been a little off For the full year and the individual quarters, certainly the Q1 beat the strength we saw coming out of Q1 and the strength we've seen coming into Q2 Helps us get some confidence in our core business. The addition of IntuitCode, which really was not reflected in our year end numbers, also helps to give us a little more confidence in raising that top end of the range as well. So it's kind of a combination of both factors that led to the top end race.
Speaker 6
Okay. So the bead and into a code of dry. Okay. Perfect. Thank you so much guys.
Speaker 2
Thanks, Barry.
Speaker 0
Our next question comes from Chad Beynon with Macquarie. Please state your question.
Speaker 8
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. There's still a lot of white space out there for you guys to grow that.
I was wondering If you or someone on the team could expand a little bit just in terms of opportunities. I know in the past you've talked about HHR. I'm guessing that's more of a for sale market, but Anything else just on the recurring side that could be a boon for the back half of the year and into 'twenty three? Thanks.
Speaker 3
Well, I don't know that there's anything
Speaker 2
I could say to 'twenty two. I mean, I think 'twenty three and out, we are looking to get into some other markets, Distributed gaming, but that's a little farther out. But we believe that Q1, we were right in our target level. We believe we're going to continue to grow our installed base. As I said on the comments, we've only got about 10% of an installed base of that whole universe.
So with the performance of our premium units and even our core units, we believe we can grow Know that installed base and continue to grow that revenue stream.
Speaker 8
Okay, great. And then you said you're still interested in a number of tuck ins. You talked about how loyalty has really become such a Major contributor from a recurring standpoint and just a revenue and EBITDA standpoint, are there still pieces of the neighborhood that you believe you could kind of bolt on 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 ECASH in Australia, where you don't have as big of a presence? Thanks.
Speaker 2
I mean, Chad, I think it's both. I mean, I think there's there are other pieces. Zuvi is an example of it, right? I mean, We don't a lot of times really talk about those, but again, an AI analytics piece that we think we can bolt on and provide through FinTech, whether it's through RegTech 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 that revenue stream.
And then again, we'll continue to look outside. We think that eCash gives us A nice ability to and even bring some of their products here to the U. S. And allow us to take our products, some of our products to Australia and maybe other regions. So I don't think we're out yet.
It's just finding the right ones and Darren and his team really on it, which he's shown he can do, but definitely not we're not done there.
Speaker 8
Great. Thank you very much. Appreciate it.
Speaker 2
You got it.
Speaker 0
Thank you. Our next question comes from John Davis with Raymond James. Please go ahead.
Speaker 9
Hey, good morning guys. I wanted to drill in on some of the cashless stats that I think you gave Mark. I think 22% at kind of 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 They're just marketing it more, rolling it out more aggressively. Just trying to understand like how we should think about the pace of What that cashless adoption would look like over a multiyear period?
Any kind of color there would be helpful.
Speaker 3
Yes. I'll start and then I'll let Darren give a little more color since he'll have
Speaker 2
a little more in-depth on there.
Speaker 3
I mean, certainly, you phrased it outright. It's Combination of factors, as our operators are focused on promoting this more to their patrons, 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 volume. So that really helps drive things along a little bit. And Darren, I'll let him kind of add some more color to the adoption rate.
Speaker 5
Yes. Certainly, we've got different profiles of customers in terms of jurisdictions and number of locations. You're going to see sort of variances of their approach. But I would say, as they move into new jurisdictions, new commercial jurisdictions, And then it will ramp up the marketing 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 at their speed, but certainly, we're supporting Their efforts in terms of how they want to market and how they want to get their customers up to speed as quickly as possible with the product. So A lot of different approaches, but we're supporting them. And so far, I would say, very happy with the results.
Speaker 9
Okay. That's helpful. And then quick follow-up for Mark. Just margins, I think the guide implies Similar margins to
Speaker 4
the Q1. Is there anything to
Speaker 9
call out from a cadence or how you expect those either ramp or just kind of stable through the quarters? Any call outs that would particularly drive the margin is really just going to be a result of mix and at this point the 51 ish number is your best guess for the full year?
Speaker 3
Again, I'm 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 where we go with EBITDA margin. The more equipment sales we have, that's what has a little bit of What some might call downward pressure on that margin percentage, but it's all additive in terms of total EBITDA. So when I say I was hoping that number comes down, that means equipment sales would have to be Pretty strong and we're expecting to see strength continue 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 those recurring revenue lines as well as equipment sales. But I think the equipment, we believe, is going to grow a little bit faster And the recurring just because of the deferred nature of capital spend of our customers over the last couple of years.
Speaker 9
Okay. That's helpful. And then Randy, bigger picture capital allocation question. Obviously, with the softness stock in the broader market, I think most of those call would agree that Evaluation 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 there's a situation where you look at a stock and say, you know what, like it's a great opportunity. There's no better company to buy than our own. So that takes priority. Like how much does the stock price play and whether it's M and A or buybacks?
And then how aggressive do you think It would be on this $150,000,000
Speaker 2
Yes. I mean, it's a great question, John. I would say, look, we are still focused first on internal use of our cash to develop products. 2nd, Acquisitions and there are things out there. So it's hard for me to say, hey, we're going to flip the switch and go after just 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's going to be a lever that we pull, John, and that's why we had the Board authorize The amount and how aggressive 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 It's going to be a part of a significant part of how we look at capital allocations when the authorization, like I say, on that 18 month It's really only about half 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
Speaker 3
to allocate it. And John, I would just add, I mean, if it wasn't us looking at ourselves, I would say our business meets all those checks in those 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.
Speaker 9
Okay. Obviously, and 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 to 2 to 3 times, like would you potentially take leverage over 3 times if you're going to aggressively buy back your stock, plus there was Deal that moved the needle? Would you go to 3.5% or just any change there?
You can obviously do both.
Speaker 2
Yes. It's early to say there, John. I'm not looking to move the 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 2 to 3 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 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 And as Mark said, we feel our price is a great value for us to
Speaker 3
go out and look at. We're sitting With the net cash position at March 31 of over $120,000,000 and again, we generated $50,000,000 in free cash flow in the Q1. While that could be Timing of interest payments impacts that number as we go forward. We believe we'll be able to fund that $150,000,000 from cash on hand plus the free cash flow we generate and not have to borrow Anything to fill that full requirement plus leave ourselves adequate liquidity for the business and adequate cash flow to continue to invest in the business and find
Speaker 9
these acquisition targets. So we feel we're in a great
Speaker 3
spot and it will only be accretive. So we feel we're in a great spot and will only be accretive as we progress forward.
Speaker 9
Okay. Appreciate all the color guys.
Speaker 2
You got it. Thanks, John.
Speaker 0
Thank you. Our next question comes from David Katz with Jefferies. Please go ahead.
Speaker 10
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 in Historical racing of late. Do you find the competitive landscape in general More or the same, probably not less, competitive today Then where it was and what are you expecting 12 months from now? Randy, 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.
What are you seeing out there and what do you expect?
Speaker 2
I want to make sure I'm understanding your question completely, David. Just And the overall competitive market in slots are you saying in total?
Speaker 10
Yes. Well, let me be more specific, right. Some of the larger players in They are gearing up, right, and are 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 So to stay comfortable or get comfortable that you can keep the momentum rolling along.
Speaker 2
Okay, got you. Look, I feel like It's all content, right? And clearly, we're starting to expand out. We've gone to pick up a studio in Australia. And we have invested heavily in our own studios here in the U.
S. And so I look, I think we're doing the same thing that the other suppliers are. We know it's Content, we know it's 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's done over the last several years. I think he's really beefed up the studios, and I feel like he's got A road map for the new content he wants to bring out for both premium and for sale.
So you know me well, David. So I'm as bullish as I can be here, which is, look, we've got great teams, and I think Dean's got a great road map. And I'll let Dean throw a few things in, Because I think he also would point to some of his hardware that he's working on.
Speaker 7
Hey, David. So Definitely content is king. It's been competitive for 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
Speaker 9
and grow, not only domestically, but as Randy talked about in some of these other
Speaker 7
tuck ins that will allow But as Randy talked about in 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 that we're in a great position to 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. It will continue to be there.
And if we think it's not going to be there and get better, then that would be a giant mistake on our part. So We're ready for it and we're going to put our best foot forward and feel very excited about it.
Speaker 11
Got it. Thank you very much. Appreciate it.
Speaker 0
Our next question comes from George Sutton with Hallum. Please go ahead.
Speaker 11
So Randy, I've 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. But that's a comment, not a question. So on the question side, question for Darren. As you're getting some of these metrics in, for example, a 39% increase in average transactions for the wallet user, I'm just I'm wondering if we're getting to the point where in your pipeline, operators are starting to realize that A customer can walk in Casino A that has a wallet, leave and be very happy with the 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 and the Sort of market dynamics in your opinion?
Speaker 5
Yes, it's probably a little early to say that. I mean, look, at the end of the day, I think An operator having a wallet is 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, it's their people, it's their product that are really going to drive that customer experience. And Having a wallet is just one of those tools, one of those arrows in the quiver that will help certainly facilitate that experience. But obviously, again, the early data points to that this is certainly an opportunity for them Create some opportunities for loyalty engagement, right, because you're using an app that's got their loyalty components associated with it.
And the data points in terms of transactions and how it's increasing play and time on devices It's going to be an important part of how any operator would look at this.
Speaker 11
Got you. A clarity 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 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?
Speaker 3
Yes, that's exactly it. I wanted to highlight that as we start comping and lapping strong periods that Those year over year growth rates should start mirroring kind of how we were pre pandemic, not the Double digits we've been talking about in the last several calls as agents were slow to come back and not fully back in the environment.
Speaker 11
Perfect. Thanks for the clarity. That's it for
Speaker 0
me. Thank you. Our next question comes from Edward Engel with Roth Capital. Please go ahead.
Speaker 12
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?
Speaker 2
Yes. I'll turn it over to Dean real quickly. But look, I think we just acquired it, so I think there's going to be a little bit of time there, but I'll let Dean, give a
Speaker 7
little bit more depth there. So we've been working with Exact and Intuicode on Placed in our cabinet out in HHR for a while now. So we believe that in the back half The year you'll see in every cabinet in HHR, but even more so than that, We will work with IntuitCode to place every content onto their installed base that's out there. Plus, we'll also port what I would call their APIs into our every platform and start distributing Some of our additional cabinets in the HHR by the end of the year and then it will be a smooth runway from that point forward. So expect a lot more Traction and sustainability come towards the end of the year.
Speaker 12
Great. Thanks for the color. And then, one of your peers just recently talked about incremental cost inflation within the EGM sales segment. Know that you're getting this question on every call, but just any update on inflation you're seeing for certain parts or inputs impacting your gross margins there?
Speaker 3
Yes. Well, look, I think if you look at the supply chain in general, the costs around it, delivery 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. Our customers want our products.
So certainly having more unit sales Through the pipeline is a good thing for us, but add some pressure. But we continue to manage that and component prices change and We deal with those, but nothing material has really come through our numbers. It's not seen there already. Nothing material is changing this.
Speaker 2
I would just add, look, I'm really excited and glad I said excited, pleased at how our team has done to manage this. So I think On both sides of the business, they've done a tremendous job trying to work on this, and I think they'll continue to do that. So That's all I can add there.
Speaker 12
No, it's perfect. Thanks for the color.
Speaker 2
You bet.
Speaker 0
Thank you. Our next question comes from Riccardo Chinchilla with Deutsche Bank. Please state your question.
Speaker 13
Hey, guys. Thanks for taking my question. I was wondering if you could please comment on how your discussions with the rating agencies have evolved over the last year since your last upgrade. I believe that one of the Our curious for them for a further upgrade was to keep leverage below 3 turns and based on your guidance and even consensus expectations, You're well below that threshold. So any color there would be very helpful.
Speaker 3
It's hard for me to speak to what the Rating agencies ultimately are going to decide and do. Certainly, as you pointed out there, they do have certain, I'll say, hard measures for when they consider The next breakpoint and where a company is, I believe that our proven record of earnings growth and 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, It is less than 2.5 times at the end of the March quarter. And as we continue to grow and maintain 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.
And we continually work with them to try to Tell our dream and story and talk about the direction of where the company is going and get them just as excited about
Speaker 2
the story as we are. I would say, look, Mark and Bill and the IR team have done a great job working with the rating agencies. But to Mark's point,
Speaker 13
Great. Thank you. If I may have a follow-up, Have you guys considered given the current rate environment to switch the mix of fixed and variable debt in your cash structure? Sure. Are you guys happy with the current kind of mix?
Speaker 3
When we redid the whole Capital structure last year, we really looked at the overall structure of the debt and knowing that earnings could help us pay down certain pieces of it. We certainly were very much obviously when interest rates are very low, the variable rate results in limited interest cost. And even as rates rise, We only have limited exposure in our viewpoint as rates rise. Every 100 basis points is less than $6,000,000 of annual interest. So we're pretty comfortable with where we are in terms The mix of variable and fixed rate debt right now, and if our viewpoints change, we can always do other things around the variable debt Get it fixed without changing the composition of the type of debt.
I like the secured where it's at and the flexibility that it provides us.
Speaker 2
Yes. I would support that 100% behind Mark, which is luck. We just did it. We have a period of time in which we couldn't even change it. We're probably coming up to that.
But I think there's other things we can 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.
Speaker 13
Perfect. Thank you so much for the color.
Speaker 0
Thank you. There are no further questions at this Time, I'll turn the floor back to management for closing remarks.
Speaker 2
Thank you for your interest in EVRI. And I would like to reiterate But 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 operate 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 the next call. Thank you.
Speaker 0
Thank you. This concludes today's call. All parties may disconnect. Have a good day.