Everi Holdings Inc (EVRI) 2021 Q1 法說會逐字稿

Thank you for standing by. This is the conference operator. Welcome to the Everi Holdings Incorporated First Quarter 2021 Earnings Conference Call. (Operator Instructions)

I would now like to turn the conference over to Bill Pfund, Senior Vice President, Investor Relations. Please go ahead.

Thank you, operator. Welcome, everyone. Let me remind everyone of our safe harbor disclaimer that covers today's call and webcast. Our call will contain forward-looking statements and assumptions which involve risks and uncertainties that could cause actual results to differ materially from those discussed during our call. These risks and uncertainties include but are not limited to those contained in our earnings release today and in other SEC filings, which are posted in the Investors section of our corporate website at everi.com.

We do not intend and assume no obligation to update any forward-looking statements which are made only as of today, May 5, 2021. You are also cautioned not to place undue reliance on such forward-looking statements. We will also refer to certain non-GAAP financial measures, such as adjusted EBITDA, free cash flow and net cash position. A description of each non-GAAP measure and a reconciliation to the most directly comparable GAAP measure can be found in our earnings release and related 8-K as well as in the Investors section on our website. This call is being webcast and recorded. A link to the webcast and a replay of today's call can be found in the Investors section of our website.

Joining me on the call today are Mike Rumbolz, our Chairman and Chief Executive Officer; Randy Taylor, President and Chief Operating Officer; Mark Labay, Chief Financial Officer; Kate Lowenhar-Fisher, General Counsel; Dean Ehrlich, Games Business Leader; and Darren Simmons, our FinTech Business Leader. Also joining us today is Steve Kopjo who recently joined Everi and will be assisting Mark and me on finance and IR projects.

Now it's my pleasure to turn the call over to Mike Rumbolz.

Well, thank you, Bill, and good afternoon, everyone, and thank you for joining us. Before I begin today, I'd like to take a moment to thank Miles Kilburn who will be retiring from the Board effective at this year's annual shareholders meeting. He has served on our Board since the IPO in 2005 and Miles has been our Chairman since 2013. At the Board level, he's been instrumental in advancing the evolution of Everi and promoting our growth initiatives. We'll miss his valuable insights and we all want to wish him well in all of his future endeavors. Thank you, Miles.

Now let me begin our review today by sharing a few highlights and observations from the first quarter. Our record results demonstrate the substantial progress that we continue to make with our organic growth initiatives and the ongoing recovery in the gaming industry. North American gaming has benefited from a tailwind of pent-up demand and easing of capacity restrictions and increased vaccination rates. Due to the impacts of COVID-19 on the casino industry in both 2020 and lingering into 2021, we believe our financial performance is best when measured against 2019. And as you might imagine, our first quarter of 2021 compares very favorably to 2019's first quarter, even though parts of our business such as the gaming unit sales have not recovered to pre-COVID levels.

On a consolidated basis, our revenue set first quarter record and reflecting our improved margins, we set all-time quarterly records in net income, adjusted EBITDA and free cash flow. In fact, operating income was up 55% over the first quarter of 2019, while our adjusted EBITDA was up 23% over the then record 2019 first quarter. On an operational basis, our outstanding performance is reflective of a variety of factors and these are some of the examples. The complementary balance between our games and FinTech segments has never been stronger. Our focus on developing innovative price has resulted in an increasing demand from customers since our products help them build stronger relationships with their patrons, and at the same time, improves their operating efficiencies. Also, we have developed a track record of consistent operating execution that gives our customers confidence that we deliver the products and services that they expect. And finally, and most importantly, our worldwide Everi team whose commitment to collaboration and excellence has made all of this happen.

Now common to both our FinTech and games businesses is a large component of high margin recurring revenues. I'll focus my remarks today on the success of these revenue streams and why we continue to believe in the long-term sustainability of our recent performance levels. The investments that we have made in the few years prior to the pandemic have supported the resiliency of our recurring revenue operations. In the games business, it has been our ongoing investment in developing player popular games in multiple product categories with our differentiated cabinet strategy. Those investments are driving increased placements and higher daily win per unit in our gaming operations as well as fueling the ship share gains that we've achieved in the for-sale side of the market.

The success of our premium games has been the primary growth driver of our class 2 and class 3 installed base and continues to drive our revenue growth from gaming operations. Premium units have increased every quarter for the past 11 quarters, including throughout the pandemic impacted quarters in 2020. As a result of this steady growth, our installed footprint of premium games has more than doubled over the last 2 years. Today, premium units comprise 42% of our base compared to 22% at the end of the 2019 first quarter.

Our premium unit growth has been broad-based reflecting increased placements of class 3 units in tribal casinos and our growing penetration of commercial casinos. For example, in California, a large tribal jurisdiction, our base of premium units has increased nearly 100% since the first quarter of 2019. Our base in Nevada, a large commercial jurisdiction, is up about 200% in that same time period. But very recently, we've added 2 new premium game themes to our portfolio, Dragon Kingdom on our Empire 5527 cabinet, and a Monsterverse themed wide-area progressive game on our Empire DCX dual-curved cabinet.

Our Monsterverse game joins The Mask and The Karate Kid games that are already available as wide-area progressives. Furthering our progress in the wide-area category, we recently received approval to place link units in Nevada and New Jersey. With our record of ongoing success in the tribal casinos, we're confident in the continued success of our wide-area progressive units as we now expand our market opportunity and begin to compete in the class 3 market against the best of the best in this category. Given our history of growing our installed base, our record daily win per unit, our growing ship share per unit sales and our pipeline of new products under development, I am confident that we have the right elements in place to continue to propel the ongoing growth of our games business.

As I turn now to our FinTech business, you will note that we have changed the naming conventions of our revenue line items within the FinTech segment to better represent how our business has evolved. The cash access services line has become financial access services, reflecting the wide range of both cash and cashless integrated financial service solutions. Within the key performance indicators of financial access services, ATM has been renamed funds dispensed to reflect the actual cash dispensing transactions occurring from all of our devices. In addition, cash advances has become funds advanced, as it will include both cash and cashless operations completed in a self-service fashion, either through our digital wallet, a self-service kiosk or completed by our customers' personnel at a casino cage.

While years ago, our original business may have been principally based on supplying ATM machines into customers' casinos, the majority of our business today is facilitating stating financial transactions that provide more than just standalone ATM type operations. As we continue to evolve our digital solutions, the power of patrons performing their own enhanced movement of value into, around and back out of the gaming ecosystem in a self-service environment will further cement this definition of our products and services.

We've also replaced information services and other with software and other. Now that revenues from loyalty software sales and subscriptions and from our reg tech software for regulatory compliance comprised the largest component of revenue within this line item, we believe this change is more descriptive of the revenues generated. And finally, hardware replaces equipment and is made up of revenue from the sale of our kiosks together with those additional efficiency-enhancing hardware pieces that we sell for use in casino operations.

Turning to financial access services, revenue grew 25% sequentially over the fourth quarter and we're only about 5% below the record revenue of the 2019 first quarter. We are seeing increased casino activity, best reflected in the sequential rise in our financial access revenues each month during the first quarter. These increases resulted in our March revenues turning positive on a same-store basis when compared to the same period in 2019.

Now since the pandemic halted our 21-quarter streak of consecutive same-store revenue increases, it is particularly gratifying to have same-store sales increase over 2019 levels. With about 5% of the U.S. casinos currently closed, essentially all Canadian casinos still closed, and international travel to destination markets like Las Vegas virtually nonexistent, we expect to benefit from further recovery in addition to the underlying growth trends that are driven by new customer contracts.

Our growth in software and other revenue has also been tremendous. Our revenues have doubled from the 2019 first quarter. This reflects both our entry into the loyalty products category through acquisition and the incremental organic growth since we acquired those assets. Like financial access services, our revenue from software, reg tech products and annual software maintenance and support services have a large recurring revenue component. The recurring revenue portion represented 72% of software and other revenues in the first quarter, while initial or other onetime sales accounted for 28% of Q1 revenue. With several new loyalty and reg tech-related products under development, we are focused on continuing to expand this category to generate long-term growth.

Now let me turn the call over to Randy for some additional color.

Thank you, Mike, and hello, everyone. We hope you are all doing well. While our core recurring business operations are providing strong growth and profitability in today's environment, we continue to invest to ensure the sustainability of our growth. Our R&D investments are focused on promoting internal development and product enhancements that will drive ongoing longer-term organic growth. As the year progresses and business volumes continue to recover, we also expect that operating expenses will begin to increase as normal business activities resume and we incur more of the marketing and other costs that support our customer relationships. However, I'll highlight that as a percentage of total revenue, we do expect total expenses will trend lower than pre-pandemic levels, thus supporting some margin improvement as compared to prior years.

Now I would like to share with you some more details about 2 of our exciting growth opportunities for the future that leverage our strengths. First is our growing digital business that supplies slot content to iGaming operators. Revenues more than doubled in the first quarter on a year over year basis and were up 50% sequentially from the 2020 fourth quarter. The major factor of that growth was due to Michigan iGaming going live midway through January and then ramping up. When Michigan opened, we went live with 6 of the 9 operators. Today, we are live with 7 of 11 and preparing to go live with several others. Our digital growth is also powered by expanding the number of online operators to whom we provide slot content in previously open markets such as New Jersey, Pennsylvania and Canada. We recently expanded into British Columbia and Manitoba through an agreement with the British Columbia Lottery Corporation.

Another growth driver comes through expanding the number of games available to iGaming operators. We can draw upon our large library of successful land-based casino games while also leveraging our development of new land-based player popular games by adapting them for the online world. One added focus is creating customized games for our operators, which strengthens our relationship with some of the country's fastest-growing I-game operators.

Another very exciting opportunity is the significant interest in the commercial and travel casino operators in our cashless, enterprise-wide mobile wallet, our digital CashClub Wallet. Importantly, for operators, our CashClub Wallet platform is fully customizable to meet their different needs and can be white labeled to carry each casino's own branding. With our flexible system, operators can choose the level of experience they want to offer their patrons and the speed at which they move forward. We believe we are at the very beginning of a significant transition that will enable our customer to deliver an integrated digital cashless experience alongside existing cash solutions.

CashClub Wallet's advanced enterprise-wide platform integrates operators’ investments in infrastructure with our casino banking-as-a-service capabilities, allowing our digital wallet to act as a central hub for payments across the entire breadth of the casino enterprise, from the gaming floor to food and beverage, to retail and to hotel and resort amenities. Importantly, our unique strengths enable us to provide a casino operator with a single wallet, where the funds can be used across their multiple properties and across multiple jurisdictions.

For operators with online offerings, such as iGaming and sports wagering, CashClub Wallet also provides funding to bridge a patron's online experience with their land-based experience. Our solution complements our financial access services and it's fully integrated with our loyalty and reg tech offerings. It is the next step towards offering convenience for players and significant cost efficiencies for operators. CashClub Wallet fits seamlessly into casinos’ existing back-of-house processes and controls and meets the needs of the relevant banking and other financial regulators at the state and federal level as well as the extensive need of gaming regulators.

In addition to the cost efficiencies that come from reducing the need for cash, operators also see significant advantages in the data and intelligence gathered on their patrons spending across the casino property through our wallet. It provides operators with the opportunity to extend their relationship and connection time with their guests through integration with our player loyalty applications.

We believe we are truly at the forefront of the convergence of financial access services and loyalty in the digital casino world. With the stringent compliance requirements that we meet and our history of player funding capabilities, we offer the industry a truly differentiated high-value solution. We are seeing substantial interest by operators, and the initial response from casino's patrons has been positive. Based upon the initial transaction activity from the casino's patrons, our expectation remains that cashless transactions will increase the total number of transactions performed by patrons, providing another growth driver for Everi in the years ahead.

However, given the early stage of deployment, we are not yet at a point where it's appropriate to share specific data and project future growth potential. As our cashless solutions go live at additional casinos in the upcoming months and the user base expands, we expect to share further insights about these trends with you.

Now I'd like to turn the call over to Mark to share his perspective on our free cash flow and outlook. Mark?

Thanks, Randy. Before discussing our outlook, I'd like to provide some thoughts on a significant increase in our free cash flow, and how we're looking at our capital structure. Our free cash flow more than doubled compared to the year ago period. That was essentially equal to the free cash we generated in all of 2019. This growth represents a significant flow-through of the record adjusted EBITDA we earned in the first quarter. The reported free cash flow also benefited from a more modest level of capital expenditures in the quarter. This free cash improves our balance sheet by further bolstering our near-term liquidity. The uncertainty surrounding the recovery of the macroeconomic environment and our industry continues to diminish, this added liquidity may ultimately position us to reduce our leverage more quickly than we had originally expected.

While the pandemic may have slowed our momentum towards reducing leverage in 2020, it did not change our goal of reducing total borrowings and achieving lower net leverage ratio. We recognize there is currently a favorable environment surrounding the debt and capital markets. As the year progresses, and assuming the current level of stability in our operations continues, you should expect that we would look to take advantage of any attractive options that preserve or enhance our liquidity, strengthen our overall balance sheet, and optimize our capital structure prospectively.

In terms of modeling, as you think about the components of free cash flow for the rest of the year, with more than 450 million of accumulated federal operating loss carryforwards, we do not expect to pay meaningful cash taxes this year and for several years to come.

Regarding capital expenditures, I believe the run rate of capital expenditures in the first quarter could represent the quarterly low watermark in 2021. To date, we've managed our capital spending to match our customers recovery. As further recovery continues, I would expect to see an increase in the quarterly spend as we undertake and complete certain previously delayed or deferred capital projects. But I would not foresee annual expenditures meaningfully creeping above the levels we spent in 2019.

It's important to note that in the event that the recovery slows or stalls, we expect to have the ability to pull back on our spending to match the level of free cash flow our businesses generate. As you review your models for free cash flow for the second quarter and for the full year, I would remind everyone that we still have 2 noteworthy cash expenditures that we expect will occur in the second quarter. These are not part of our free cash flow computation. This includes up to $10 million for the contingent consideration earned by the sellers of the loyalty assets from Atrient and the $5 million final installment payment of the purchase price related to the assets acquired from NDT.

Turning to our outlook for adjusted EBITDA. Throughout the first quarter, casino activity has clearly increased. To frame out the puts and takes of the macro revenue drivers, our first quarter results likely benefited from rising vaccination rates across the U.S., limitations on casino capacity easing, and casino activity picking up due to pent-up demand. As a result, our first quarter results likely receded added benefit that we might not continue to see as competition increases for consumers’ discretionary dollars from the reopening of other entertainment options throughout the year.

With some customers still impacted by some degree of capacity restrictions, or like those in Canada and other international markets where the casinos are still closed, we do believe there is still an opportunity for further recovery. However, in our discussions with customers, many still remain in capital conservation mode. Their capital spending plans are focused on the next 60 to 90 days instead of through year-end. Given this wide range of variable revenue drivers and our outlook that operating expenses will begin to increase throughout the year as operations continue to return to more normalized levels, we believe the second quarter adjusted EBITDA will remain well ahead of the second quarter of 2019. It could be comparable to slightly below our first quarter 2021 performance.

We expect free cash flow will remain strong. But with our semi-annual interest payments on our notes due in June and an expectation for increasing capital expenditures, this should be less than the record $43.5 million generated in the first quarter. We do not expect a further significant ramp in quarterly performance in the back half of the year, without a corresponding and sustained improvement in the overall gaming industry. With competing choices for entertainment dollars becoming more available, we believe a more gradual industry coverage is likely, as more of the population becomes vaccinated, and some of the typical demographics that make up the larger portion of our customers' best players return to their favorite casinos.

With that being said and barring any further macro setbacks, we would expect our adjusted EBITDA in the second half of the year will exceed the then record results we reported in the second half of 2019.

With that, I'll turn the call back to the operator for questions.

(Operator Instructions) The first question comes from David Bain from B. Riley.

Congratulations on a very strong quarter, clearly. Mike or Darren, when you talk TITO rollout ticket in, ticket out, it kind of happened relatively fast. When you compare the technology benefits that Randy outlined with the digital wallet and the CapEx at casino needs to make to -- needs to spend to roll this out relative to TITO. Is there any reason to believe that proliferation shouldn't at least match that transformation?

Well, let me -- I'll turn it over to Darren, David, but let me just address the question of commercial jurisdictions, in particular. There tends to be -- I'm sorry. There tends to be, in tribal jurisdictions, the casino operators are working with us and with the regulators on a fairly regular basis on all of the different technology that we introduce. That's not necessarily the case in commercial jurisdictions where oftentimes you'll find different vendors offering multiple different technology into the regulatory system, and you're subject to their ability to both test and time their agendas, so that you can get approval. So we have been looking for approvals in multiple commercial jurisdictions. We'll move forward with that, but I would still expect the rollout to be somewhat faster in tribal jurisdictions than commercial at this point in time. And then, Darren, do you want to address that versus quick ticket?

Well, for TITO, I guess you're referencing when TITO got launched in gaming, and remember I was probably still in diapers when that happened, but as my gaming friend Dean says, that actually took years, right? But it kind of felt like it happened overnight. And so I seem kind of the pivot to digital and cash flows to be in -- again, I think I said this before, somewhat revolutionary in some components and somewhat evolutionary in other components. So we're going at the pace of our customers and the adoption of their patrons. So again, I think I feel good about sort of the early data that we have with our rollouts, but I think it's in terms of the pace, it's really at the operators and what they need to do operationally to bring the technology in, and as Mike said, certainly jurisdictionally between commercial and tribal, there are some differences in terms of how that will roll out.

But I think as I've said in previous calls, certainly regulators in the different jurisdictions are -- have been looking at this. We've been engaged with them in terms of educating about what it is, what it looks like, and what the opportunity is, and I think everybody feels good that cashless and a digital pivot is where they want to go. So we're really at the pace of our customers and it’s -- I would say the pace is very high in general for us. We have a lot of projects in flight with it.

Okay, fantastic. And then my second question would be on the game side. I mean, clearly, I think when we're finished with all the reports from competitors, we'll see some ship share gains, and I don't know if that's 10% or what, but is there any reason to think that that would not be sustainable as volume returns to normalcy in terms of buying activity? Or is there an added dynamic, I guess, to consider?

Yes, I don't think there's any reason not to believe that we would be able to sustain whatever gains we've been able to make in ship share as the capital budgets are finalized and released in our customer's operations. So I don’t -- yes, I mean there is nothing that I see that is systemic that would stop us from realizing those gains and continuing them. Dean, is there anything you can think of?

Well, to me, it's proportional. If the customers were buying X amount of games and then it becomes X plus, we should be able to hold our ship share percentage if we do our jobs and continue to provide a compelling product that we've been providing.

Our next question comes from Jeff Stantial from Stifel.

I just want to start on leadership succession plans, and with that also formerly say, congratulations, Mike, on being appointed Chairman of the Board. I think everyone on this call is truly relieved to see you staying deeply involved, even after you do hand the reins off here. But just first and foremost, congratulations.

Thank you.

And on that note, I wanted to get your updated thoughts here on the succession plans, just what type of background or experience is the Board looking for in their ideal candidate, and just any other color on the search that you can provide would be appreciated.

Yes. I'm a little reticent to lay out the necessary elements of a resume to get in front of the Board, but let me address -- the Board -- well, no, but let me -- I'll try and get you to where you're trying to go, Jeff, if that's possible. The Board has been looking at succession planning now for well over 2 years for the CEO position. And that's been an ongoing review. They've narrowed the field somewhat to both internal and external candidates that they are well aware of, and I would assume we'll be getting more deeply involved in the selection process here over the next several months. So there can be an easy handoff, but I think first and foremost, they're looking for C-suite experience in companies that are in one or the other, or both of our businesses, and have some understanding certainly of the gaming industry. Obviously, a senior executive in this kind of a business has to be prepared for all of the licensing and regulatory requirements that come with the position.

And for somebody coming from outside the gaming or the FinTech in gaming universe, that's often a very surprising reality to be hit with, to suddenly be asked to fill out, hundreds upon hundreds of licensing applications and basically just rode in front of regulators financially and show them everything that you've done for years. And that oftentimes limits the pool of candidates. So I would say we have had an excellent pool of candidates that the Board has been looking at, and I think that they will narrow it and come to a choice here fairly quickly.

Okay, great. That's really helpful, and I appreciate you offering color in the context of some of the limitations of what you are allowed to say. Switching gears here over to the CashClub Wallet, as you meet with new potential customers for the solution, I'm just curious how frequently do your discussion also include the prospect of layering the wallet into the customer's online offering as well? I guess I'm just trying to get a sense for how many operators with omnichannel aspirations are starting off with more of a 2-pronged approach for the wallet for the time being, online versus brick and mortar, versus how many are striving to integrate the 2 right off the bat?

Darren, why don't you take that? Was Darren on mute?

Darren on mute. So maybe I'll jump in. I would say it's really customer by customer. If they have an online presence, I think we are -- that's one of the first thing that comes out in this discussion from the sales side. So -- and I think customers are very interested in it. They do want a product that will allow their bricks and mortar to transfer over to online. So I think it's hard for me to say how that happens each time, but I would say there's not a meeting that we don't have when we're talking whether they're renewing their cash access or gains that our sales force is not in front of them and talking about the wallet, because I think it's very much at the forefront of the discussions. And they look at all different pieces and I think it goes back to what Darren was talking about. It's really what the casino wants to do. Some of them may not want that just yet. They want to just only show it to VIPs, et cetera.

And with that, I'll let Darren kick in.

Yes, I was talking on mute there, Randy, sorry. So I would say to Randy's point, yes, it's a discussion that is key to sort of the overall, I would say, digital wallet strategy, cash flow strategy that operators have from a brick and mortar standpoint that they do want to connect. Again, we talk about our wallet being multi-jurisdictional, multi-property. But it's also multi-platform. So they do definitely want to connect the brick and mortar to the online present, whether that be through sports or whether that be iGaming or whatever else their online presence might be.

So yes, it's part of the discussion and yes, the operators are thinking very strategically about how to tie that together because, again, having that full view of their player and their patron and that engagement across multiple platforms is a real critical part of their overall strategies as they move -- as they pivot to digital.

Our next question comes from David Katz from Jefferies.

Congrats on a pretty strong quarter. I wanted to go back to the digital wallet and if you could discuss in qualitative terms or some structural way how we should think about how you get paid for that, right? And how you sort of earn off of it. And if there is any sort of upfront installation cost or anything on your side that you can paint us a picture of how that works.

David, I'll start and I'll turn it over to Darren, but it's kind of -- I know we keep saying this, but customer by customer. But clearly, there's a transactional piece to it because, again, it's consistent with our cash access, which -- it's a transactional fee, and there are other fees in the digital environment that we can also take advantage of, as in pushing money back to someone's account. Obviously, there's other costs that are incurred as far as developing it. Because again, as we talked about, these are very specific customer by customer, and therefore there's development cost, and then there is a cost with software and maintenance, but Darren can go on a little bit more, but again, it's hard to give you very specific about how it is because each one will be different, in my view.

Yes. I think maybe, David, easy way to think of it is, obviously, today our revenues are transactional, right? So there's transactional fees that are garnered through the transactions that we support, whether that be the cash dispensing transactions or the other cash advance transactions. So as we move towards digital, right, this to us is just another transaction type that's got transaction fees associated with it. So it does come with obviously a premium from that standpoint, but also we've got software associated -- sort of software modules associated with it and annualized support. But remember also we're connecting this into other components of the FinTech business and other products. So it's just not a one-trick pony, okay? This is integrated into loyalty. It's integrated to compliance products. So a lot of that kind of goes along into these discussions. So it's just not binary in terms of, "Oh, you're now transacting through a digital wallet." No, no, no. There's other components that are contributing to the revenue opportunity for us.

So we see increased transaction volume as we pivot towards digital wallets. And then as Randy mentioned, we are introducing new transaction types associated with the wallet. So we expect that we monetize those as well. So right now we've got transaction fee associated with funds coming in as we bring money into the operator, but we also are giving the opportunity for players to bring money out of the ecosystem and put it back into their bank accounts if they've had it in their wallet. And so there's fees associated with that also. So greater transaction volume and new transaction types that we support and then other products and services that we'll be able to include as a part of the service that we provide as it relates to our wallet, including loyalty and compliance.

Got it. And just to be clear, I think part of what I was getting at is there isn't some sort of upfront lump cost on your side that if we had 15 customers adopt this next quarter, hypothetically, right?

Yes. So in terms of what we would charge to our customer, there's potentially some customized development that maybe could come into play here. But obviously, we do this case by case with our customers. So nothing -- again, our infrastructure is kind of built out. It's more of the customization that we've got to do now for our customers.

Perfect. And I wanted to just ask one other detail. Mark, the term loan, the $125 million that was put in place second quarter of 2020. Can you just help us recall that? Becomes callable in 2 years, was it?

Yes. You've got make whole interest. You're paying the interest through April of 2022, and then there's a soft call on there for 6 months thereafter for 1%.

Our next question comes from Barry Jonas from Truist Securities.

I wanted to start with the games segment. Daily win per unit on the participation side was well ahead of where we were thinking. Can you maybe give a little more color what's driving that growth? And then also as we think about the cadence of results throughout this year, are those levels sustainable? Just any thoughts on seasonality also, it'd be helpful.

Yes, let me give you just a couple of quick thoughts and then I'll turn it to Dean to particularly tell you why it's sustainable. But Barry, remember the base has been growing throughout 2020, and it has been a larger premium growth than there has been in just the standard games. You should expect that our premium games are played by more customers and those games deserve a greater fee, whether it's a flat fee or whether it's a participation fee because of the play that it generates. So that's a portion of that. And as long as we continue to grow our base and we continue to grow our premium games as the faster portion of the growth of that base, I personally think that that will continue. But let me turn it over to Dean and have him give you the inside baseball answer.

I don't know if I could top what you just put out there, Mike. When your premium installed base grows that substantially over the last couple of years and you continue to perform in a variety of product categories that we have out there, to me it's sustainable. We got 5 different product categories in the premium sector between Flex Fusion or Skyline Revolve or DCX or Arena or even Renegade at this point. And we just launched a latest theme, Press Your Luck. It's done really, really well. We have a lot of areas to turn to that can continue to sustainability, so I'm very comfortable with our product breadth in terms of covering each of those categories. Obviously, you just got to continue to hit the dates on roll out the products that we expect to roll out and we should be looking pretty good.

Great. And then as a follow-up question, just shifting over to FinTech, any updated thoughts on the kiosk replacement cycle in general and timing? I just wonder, does that get tied up with the same capital preservation commentary related to the game segments?

Yes, it really does.

It does. Go ahead, Mike.

And you're going to hear the same thing from Randy.

I was just saying that these kiosks aren't the core revenue-generating products either. So when customers have to make a choice between replacing a revenue-generating piece of capital expenditure, like a game on the floor or something that works fine right now, they're just getting a little longer in the tooth that supports our operations is critical. I don't want to diminish its importance. They're still making those choices today towards more revenue-focused stuff as opposed to cost containment or operating efficiency kind of devices.

Yes. I think we've had some bright spots in terms of casino expansions and our new casino openings that we've had success with. But I still think there's a little bit of a capital constraint that we're seeing. And again, maybe that turns in the second half, but I don't know if we have a tremendous amount of foresight. We're still kind of, again, queuing off the operators and how they're viewing the second half, which is not totally clear. But certainly, I think there's still some capital constraints there.

Our next question comes from John Davis from Raymond James.

Maybe Mark, I'll start on the margins. If I just look versus 2019, I think you're up 400 to 500 basis points. You guys made some points through the pandemic that you thought your structural margins could be a little bit higher. But I'm guessing kind of 400 to 500 basis points is probably the upper end of that range. So maybe just talk a little bit about how you think margins will kind of trend through the rest of the year? I would expect you would continue to invest for growth. But just any commentary there, the 54% was quite a bit better than expected this quarter.

Yes. I think we've talked about this on the prior calls and really the biggest contributor here is the mix shift, these higher-margin recurring revenue streams that have come back strong and come back most quickly are certainly contributing to the improved margin that you're seeing on a quarterly basis. It's capital sales that our customers aren't buying as much equipment right now and we're exhibiting record revenue in things like gaming operations, where we're seeing growth, that all flows through to the bottom line and results into higher margin. I think our belief is capital still stays constrained as we continue through '21, and you start getting into '22, it starts getting back to the more normalized levels. But the higher recurring revenue base that we're generating today and that keeps being added to it should keep those margins probably higher in terms of go forward or I'll call it normalized levels once we get past all of the pandemic periods.

Okay, but it’s sustainably higher, call it 200, 300 basis points margins versus pre-pandemic on normalized basis, doesn't seem out of the realm of reality. And then quickly, obviously, Mark, I heard your comments in the prepared remarks about leverage, but organically here, once you lap 2Q given the strong performance in 1Q and what you guys have alluded to in 2Q, by my math, it’ll kind of delever organically down to mid-3s. So just curious, you talked about reducing leverage. Like how do you guys think about steady-state leverage and where you're comfortable getting to? And can you just get there organically over the next several quarters? Just curious how you think about actual leverage targets and where you guys would like to operate on a normalized basis?

Sure. We've talked about that. We definitely -- pre-pandemic wanted to be below 4x. It really had to go closer to 3x for overall total leverage. We felt that was a good comfortable level that allowed us flexibility if we needed to look at other things organically -- internally or externally to -- from acquisitions that gave us maximum flexibility on that front. To your point, as earnings grow, clearly, that's one way to deal with the leverage ratio. The other way is paying down debt and to the extent we can afford to do that, it may make sense to do that. The troubling piece right now on the balance sheet is we have the incremental term loan that's at L plus 1050. I clearly wouldn't want to leave that on the balance sheet. If the margins there -- the EBITDA is improving and we're in a better position, we could probably at worst replace that with something better at some point when the time makes sense.

Okay. And then just on that front, remind us, I think your step-down in make-whole for the 7.5% bonds is in December. I just want to make sure I have that right.

That's correct. Every December. So we're at -- there's a premium about -- just under 4% now, and it steps down to just under 2% in December.

And then, I don't know if this is for Randy, Mike or Mark, I guess any of you guys can take this. If I just look, I appreciate that 1Q was significantly better than I think everyone's wildest dreams, at least where we sat a couple of months ago when you guys reported. But as we go into 2Q, historically, you've seen kind of a 3% to 5% step up sequentially, you have more vaccinations. I appreciate that maybe that's more competition for that entertainment dollar or want to talk about the puts and takes and why you guys think that it could be kind of flat to slightly down? I appreciate the conservatism, but just trying to make sure that I'm catching everything is sort of comp issues or any kind of pull forward you had in 1Q. Just maybe to puts and takes as we go from 1Q to 2Q.

John, this is Mike, and I'll let Randy and Mark chime in if they want to. I would just say that you really are just hearing our conservativism. We don't want to get ahead of our skis here. I can dream pretty wild and maybe in my wildest dreams I thought we might be here, but I certainly didn't expect it. And we're trying to talk about expectations. And since we haven't got clarity yet from our customers on exactly what their budgets are going to be on the capital expenditure side, and even where they think their casino floor business is going to be in the second half of the year, directionally they believe it's going to be higher. And we agree with that, but how high is that? Does it grow to the sky? I have some doubts.

So I think you're hearing more than anything else just us being careful that we don't get ahead of our customers and the rest of the industry. And always reserving at the same time, the possibility of additional shutdowns in certain states. I mean there are still casinos that have not yet reopened. There may be casinos as we see this virus spike here and there that may have to shut for a while. And so we're just trying to be cautious, I think, more than anything else. But I will let Randy or Mark give you their thoughts.

Hey, look, John, I think, again, too, what we've seen is just in our own internal data as we started in the month of April compared to March. March was just an extremely strong month for us. And what we've seen is while April is still a positive month for us, as we go through there and we haven't finished the close process, it wasn't as strong as March. So it's hard for us to tell just how much settling, if you will, in terms of the revenue there is, that we should be thinking about. To Mike's point, we're uncertain on the revenue. There's still lack of visibility there.

But we talked about in the prepared remarks that we also know that if our customers are coming back to normal themselves, our personnel are able to visit the casinos now and get in there more. So just some of our operating expenses naturally are going back and rising, where customers are having visitation, so travel costs are up. There’s marketing expenses. Things like gaming shows are starting to come back on and we're starting to attend these things again. As you get in the back half of the year, G2E is going to happen again, and there's a big cost for us in the industry. So operating expenses are rising, we're uncertain on the revenue side of things. So to Mike's point, I think we're trying to be measured in suggesting, look, I think Q1 was really strong, but there's opportunities here, where with rising that expenses -- slightly rising expenses may be a little softening on the revenue. We're still positive, but it just might not (inaudible).

Yes, John, I hope you didn't miss the fact that we did say that we're going to beat 2019.

Well, and John, just so you know, I totally disagree with Mark and Mike to start there because you know how aggressive I am. So look, I think you were pointing more to Q2, and I think we said comparable. And so, look, is there upside? Yes, I think there is upside in Q2, but I think, to Mike's point, we're just trying to say, look, we want to be, I guess you can call it conservative, but I think it's reasonable, which says, look, Q1 was more than anybody else thought and that's us included. And to Mark's point, things are -- we're just going to see how April, May and June come out. But our initial thought on Q2 is it's comparable. And to have a comparable Q2 to Q1, I mean, that's going to be a significant beat on second quarter of 2019. When you hit the back half of the year, that's where there's just more uncertainty. And so I don't think we're, at this point, feel good -- and I say feel good, but we're not ready to really give anything more than, "Hey, we feel we're going to beat 2019 numbers." The real question is, how much? So I think that's why I disagree with Mike and Mark completely. So there you go.

Well, if conservative range and you think there's upside, take it to the bank. So really quickly, Canada -- just remind us, obviously, that's pretty much completely shut down at this point. Can you remind us, if you go back to '19 or something like what percentage of revenue or EBITDA Canada was? Because obviously that will come back at some point, but is basically 0 at this point.

We haven't provided that kind of level of depth, but it's not a -- I'll call it, it's not a significant enough sub that we -- or division that we would carve it out from a concentration risk in the financial. So you can venture to say it's probably less than 10% of our total volume, but it still contributes. So I don't want to diminish that it’s importance to us.

And it's going to contribute more in the future because of some contracts that we're now going through with various provinces.

It's just hard to put a number on that one, John.

Our next question comes from Chad Beynon from Macquarie.

Congrats on the great start to the year. Just one for me, you guys have covered a lot of ground, and I guess this is probably in your 2021 expectations, but just wanted to drill a little bit more into the commercial gaming WAP opportunity. You mentioned that the regulators just approved your WAP links in Nevada and New Jersey. You've obviously had a ton of success with the WAPs outside of these markets. Just trying to frame out, I guess, how quickly you can start to get some success here. And if you've already had some product or trial product with some of the operators in these markets, if they're well aware of the productivity that you're pushing out, just trying to understand how to think about this in the back half of the year and then beyond that.

Sure. Dean, do you want to add the color for that?

Sure. Do you want to start, or do you want me to just take it?

No, no, no, go ahead. I mean you -- you've been intimately involved in the process. I would probably devolve into the field trial only allowing us very limited games out, and the fact that we don't make any money from them. But other than that, I'll leave it to you.

Okay. So Chad, in the wide-area progressive side, it is what I would call a slow, methodical crawl. It's not a sprint to get to huge footprint, because it is the toughest model that's out there. And through our class 2 wide-area progressive and our class 2 tribal wide-area progressive, that's how we've ended up incrementing, right? If you look through its inception to now, we've just continuously raised on number of units to get to the certain point. I expect the same thing to happen on the commercial side. We've had really good success with the products that we field trialed. They're proven in the other links and have some sustainability. So I have tons of confidence there. I have tons of confidence in the road map that follows the current products that are out there. I'm not going to give you a number where I think we can get to, but I would say, expect it to reasonably ramp up and as we go throughout this calendar year, and I think the bigger part of 2022, Mike, would it be fair to say?

Yes, I think that's right.

Our next question comes from George Sutton from Craig-Hallum.

While I always hope to hear smoking hot wicked wheel out of the mouth of Randy Taylor, I never expect to hear the word, "aggressive." So that was entertaining. I also heard the word, "C BaaS" or the term "Casino banking-as-a-service," which is a term I had not heard used before. And I'm just curious if that was something Randy created and hopefully trademarked. But Dean -- I'm sorry, Darren, relative to your offering of the CashClub Wallet, I know one of your customers today initially served predominantly the whale customers. And I'm just curious, as we see, will customers migrate from one casino to another operator, and they're used to using these apps, just like everything consumers are doing today, using an app for one thing, if the other player doesn't have an app, they very quickly look old. And I'm wondering if you think that could really accelerate the progress for this offering?

What's interesting is kind of when we looked at the demographics of the utilization, again, it's still very early and the data is, again, it's not huge data sets. So I think it's interesting because it's fairly widespread. Obviously, as we expected, kind of some of the higher spend is in those kind of the 40, 50 plus age groups. I think there certainly is those aspects of digital and mobile technology that people like and are getting more and more used to. And so certainly there is, I would say, that competitive pressure and we're even hearing our customers sort of talk about, they want to make sure that they're leading and they want to get out ahead of this and start to really transform their business towards cashless opportunities for their patrons.

And again, it's kind of the interconnectivity that they want to start to bridge between kind of their land-based gaming operations, their land-based non-gaming retail, entertainment, hotel, food and beverage. And then, again, into the -- from land-based into the IGaming digital sort of sports betting and/or IGaming platform. So they're looking at this very strategically, and so I would say, yes, that's going to be a driver certainly from a competitive standpoint by having this technology that's certainly attractive to -- again, the demographics are fairly widespread, which is to me is great. I mean that just tells you that it’s not just -- they're just not worried about 20-year-olds or 30-year-olds adopting this technology, it's in the 40s and the 50s, and even the 60s. So I think it's really going to be about -- at the end of the day, I think the operators and the player experience that they're providing is what's going to get that adoption.

Speaking for the more mature part of the market, Dean, you did get called out earlier for your industry maturity, just to remind you of that. But as we look back just a couple of years to 2019, and we look at the market then and the market now. In 2019, you had an incredible breadth of offerings. You were starting to see some pressures on engineered costs, CapEx budgets were getting better. That was the environment then. Since a lot of this call is looking back to 2019 and comparing, can you talk about 2021 relative to that?

I think Mike hit it initially. In terms of our performance, our footprint in the premium side is that much more substantial. So the investments that we made in 2019 and '20, if we do our job from a product side of it and we continue to have offerings for each of the platforms that we're putting out in the field, one would say, you should be spending less money as you go forward. That's traditionally how it's supposed to work. And right now, currently, it's playing to that. We basically say set the foundation to be able to have this thing run. And when you have that kind of growth and you have success in each of the product categories, especially on the premium side, that helps get there. I don't know if I answered that. Did I miss that? Or is there something else? I know you're trying to compare 2021 to '19, but I can answer more if you want.

George, this is Randy. Are you talking more towards development costs? Because I would say, and what we're paying for, the development talent to produce, because I would say if that's where you're going, I think Dean's done a great job and the pandemic did -- terribly tough times, but we have kind of reset and believe we have the right people in place and we have the right staffing. And now still it is competition out there. We're seeing some of that, but I think Dean's done a great job there. And we've been able to ensure that the people that we need to continue the success we're having are on board. So right now we're feeling a little bit of pressure there, feeling a little bit of pressure from just -- there is a lot of need for those types of developers, but we feel really good where we're at right now. And I think Dean feels really good about hitting his road map and being able to continue to success.

This concludes the question-and-answer session. I would like to turn the conference back over to Randy Taylor for any closing remarks.

In closing, as we look to the year ahead, we expect to continue to maintain our focus on achieving sustainable growth, strengthening our balance sheet, and building long-term shareholder value. We look forward to providing you with an update on our next quarterly call. Thanks for joining us.

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.