Everi Holdings Inc. (EVRI) on Q1 2021 Results - Earnings Call Transcript
Operator: Thank you for standing-by. This is the conference operator. Welcome to the Everi Holdings, Inc. First Quarter 2021 Earnings Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. I would now like to turn the conference over to Bill Pfund, Senior Vice President, Investor Relations. Please go ahead.
Bill Pfund: 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.
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.
Randy Taylor: Thank you, Mike. Hello, everyone. We hope you’re 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.
Mark Labay: Thanks, Randy. Before discussing our outlook, I’d like to provide some thoughts on the significant increase in our free cash flow and how we are 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 flow 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 flow improves our balance sheet by further bolstering our near term liquidity. As 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 net 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 water mark 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 two noteworthy cash expenditures that we expect will occur in the second quarter. These are not part of our cash flow – 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 MGT. 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’s 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 a 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 of 2021 performance. We expect free cash flow will remain strong, but with our semi-annual interest payments that are 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 the further significant ramp in quarterly performance, 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 recovery 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 then record results we report in the second half of 2019. With that I’ll turn the call back to the operator for questions.
Operator: Thank you. The first question comes from David Bain from B. Riley. Please go ahead.
David Bain: Great. Thank you. And congratulations on a very strong quarter clearly. Mike or Darren, when we 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 that casino needs to make to – or 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?
Mike Rumbolz: 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 – yes, 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 multiple 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 a quick ticket?
Darren Simmons: Well, for TITO, David, 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 see kind of the pivot to digital and cashless 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’ll 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 it – 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 so.
David Bain: 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, look into it?
Darren Simmons: Yes, I don’t think there’s any reason not to believe that it would, that we would be able to sustain whatever gains we’ve been able to make and ship share. As the capital budgets are finalized and released in our customer’s operations. So I don’t, yes. I mean, there’s 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.
Dean Ehrlich: Up to me, it’s just a proportional, if the customers are buying ex-amount of games, and then it becomes that class, we should be able to hold our ship share percentage here, if we do our jobs and continue to provide a compelling product that we’ve been providing.
David Bain: Okay, great. All right, thanks guys.
Operator: Our next question comes from Jeff Stantial from Stifel. Please go ahead.
Jeff Stantial: Great. Thanks, operator. Good afternoon, everyone. Thanks for taking our questions. I just want to start on leadership succession plans. And with that also, formally 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 start with first and foremost, congratulations.
Mike Rumbolz: Thank you.
Jeff Stantial: And on that note, I wanted to get your updated thoughts here on the succession plans. Just what’s like a background or experience is the Board looking for in their ideal candidate and just any other color on the search, you can provide, it would be appreciated.
Mike Rumbolz: 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 it. The board will know – but a little bit, 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 two 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 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 they – I mean, 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, they 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. So suddenly be asked to fill out, hundreds upon hundreds of licensing applications and basically just robe in front of regulators financially and show them everything that you’ve done for years. And that oftentimes limits the pool of candidates. 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.
Jeff Stantial: Okay, great. Thanks. 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 online offering as well? I guess I’m just trying to get a sense for how many operators with omni-channel aspirations are starting off with more of a two-pronged approach for the wallet for the time being, how my versus brick and mortar versus how many are striving to integrate the two right off the bat.
Mike Rumbolz: Well, Darren, why don’t you wanting to take that. Looks, Darren on mute.
Randy Taylor: 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 I think customers are very interested in. 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 about whether they’re renewing their cash access or games 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 VIP, et cetera. And with that, I’ll let Darren again.
Darren Simmons: 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, cashless strategy that 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 presence, whether that’d 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 real critical part of their overall strategies as they move – as they pivot to digital.
Jeff Stantial: Okay, great. Helpful. Thanks for all the color, everyone in and congrats on a really strong quarter.
Operator: Our next question comes from David Katz from Jefferies. Please go ahead.
David Katz: Good afternoon, everyone 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 sort of paint us a picture of how that works.
Randy Taylor: 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 says 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. But then 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’s a cost of the software and maintenance. But Darren can go in a little bit more, but it’s again, it’s hard to give you very specific about how it is because each one will be different in my view.
Darren Simmons: Yes. I think maybe David easy way to think of it is, obviously today, 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 transaction. 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 sort of 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 into compliance products. So a lot of that kind of goes along into these discussions, so it’s just not binary in terms of – you’re now transacting through a digital wallet. No, no, no, there’s others 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 fees associated with funds coming in as we bring money into the operator, but we also are going to be 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 fee associated with that also. So greater transaction volume and new transaction types that we support, and then other products and services that we will be able to include, as a part of the service that we provide as it relates to our wallet including loyalty and compliance.
David Katz: 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 costs on your side that, if we had 15 customers adopt this next quarter hypothetically, right?
Darren Simmons: 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.
David Katz: Perfect. And I wanted to just ask for 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 two years was it?
Mark Labay: 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 six months thereafter for 1%.
David Katz: Got it. Got it. Okay. Thank you very much.
Operator: Our next question comes from Barry Jonas from Truist Securities. Please go ahead.
Barry Jonas: Thank you. I want to start with a games segment daily win per unit on the participation side was well ahead of where we’re thinking. Can you maybe give a little more color at 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 thought from seasonality also would be helpful. Thanks.
Mike Rumbolz: 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 that those games deserve a greater fee, whether it’s a flat fee or whether it’s a participation fee because of the play if 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 will continue, but let me turn it over to Dean and have him give you the inside baseball answer.
Dean Ehrlich: I don’t know if I could top what you just put out there, Mike. When your premium install base grows that substantially over the last couple of years, and it continued to perform in a variety of product categories that we have out there, to me it’s sustainable. We’ve got five 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 latest theme of Press Your Luck is on really, really well. We have a lot of areas to turn to that that can continue the sustainability. So I’m very comfortable with our product threats in terms of covering each of those categories. Obviously, just got to continue to hit the dates as well as the products that we expect to rollout and we should be looking pretty good.
Barry Jonas: Great, 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 wondered, does that get tied up with the same capital preservation commentary related to the game segment?
Mike Rumbolz: Yes, it really does. I mean, it does. And you’re going to hear the same thing from Randy.
Randy Taylor: I was just saying these kiosks are core revenue generating products either, so when customers have to make a choice between replacing it 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 operation 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.
Darren Simmons: Yes, I think, did we’ve 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 some, 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, cuing off of the operators and how they’re viewing second half, which is not totally clear, but certainly, I think there’s still some capital constraints there.
Barry Jonas: All right. Great. Thanks everybody.
Operator: Our next question comes from John Davis from Raymond James. Please go ahead.
John Davis: Maybe Mark, I’ll start on the margins. If I just look versus 2019, I think they are up 400 to 500 basis points and you guys made some points through the pandemic that you thought 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 to continue to invest for growth. But just any commentary there, the 54% was quite a bit better than I expected this quarter.
Mark Labay: Yes. I think, we’ve talked about this on the prior calls and really there’s – 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. There’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 in a higher margin. I think our belief is, capital still stays constrained as we continue through 2021 and start getting into 2022, 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 them normalized levels once we get past all of the pandemic periods.
John Davis: Okay. Sustainably higher, call it 200 to 300 basis points, margins versus pre-pandemic on an normalized basis doesn’t seem out of the realm of reality.
Mark Labay: Yes.
John Davis: Okay. And then quickly, obviously Mark, I heard your comments in the prepared remarks about leverage, but organically here, in Q given the strong performance from 1Q and what you guys have alluded to in 2Q, by my math, they’ll kind of do level organically down to the mid 30. 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 kind of how you think about actual leverage targets and where you guys would like to operate on a normalized basis?
Mark Labay: Sure. We’ve talked about that. We definitely pre-pandemic wanted to be below 4 times, really had to go closer to 3 times 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 from acquisitions that gave us maximum flexibility on that front. To your point is earnings growth, 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 10.50%. I clearly wouldn’t want to leave that on the balance sheet. If the margins or 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.
John Davis: Okay. And then just on that front. I think you stepped down and they call for the 7.5% bond is in December. I just want to make sure I have that right?
Mark Labay: That’s correct. Every December. So we’re at – there’s a premium bond just under 4% now and it steps down to just under 2% in December.
John Davis: Okay. And then, I don’t know if this is for Randy, Mike or Mark, as you guys can take this. I might 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, add more vaccinations. I appreciate that maybe as some more competition entertainment or 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 very sort of comp issues or any kind of pull forwards you had in 1Q, just maybe the put some takes as we go from 1Q to 2Q?
Mike Rumbolz: Yes. John, this is Mike. And I’ll let Randy and Mark chime in if they want to. I would just say that we’re – 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, how high is that? I mean, 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, 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 awhile. And so we’re just trying to be cautious I think, more than anything else. But I’ll let Randy or Mark give you their thoughts.
Randy Taylor: Look, John, I think again, what we’ve seen in 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 as well, 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 that we should be thinking about. To Mike’s point, we were uncertain on the revenue. There’s still lack of visibility there, but we talked about in the prepared remarks that we also know that as 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. Customers are having visitation, so travel costs are up where 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 arising, 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 expenses, slightly rising expenses and may be a little softening on the revenue. You’re still positive, but it just might not...
Mike Rumbolz: Yes. John, I hope you didn’t miss the fact that we did say that we’re going to beat 2019.
Randy Taylor: John, I totally disagree with Mark and Mike because you how aggressive I am. Look, I think you were pointing more to Q2 and I think we said comparable. So look is there upside? Yes, I think there’s 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 up. 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, 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.
John Davis: Well, if conservative, Randy, there’s outside, take it to the bank. So last one for me very quickly. Just reminders, obviously that it’s pretty much completely shut down at this point? Can you remind us, like if you go back to 2019 or something like what percentage of revenue or EBITDA Canada was? Obviously that will come back at some point, but it was basically zero at this point.
Randy Taylor: 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 stuff that we – a 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 contributing. So I don’t want to diminish that it’s important to us.
Mike Rumbolz: And it’s going to contribute more in the future because of some contracts that we’re now going through with various provinces.
Mark Labay: It’s just hard to put a number on that one, John.
John Davis: That’s fine. Okay. All right, thanks guys.
Mark Labay: Thank you.
Operator: Our next question comes from Chad Beynon from Macquarie. Please go ahead.
Chad Beynon: Hi. Good afternoon, guys. Congrats on a great start to the year. Thanks for taking my question. Just one for me. I think 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. Thanks.
Mike Rumbolz: Sure. Dean, do you want to add the color for that?
Dean Ehrlich: Sure. Do you want to start, or do you want me to just take it?
Mike Rumbolz: No, no, go ahead. You’ve been intimately involved in the process. So 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.
Dean Ehrlich: 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 a huge footprint, because it is the toughest model that’s out there. And through our Class II wide area progressive and our Class III 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 our number of units to get to the certain point. I expect the same thing to happen on the commercial side. We’ve had a really good success with the products at field trial, they’re proven in the other links, and have some sustainability. So I have tons of confidence there, I got tons of confidence in the roadmap that follows the current products that are out there. I can’t – I’m not going to give you a number where I think we can get to, but I would say expect to reasonably ramp up, and as we go throughout this calendar year, and I think the bigger part of 2022, I think it would be fair to say.
Mike Rumbolz: Yes, I think that’s right.
Chad Beynon: Okay, perfect. Thanks guys. Nice quarter. Appreciate it.
Mike Rumbolz: Thanks, Chad.
Operator: Our next question comes from George Sutton from Craig-Hallum. Please go ahead.
George Sutton: Thank you. Well, I always hoped 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 words CBaaS or the term casino-banking-as-a-service, which is a term I have 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.
Darren Simmons: 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 datasets. 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 be – 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 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 certainly is attractive to – again, the demographics are fairly widespread, which is to me is great. 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.
George Sutton: Got you. Speaking for the more mature part of the market Dean, you did get called out earlier for your industry maturity, just sort of 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 engineer 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?
Dean Ehrlich: I think Mike shaded initially in terms of our performance, our footprint in the premium side is that much more substantial. So the investments that we’ve made in 2019 and 2020, 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. 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 the product – in each of the product categories, especially in the premium side, that helps get there. I don’t know if I answered. Did I miss that? Or is there something else? I know you’re trying to compare 2021 to 2019, but I can answer more if you want.
Randy Taylor: 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 were – 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, a little bit of pressure from just – there is a lot of need for those type of developers, but we feel really good where we’re at right now. And I think Dean feels really good about hitting his roadmap and being able to continue his success.
George Sutton: That’s very helpful. That answers my question. Thanks guys.
Mike Rumbolz: Thanks, George.
Operator: This concludes the question-and-answer session. I would like to turn the conference back over to Randy Taylor for any closing remarks.
Randy Taylor: 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.
Operator: This concludes today’s conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.
