Description

Executive Summary:

Everi Holdings Inc. (“Everi”, “EVRI”, or the “Company”) is a producer of gaming products and technology solutions for the casino and digital gaming industries. These products include mechanical and video game reels as well as financial services products such as funds dispensed, financial access transactions, and check warranty. Most notably, the Company is making a push into the digitization of the casino industry and is in a strong position to capture spend and grow its high quality FinTech portfolio.

Recent stock price decline doesn’t reflect the material progress the new management team has made on investing in the business, advancing product offerings, and gaining share in end markets. We believe recent share gains in the gaming segment are sustainable and could have more upside as 2023 is set to be the largest launch of new products in Company history. Furthermore, the legacy FinTech segment is a market leader and puts them in the top position to capture share of the digital wallet transition at casinos which is accretive earnings over time. With the balance sheet in a good position, EVRI will further grow its free cash flow which can be used for tuck-in acquisitions and returning capital to shareholders through repurchases.

Currently, EVRI trades at ~5.3x 2023E EBITDA with a 15% free cash flow yield. Given the above, it seems reasonable to place an 8.5x multiple on 2023E EBITDA of $390 million which would represent >90% upside to current share price.

Why Does the Opportunity Exist:

Recession Concerns & Stimulus Reversion:

Talking to sell-side analysts, the Company, and other investors, it seems like recession fears have played some impact in the recent decline in share price. This is certainly a concern as it can impact the levels of gambling at casinos and casino spending plans. However, we believe any impact from a recession would be short lived and similar to prior periods the recovery would be strong. In addition, Everi has a significant amount of exposure to Class II machines in tribal casinos which have historically been much more resilient vs. commercial locations that rely more on travelers. Further, Everi capital expenditures are highly correlated to orders so cash flow generation would stay strong even in a decline in earnings.

Another concern remains around the sustainability of daily win per unit. This has increased from $33 in 2019 to ~$40 per day in recent quarters. There certainly could be some reversion in this number but we believe a majority of the increase is sustainable due to better investment in games leading to higher usage on casino floors and also a higher share of premium units placed which typically generate $50-$60 per day.

Difficult Industry:

The gaming industry has historically been highly competitive with a few players dominating floor share. There are write-ups on EVRI from 2018 and 2019 by Surfer and aa123. These do a great job of summarizing how the industry has changed and why Everi has been able to capture a higher floor share. With a new management team taking over after a botched merger, they have been able to increase ship share from 2-3% to 9-10% in recent quarters. Many investors remain skeptical as casinos often place orders based on what’s working on the floor so this share can change quickly. We don’t discredit this concern, but would point that the material investment Everi has placed in its gaming operations should make them a much more consistent player throughout the cycle making recent floor share wins much more sustainable and hence a higher quality business than in the past.

Tax Loss Selling:

After the 3Q earnings, investors were somewhat disappointed by the Company not increasing the guide largely due to growth in R&D expenses. This caused a sell-off on the day of the print and a slow bleed in late November and all of December. We have heard there are multiple large holders selling for “exogenous reasons”. Based on this trend, it is likely that some portion of the performance in the last two months is explained by tax loss selling which could become a tailwind in 2023 as these buyers look to rebuild their position.

Investment Case:

Gaming Industry has Improved, and Floor Share is Sustainable:

As mentioned above, prior EVRI write-ups on VIC highlight the consolidation trends in the industry and the casino’s focus on diversifying floor share among suppliers. This has led to smaller players such as EVRI taking some share.

To give some context, in 2014 Global Cash Access did a merger with Multimedia Games (“MGAM”) where the FinTech business was combined with a gaming business. Given the legacy focus on FinTech side, MGAM struggled post-merger and was largely a mess until a new management team was put into place in 2016. Post the management change and focus on the gaming side, Everi has increased ship share from 2-3% to 9-10% in recent quarters. We believe this ship share is sustainable and could accelerate in 2023. The Company has made massive investments into R&D and studios to increase the quality of content. In 2023, total themes launched are expected to grow 38% from 2022 which was already a record year. This is highlighted by a big video launch in 2Q 2023 which will be 4 differentiated families of gaming content. With Everi historically being focused on mechanical games in tribal casinos, this is a new area of growth that isn’t being appreciated by the market.

As casino’s largely base buying decisions off what is working on the floor, this seems like a material catalyst for Everi as if successful, they should be able to maintain ship share and possibly even grow. Management has laid out a goal to get to 15% ship share which seems possible given some recent wins including 15% floor share at Boyd’s Sky River Casino in Sacramento. At an industry level 70K replacement units per year, each 1% gain represents 700 units annually for EVRI. 700 units * ~$18,000 per unit is $12.6mm of annual revenue at 40% gross profit margins.

Furthermore, recent public commentary from casinos point to higher spend in 2023 versus 2022. For reference, typical replacement cycle in the industry is 60k – 80k units per year. 2020 was 40k units, 2021 was ~57K units, and 2022 was 70k units meaning recent trends have been below historical averages and could lead to sustained/increased investment levels.

Given strong unit economics of both one-time sales and leased machines, this is a high-quality revenue base that could grow and provide incremental cash flow to return to shareholders and invest in the FinTech business.

FinTech Assets Underappreciated:

We think the FinTech assets are underappreciated by the market and as digitization of the casino industry occurs, the market will further appreciate the position Everi is in to capture spend. Payment’s business typically demand premium multiples and as earnings streams shift from historical cash access to digital wallets, the multiple could expand.

To level set, the historical FinTech business at Everi is dominated by cash access (ATM’s, Cash Advance, and Check Services) along with some information services such as compliance and credit information. This is complemented by hardware sales including ATMs and Kiosks. Industry estimates that Everi likely has between 50-70% share in these markets giving them a strong foundation. This is a strong revenue source with high margins and good cash flow generation.

What’s interesting here is the FinTech portfolio that Everi has built/acquired that is in position to capture the digitization of the casino industry. The industry as a whole can be slow to adapt and is relatively outdated due to regulation and a system that has always worked. Yet COVID provided an acceleration of adoption of the digitization and the industry should be entering the early stages of a multi-year transition to a cashless ecosystem.

Per our conversations, Everi is capturing a large amount of the spend that is going into the digitization. This is due to strong roots on financial access side, complimented by diverse product portfolio that can be developed to fit exact needs of the customer. For example, Everi can offer a one stop solution for the entire casino including cash access (licenses and regulation required), compliance and regulatory software, and a digital wallet that ties it all together. This allows the casinos to better track their players spend throughout the ecosystem – i.e. they can use their digital wallet at slots, gaming tables, restaurants, shows, and other spending when staying at the casino / resort. This can make it so they can better incentivize players with promotions to where they are spending the most money. Everi also has looked to expand beyond just the casino floor to include things such as sporting events to further capture spend.

This has other benefits to both the customer and the casino – it has a convenience factor to remove the friction from having to bring cash around. It can reduce costs of handling cash on the casino floor. It can make regulatory compliance easier.

So the question here is what happens to the legacy cash business as dollars shift to digital? The answer is it is net accretive to Everi given it is a premium service and the fees they charge per dollar are higher. For each dollar shifted from cash to digital, it is a 1:1 trade off. But, for each dollar shifted to digital Everi captures ~25bps of additional fees. To size out this opportunity, currently Everi handles about $40B of cash annually on casino floors. So, if you move 10% of that to digital at 25bps they would capture an additional $10 million of revenue at largely 100% margin. Over-time, a majority should switch to digital, so the capture is a matter of when. To put some potential value around it, if 40% of the dollars shift to digital in the next 3-4 years that would be ~$35-$40 million of EBITDA. At 10-12x multiple, that’s ~$4-$5 per share of value on a $14 stock.

What about insourcing? We think the Penn win is a perfect example of why most casinos will go with an outsourced product. Penn had talked about building their own wallet for a while but ultimately chose the Everi products across their 40 locations. This was due to complications with integration, regulatory aspects, and investment in resources needed to maintain the product. A few other large tribal casino wins highlight the early success of Everi.

Cross Selling & Other Opportunities:

There are a few other opportunities for Everi that we believe could become more material over time. The first is the ability to cross-sell. Relationships with casinos, especially tribal casinos, are important. Given the historical strength of the financial access side, we think that Everi could leverage those relationships to gain a higher floor share. This was not historically possible due to the low quality output from the gaming segment, but recent investments have made them much more competitive. Given the operating leverage on R&D spend, this could be incremental to margins as well. Similarly, on the legacy cash access side, Everi can cross-sell new digital products to be fully integrated on the operations.

Some other smaller growth opportunities include:

iGaming:

iGaming is a recent trend in the industry that has seen rapid growth, albeit off a small base. Everi has generated >$20mm of revenue from iGaming in the TTM. They have taken a slow approach here to see how it plays out but have seen strong results in recent quarters. What’s interesting about iGaming is that it allows Everi to take established game content and bring into the digital space. This leverages the investment in game titles and provides incremental revenue source. Management believes they have top of the line remote gaming server technology due to their patience in the industry and can compete and leverage the quickly growing library.

International:

Aristocrat is the gold standard in the gaming industry. A lot of their most successful games come from content developed in Australia. Interestingly, Everi in January of 2022 bought Atlas Gaming which is a gaming studio with 12 developers based out of Australia. They plan to double this count over time. They think they can develop a different type of game in this studio to leverage in the US to gain more floor share. Further, over time they plan to leverage Atlas and the US studios to begin to take some share in the Australian market. We give no credit to this growth but see it as possible over time.

Horse Racing:

Everi acquired a business called Intuicode Gaming in April of 2022 to make inroads into Horse Racing. Horse Racing is largely focused in states like Virginia and Kentucky with some recent developments in Wyoming and New Hampshire. The installed base in these locations is around 12,000 units and growing. Everi believes with the Intuicode acquisition they can start to gain share here. Given Everi’s current installed base is 17,735 units, even 10% share in horse racing markets is meaningful to recurring revenue. For reference, competitor PlayAGS has about 5,000 units placed in horse racing.

Strong Management:

CEO Randy Taylor took over for Michael Rumbolz as CEO in April of 2022 who moved to Executive Chairman. We believe Randy is a strong CEO who will be able to build upon recent success. He takes a conservative approach to capital allocation showing a balance between tuck-in M&A and share repurchases. At current prices, we wouldn’t be surprised if share repurchases accelerate in the coming quarters. 

Conclusion / Valuation:

In conclusion, we believe Everi has traded off for temporary reasons such as tax loss selling and macro concerns. This has led to a dislocation in share price that greatly underappreciates the growth story that Everi is in position to capture. As the Company continues to execute, we see the shares re-rating towards a fair value of $27.50 per share or greater than 90% upside.

The table below on the left side shows 2023 street EBITDA estimate ($390 million) at various multiples and also includes various downside/upside scenarios. The right side shows 2019 actual EBITDA levels and downside/upside scenarios. As you can see, even in a material reversion of earnings the stock is not overly expensive and provides strong downside protection.

We think an 8.5x EBITDA multiple is reasonable on 2023E EBITDA given growth optionality, quality of assets (74% recurring revenue), and cash flow generation. Furthermore, Everi likely is an attractive acquisition target for some larger players in the space.

Risks:

·         The gaming industry is tough and can often lead to big shifts in market share depending on which developers are having success on the floor. EVRI could revert share gains causing a loss of floor space and reversion in earnings.

·         Regulation – gambling is highly regulated and things could change on this front.

·         Competition from Sightline who is raising money on FinTech side, IGT announced mechanical machine.

·         Large M&A – management could look to purchase a larger business and lever the balance sheet. We see this as highly unlikely but remains a risk given history of this industry.

Catalyst

·         New gaming product launches in 2023 maintain ship share / grow ship share.

·         Casino industry remains resilient and shows minimal impact to earnings.

·         Further digital wallet wins show market leadership.

·         Cash flow generation and share repurchases.

·         Tax loss selling ends.