PlayAGS, Inc. (NYSE:AGS) Q1 2023 Earnings Call Transcript May 13, 2023

Operator: Ladies and gentlemen, welcome to the PlayAGS Inc. Q1 2023 Earnings Conference Call. My name is Glenn, and I’ll be the operator for today’s call. [Operator Instructions] I will now hand you over to your host, Brad Boyer, SVP of Investor Relations to begin. Brad, please go ahead.

Brad Boyer : Thank you, operator, and good afternoon, everyone. Welcome to the PlayAGS Inc. First Quarter 2023 Earnings Conference Call. With me today are David Lopez, CEO; and Kimo Akiona, CFO. A slide presentation reviewing our key operational and financial highlights for the first quarter ended March 31, 2023, can be found on our Investor Relations website, investors.playags.com. On today’s call, we will provide an overview of our Q1 2023 financial performance and offer perspective on our current financial outlook for the business. This conference call will include the use of forward-looking statements. Any statement that refers to expectations, projections or other characterizations of future events, including financial projections or future market conditions, is a forward-looking statement based on assumptions today.

Actual results may differ materially from those expressed in these forward-looking statements, and we make no obligation to update our disclosures. For more information about factors that may cause our actual results to differ materially from our forward-looking statements, please refer to the earnings press release we issued today as well as risks described in our annual report on Form 10-K, particularly in the section of these documents titled Risk Factors. Our commentary today will also include non-GAAP financial measures. We believe the use of these non-GAAP financial measures provides an additional tool for investors to use in evaluating ongoing operating results and trends in our business. These measures should not be considered in isolation from or as a substitute for financial information prepared in accordance with GAAP.

Reconciliations between GAAP and non-GAAP metrics for our reported results can be found in our earnings release issued today. Please refer to our filings with the SEC for more information. With that, I would like to turn the call over to our CEO, David Lopez.

David Lopez : Thanks, Brad, and good afternoon, everyone. I would like to start off today’s call by highlighting 5 of our most noteworthy accomplishments in the first quarter. First, total revenues increased 14% year-over-year to a company record $83 million, with growth achieved across all 3 segments of our business. Revenues have now increased sequentially for 9 consecutive quarters, supported by a consistent product and operating momentum within the business. Second, adjusted EBITDA approved to a new first quarter record of $36.5 million, up over 11% versus the prior year and ahead of Q1 2019 levels. Third, domestic EGM recurring revenue increased 10% year-over-year to a record $47.7 million, nicely exceeding the 6% to 7% average rate of growth in market-wide gross gaming revenue.

Our domestic recur business has now set revenue records in 3 of the past 4 quarters. Fourth, global EGM sales topped 1,100 units for the second consecutive quarter, up over 15% versus the prior year and nearly 10% ahead of Q1 2019. Based on the latest Eilers data, we believe our unit sales growth outpaced the level of growth witnessed in the broader sales market during the first quarter. Finally, Table products revenue increased by nearly 20% versus the prior year, reaching a new record of $4.1 million. Overall, the consistent improvement reflected in our recent financial performance speaks directly to the returns we have realized on the strategic investments in our R&D and operational teams over the past several years. These investments continue to produce greater resiliency and vibrancy in our operating performance today while also strengthening our foundation for long-term growth.

As I look ahead, my level of excitement about the long-term prospects for our company is the same as it was when we last gathered a couple of months ago. Since that time, our newest cabinet, Spectra 43 hasn’t skipped a beat, extending its run at the top of the Eilers Cabinet report to 7 consecutive months. Spectra’s 2 launch titles, Long Bao Bao and Shamrock Fortunes continue to support the cabinet’s chart-topping performance with each theme achieving a top 10 ranking for Eilers . We are excited about the buzz Spectra is creating around the AGS brand and continue to consider our most successful new product launch ever. Looking beyond Spectra, the calculated transformation and expansion of our content creation teams over the past several years has armed the business with the deepest and most diverse game content offering in the company’s history.

We currently have 7 game development studios creating over 75 titles per year, nearly doubling our game output compared to just a few years ago. In addition to added breadth of our portfolio, we remain laser-focused on ensuring we maintain our reputation as a provider of high-performing content featuring themes and game mechanics players love. This focus was prominently reflected in the most recent Eilers Game Performance Report as AGS titles, including one of our initial game themes and the high denomination category accounted for over 10% of the top 50 new core games. Supported by the teams we have in place today we are now able to deliver new high-performing hardware targeting a variety of market segments and an increasingly diverse content portfolio expanding multiple game category types with greater consistency.

This consistency positions us for sustainable market share growth in the quarters and years ahead. In addition to leveraging very strong R&D organization, we are also benefiting from the work of our sales and product management teams. By carefully investing in our customer-facing teams, we have successfully increased the frequency of our interactions, resulting in better sell-through of our products. Along with this, we have deployed a stronger go-to-market strategy which better positions our products for success in the field. During the first quarter, we sold games to over 110 different customers, including 5 of our largest corporate customers, representing an increase of more than 45% versus the prior year. All told, given the diverse array of customer accounts touched, cabinet types sold and market segments penetrated, I consider Q1 2023 the healthiest EGM sales quarter in our company’s history.

Moving outside of EGM sales, the initiatives underway to further strengthen our domestic EGM recurring revenue business continue to deliver consistent results as reflected by our record-setting performance in the quarter. During Q1, we successfully grew our premium EGM footprint for the 13th consecutive quarter, pushing our premium mix to over 15%. Although our premium strategy has come a long way in a relatively short period of time, we continue to see considerable growth opportunities in front of us, supported by new customer activations, game theme launches and hardware introductions. In addition to our success on the premium game front, we continue to leverage the added depth of our game content portfolio and product management team to further optimize our core unit performance.

The compound benefit of our premium market penetration and optimization initiatives has structurally transformed the composition of our domestic installed base resulting in 8 consecutive quarters of $30-plus domestic RPD performance. Looking beyond EGMs, the momentum building within our Table products business is as strong as it’s ever been. Our PAX S single-deck shuffler footprint grew by more than 40% sequentially topping 200 units at the end of the quarter. The competitively priced shuffler’s reliability and our service team’s laser focus on ensuring a seamless conversion experience continues to resonate with our customers. With several multi-site operators currently trialing packs and rebuy momentum amongst early adopters building, we remain in the very early innings of realizing the product’s full growth potential.

In addition to PAX, we continue to leverage our commitment to being an innovator of choice to expand the reach of our progressive products and operators’ table pits. To that end, our Bonus Spin Xtreme footprint equips 500 units at the end of Q1 with units installed across 20 jurisdictions. While BSX is off to a hot start, we see considerable growth in front of us as the product was installed at fewer than 50 casinos at quarter end. Finally, our interactive business is quickly approaching launch mode. Supported by forthcoming introduction of a new platform, expanded game content portfolio and recent new customer and market activations we continue to expect the growth trajectory within the business to improve in the back half of the year. With a record first quarter behind us, our focus now shifts to Q2 and beyond.

While we are acutely aware of the macroeconomic uncertainty in the financial markets today, we believe our ability to leverage the unique growth catalysts I just described, coupled with our outsized recurring revenue mix and strong liquidity position provide a level of resiliency within our business that is grossly underappreciated by investors today. These same attributes also provide a path to sustainable multiyear growth, in turn, further balance sheet deleveraging, positioning the company to outperform over the longer term. In closing, I would like to thank our AGS team for their continued hard work, focus and execution, which remains the foundation of our record-setting financial performance. I continue to believe we have the strongest team and the deepest product lineup in my tenure, and I’m encouraged by and look forward to what lies ahead for our company.

With that, I will turn the call over to Kimo.

Kimo Akiona : Thank you, David, and good afternoon, everyone. I will start off today’s call by reviewing a couple of highlights from the first quarter and providing some perspective on how we see each of our business segments trending as we look ahead into Q2. I will also share some thoughts on our free cash flow outlook for the year and close by addressing a few items related to our balance sheet. Turning first to our domestic EGM gaming operations business, first quarter revenue increased 10% year-over-year to a record of nearly $48 million. As we noted on our Q4 call, the first quarter got off to a strong start in January and trends strengthened throughout the quarter with March revenues reaching an all-time monthly record.

During Q1, we expanded our domestic installed base sequentially for the fourth consecutive quarter, supported by our 13th straight quarter of premium unit growth and a relatively stable core unit footprint. Domestic RPD increased 7% year-over-year, topping $30 for the eighth quarter in a row. Our growing premium unit mix with premium games accounting for over 15% of our installed units at quarter end, further installed base optimization and a generally stable macroeconomic backdrop, all contributed to our improved RPD performance in the quarter. Looking ahead to Q2, the opportunity to simultaneously activate new premium unit customers and broaden our penetration with existing customers, combined with continued stability in our core unit footprint should allow us to expand our domestic installed base for a fifth consecutive quarter.

Consistent with the expectations we articulated at the start of the year, we continue to believe our ability to leverage multiple company-specific catalysts, including our high-performing Spectra cabinet, increasingly deep and diverse core content portfolio and consistent premium game market penetration momentum should allow us to comfortably sustain domestic EGM RPD above the $30 level throughout the second quarter. Shifting to EGM unit sales. First quarter global unit sales increased by more than 15% year-over-year, topping 1,100 units for the second consecutive quarter, growing customer demand for our chart-topping Spectra cabinet with Spectra sales more than doubling versus Q4 2022 levels and over 45% increase in the number of customers sold to complementary sales into international markets and an increase in market-wide purchasing demand paced our improved unit sales performance in the quarter.

As we look ahead to Q2, the same set of strategic initiatives underpinning our outsized first quarter unit sales growth coupled with an anticipated normal seasonal lift in operator slot capital spending should allow us to deliver global EGM unit sales volumes that exceed Q1 levels. Moving on to EGM pricing. First quarter global average selling price, or ASP, increased 2% versus the prior year to over 19,500 driven by a greater mix of premium priced Spectra cabinet sales and continued implementation of our price integrity initiatives. Based on our anticipated Q2 unit sales mix, we expect ASPs to look relatively similar to the level achieved in the first quarter. Turning to our international EGM business. Recurring revenue increased by more than 15% year-over-year and improved sequentially for the 11th consecutive quarter.

The continued strong performance of several established AGS franchise game themes throughout Mexico, further installed base optimization, stable macroeconomic trends and favorable FX movements contributed to our improved recurring revenue performance in the quarter. International RPD topped $8 for the first time since Q2 2019 increasing by more than 30% year-over-year on an as-reported basis and by over 20% when adjusted for FX. Exiting Q1, our Mexico recurring revenue business was run rating at approximately 75% of 2019 levels compared to a little over 60% 1 year ago. Supported by the consistent operating trends we continue to observe throughout Mexico, we believe we should be able to further close the 2019 revenue gap during the second quarter.

Looking beyond EGMs, our table products business delivered another record quarter with revenues topping $4 million. Card shuffler revenues more than doubled year-over-year, driven by growing customer adoption of our PAX S single-deck shuffler. Progressive revenue increased by more than 10% versus the prior year and we activated our second largest AGS Arsenal site license contract during the quarter. With momentum in the business accelerating, we believe we should be able to improve upon our record-setting Q1 performance in the second quarter. Shifting to Interactive. Trends within the business once again proved stable throughout the first quarter as revenue exceeded $2.5 million for the fourth consecutive quarter while the segment continued to generate positive adjusted EBITDA.

Real money gaming revenues increased by approximately 5% versus the prior year, supported by continued outsized growth within the North American RMG channel. Looking ahead, we expect Q2 segment level revenues to look relatively similar to those achieved in Q1 with a more pronounced lift-off occurring in the back half of the year as payoff from recent investments into our technical and commercial teams and upside from recent new customer activations become better reflected in our quarterly results. Turning to margins. first quarter adjusted EBITDA margin was approximately 44%, in line with the expectations articulated on our Q4 call. Although we continue to expect full year adjusted EBITDA margin to land in the 44% to 45% range I would note, seasonal costs associated with our GameOn customer conference are likely to push our second quarter margin slightly below the low end of our targeted full year range.

First quarter capital expenditures totaled $14 million. We continue to expect full year capital expenditures to land in the range of $65 million to $70 million, inclusive of anticipated capitalized R&D expenditures. Cash interest in the quarter was approximately $13 million, a level we believe serves as a good run rate for the remainder of the year, barring any material change in market level rates. First quarter free cash flow, defined as net operating cash flow less CapEx and was negative $10 million, inclusive of approximately $7 million related to annual employee bonus payments, which we highlighted on our Q4 call. Additionally, the timing of EGM unit sales in the quarter and an increase in EGM component inventory to allow for timely fulfillment of the demand we see building within the business impacted Q1 free cash flow by a little over $7.5 million.

Adjusting for these timing-related items, free cash flow would have been nicely positive for the quarter. Looking out over the remainder of the year, we expect to neutralize a significant portion of the Q1 working capital related impact. That said, when coupled with the relative consistency we continue to observe within our day-to-day operations and our organizational focus on capital deployment discipline, we remain confident in our ability to deliver positive free cash flow over the remainder of 2023, with the level of free cash flow building sequentially as we progress throughout the year. Finally, turning to the balance sheet. Net leverage at quarter end was 3.8x, consistent with the prior sequential quarter. Supported by our solid first quarter performance, the relative stability we continue to observe across our recurring revenue business channels, the growing demand for our high-performing for-sale products and our confidence in our ability to deliver positive free cash flow over the remainder of the year, we remain on track to exit 2023 with net leverage in the range of 3.25x to 3.75x.

I would remind everyone the assumption underpinning the 3.5x midpoint of our targeted leverage range continue to contemplate a modest pullback in prevailing market level conditions as compared to those encountered in 2022 and the 2023 year-to-date period. That said, should the broader market trends remain relatively consistent with those we are currently experiencing we would expect to exit 2023 with net leverage in the bottom half of the range. Finally, it is important to note, we intend to pursue a balanced approach to deleveraging the business supported by a combination of adjusted EBITDA growth and consistent free cash flow generation. Operator, this concludes our prepared remarks. We would now like to open the line up for questions.

Q&A Session

Operator: [Operator Instructions] Our first question comes from Jeff Stantial from Stifel.

Operator: Our next question comes from Barry Jonas from Truist.

Operator: We have our next question comes from Chad Beynon from Macquarie.

Operator: Our next question comes from Edward Engel from ROTH MKM.

Operator: Our next question comes from David Katz from Jefferies.

Operator: [Operator Instructions] With our next question comes from David Bain from B. Riley.

Operator: [Operator Instructions] We have no further questions on the line. Ladies and gentlemen, this concludes today’s call. Thank you for joining. You may now disconnect your lines.