Description

We recommend purchasing shares of Everi (EVRI). We like Everi’s position as the dominant supplier of cash access products and related regulatory software offerings to casino operators, as well as its industry-leading portfolio of mechanical reel slot machines. Several factors have led to shares trading near multi-year lows, presenting a risk/reward opportunity we believe is heavily skewed to the upside.

Everi operates in two core segments:

Games: Everi manufactures/supplies slot machines for tribal and commercial casino operators and develops content for play on the physical machines as well as for digital iGaming platforms. Everi currently has ~60,000 total slot machines on casino floors (~6% floor share), of which ~17,600 operate under participation or fixed-lease arrangements; the rest are owned by the casino operators.

Everi has historically been a leading supplier of mechanical reel slot machines, and consistently ranks highly in the Eilers surveys. Mechanical slots make up roughly 15-20% of casino floors, but we estimate are probably closer to 50% of Everi’s total portfolio. Everi has been trying to increase its ship share in the video slot market, and this is the area they have been struggling with lately.

FinTech: Everi provides cash access products and related services/software to casino operators. This is not just an ATM business – there are software offerings for regulatory and compliance, player loyalty programs, as well as a cashless wallet offering (nascent but growing over time).

We will spend our time focusing on the games segment since that’s where the challenges have been. That said, we briefly highlight FinTech’s outstanding results: Revenue in 2017 of ~$190 million is projected to be ~$380 million in 2023, EBITDA has grown from ~$97 million to ~$155 million, while CapEx has increased by just $10-15 million, resulting in $100+ million of segment cash flow.

Games Segment – Brief History of Recent Events

From the beginning of 2017 through 2022, Everi’s growth was extremely impressive:

• The leased unit portfolio increased from ~13k to ~18k slot machines and win-per-day increased from $27 to $40 as Everi’s percentage of premium units on lease increased from 15% to 50%.
• iGaming as a category went from ~0 in 2017 to over $20 million of revenue in 2022.
• Slot machine sales grew from ~3,650 units in 2017 to ~7,200 in 2022, at an ASP of close to $19K.
• Segment EBITDA in total grew from $116 million in 2017 to $228 million in 2022.

Following this dramatic success, 2023 has presented several issues:

• Older leased units placed on the floor 5-6 years ago are underperforming, and Everi has lost some share – units will be down 2-3% YoY, and win-per-day has also declined by ~6%.
• Game sales are also down – Eilers is projecting a 15% decline YoY to 6,100 units sold in 2023.
• Segment revenue will likely be flat in 2023 vs. 2022, with EBITDA declining by low-single-digits.

There are two separate issues at play here:

Regarding older units underperforming, this is an issue in the video slot portfolio. Everi has acknowledged they waited too long before introducing a refreshed offering of replacement cabinets. Everi recently showcased several new cabinets at G2E along with many new game themes for 2024. The hope is these new machines will perform well, allowing Everi to maintain and ultimately continue to grow its share on the floor. That said, investors are not willing to give Everi credit for these new machines until they start seeing evidence of a turnaround.

On the game sales side, it’s evident over the last couple of years that Everi was earning more than its fair share of mechanical reel machine replacements. For many years both IGT and LNW had not developed good replacement cabinets, and Everi was probably replacing more than 60% of mechanical units annually vs. its floor share of ~25%. As both IGT and LNW now have a competitive offering, Everi is back to a more normalized 25-30% share of replacements. Therefore, we don’t view the decline in machine sales as a permanent issue, we believe it is a reset to a more appropriate base from which Everi can grow from moving forward.

Valuation

On a consolidated basis, Everi is trading for 5x EBITDA and 6-7x FCF on management’s 2023 guidance. Leverage is sub 2.5x. Sell-side estimates call for modest EBITDA growth in 2024, but even if you haircut EBITDA in 2024 by high-single-digits to account for continued weak performance Everi still trades at 5.5x EBITDA and 8x FCF.

On a SOTP basis, we believe the FinTech business deserves a multiple anywhere from 6-8x EBITDA, if not higher – this is not a capital-intensive business, it has a leading market share, and is still growing mid-to-high single digits. Further, we view Everi’s mechanical reel portfolio as attractive to other industry players – Aristocrat for example has yet to succeed in meaningfully penetrating this market even as they have achieved great success on the video side of the business. Everi’s video slot business is what’s challenged now, but we think it accounts for at most 30% of consolidated EBITDA – to the extent it deserves a lower multiple, we think it is overly punitive when you consider the overall valuation of Everi today.

Bear case: EBITDA in 2024 declines to ~$345-350 million from $374 million in 2023, and the multiple stays at 5x. In this scenario, after accounting for $100+ million of FCF (12% FCF yield) you have a year-end share price of $10.50 – where the stock is trading right now – which would also be 7.5x FCF.

Can the multiple drift lower? Anything is possible.

Can EBITDA decline further? That’s possible as well, although we believe the challenges are largely limited to the video part of the business – and Everi will throw off loads of FCF in the meantime.

Where we are getting at is, it’s difficult to see shares trading much lower than where they are today. Meanwhile, the upside comes if the business just begins to show signs of stabilization – in that scenario the multiple should re-rate higher. Even if you use $350 million of 2024 EBITDA but then apply a 6x EBITDA multiple as the business stabilizes, that results in a $15 share price, ~10x FCF – huge upside from today’s share price.

With the downside limited to ~0-10% and the upside of 40-50% (or more), for a fairly stable business with lots of FCF, we think Everi deserves strong consideration as an asymmetric opportunity. Management clearly believes this is the case as well, as they are in the midst of a very aggressive share repurchase program authorized in May of 2023, $180 million over 18 months. At that pace, EVRI will repurchase over 10% of its shares outstanding on an annual basis.

Catalyst

Signs of stabilization in Everi's leased portfolio

Anniversarying tough comps of for-sale mechanical reel cabinets