PlayAGS, Inc. (NYSE:AGS) Q4 2022 Earnings Call Transcript

PlayAGS, Inc. (NYSE:AGS) Q4 2022 Earnings Call Transcript March 9, 2023

Operator: Good afternoon. Thank you for attending today’s AGS Q4 2022 Earnings Conference Call. My name is Temmia and I will be your moderator for today. It is now my pleasure to pass the conference over to your host, Brad Boyer, Senior Vice President of Investor Relations.

Brad Boyer: Thank you, operator. And good afternoon, everyone. Welcome to the PlayAGS Incorporated fourth quarter and full year 2022 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 fourth quarter and full year ended December 31, 2022 can be found on our Investor Relations website, investors.playags.com. On today’s call, we will provide an overview of our Q4 and full year 2022 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 that 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. Q4 2022 was a record setting quarter for AGS on many fronts. That said, I would like to highlight a few of the many impressive accomplishments from the quarter. Total company revenue increased 16% year-over-year to a record $82 million. Net income and adjusted EBITDA grew to quarterly records of $2.5 million and $37.3 million respectively. Domestic EGM recurring revenue grew by 8% year-over-year to a record of over $47 million. Global EGM unit sales increased by more than 35% year-over-year to over 1100 units. Our Premium EGM install base increased by nearly 60% year-over-year, and Table Products revenue was up more than 20% year-over-year to approximately $4 million. All the highlights I just described were directly driven by the investments we have made into our R&D, sales and product management teams over the past several years.

Looking back, it is remarkable to think how far we have come in a short period of time. The payoff from these investments is not only reflected in our record setting fourth quarter results, but also in the consistent improvement in our financial performance over the past several years. Here are a couple of high level examples. First, total company revenues have now increased sequentially in each of the past eight quarters, while adjusted EBITDA has made similar progress by growing in seven of eight quarters. Drilling a little deeper, domestic EGM RPD has held above the $30 level for the past seven quarters. While our domestic EGM install base has grown sequentially for three consecutive quarters. Looking ahead to 2023, I see a company specific growth catalyst forming within all three segments of our business that should allow our operating momentum to continue.

Turning first to EGM sales, our recently launched Spectra Cabinet continues to serve as the star of the show. Spectra has now achieved top billing in the Eilers cabinet report for five consecutive months, with reported performance consistently exceeding two times house average. Spectra’s launched titles, Long Bao and Shamrock Fortunes, continue to support the Cabinet’s star topping performance with each theme achieving a top 15 ranking for Eilers. In addition to Spectra, our first two high-denomination game themes, Mega Diamond and Gold Inferno, continue to deliver strong game performance both inside and outside of the high-limit room. Spectra and our high-denom game pack, series one two punch by enabling us to attack various segments of the operator’s floor, contributing to an increase in our average order size.

Shifting to the people side of the EGM business, recent investment in R&D, product management and sales should not only provide our team with a deeper and more diverse portfolio of products to sell, but it will also enhance market penetration, in turn strengthening returns on our investments. In 2023, we intend to nearly double our core game content releases as compared to the number of launched in 2019, allowing for more shots on goal with our customers. Finally, we recently received state level regulatory approval to begin selling our products into Colorado, Minnesota, and Missouri, three states that collectively represent an addressable market of over 40,000 units. We plan to make our initial sales into these markets later this year. Ultimately, I believe our unique blend of product, people and new market growth catalyst should allow us to increase our share of the domestic slot sales market in 2023.

Moving on to our domestic EGM recurring revenue business, although we have produced 12 consecutive quarters of premium footprint growth, we estimate we have only penetrated 65% of the addressable casino market for our products. That said, when viewed in conjunction with the over 25 new premium titles scheduled to launch throughout 2023 and the added diversity of our product offerings, we intend to expand upon our 15% premium unit mix as the year progresses. Additionally, we plan to further leverage the expanded scope of our core product portfolio and added capabilities of our product management team to further optimize the performance of our core unit footprint. All told, I believe the steady performance of our existing premium footprint, the opportunity for additional premium unit growth and our unique set of core unit optimization tools, should allow us to improve upon our record 2022 recurring revenue performance.

Although it is still very early in the year, I would note 2023 is off to a very encouraging start as we set new all-time monthly record for domestic EGM recurring revenue in January and trends through February remain on a similar trajectory. Looking beyond EGM, I’m equally excited about the outlook for our Table Products business. PAX S, our recently launched single deck card shuffler is off to a strong start with our footprint expanding to nearly 150 units at year end. With PAX approval in all major North American markets and supported by the overwhelmingly positive customer feedback we continue to receive on the product, we believe we remain in the very early stages of realizing the product’s true growth potential. In addition to PAX, we also see accelerating demand for our Bonus Spin Xtreme Table game progressing.

At year end, BSX was installed in nearly 20 different gaming jurisdictions throughout the United States and Canada with an install base of over 400 units. Last but certainly not least, the growth prospects for our Interactive segment are as bright as they’ve ever been. Following the recent announcement of several impactful new customer wins, including DraftKings and BCLC, our portfolio over 30 proven AGS titles is now live in near the every active North American jurisdiction and with all five of the highest revenue generating operators in the United States. A group that collectively accounts for over 80% of market-wide GGR. Additionally, we believe recent, strategic new hires on our technical and commercial teams should meaningfully transform the trajectory of the business by accelerating the flows of AGS game content into the online channel.

In summary, I believe that with the investment we have made in people along with the momentum and potential we have in all three product lines, we are on pace to challenge our record full year adjusted EBITDA performance in 2023. Before closing, I would like to address a topic that is usually reserved for Kimo, the balance sheet and deleveraging, an area where I’m happy to report achievement of our year-end net leverage target of less than four times. I want to reinforce to our investors that as an organization we are intently focused on increasing cash flow and reducing the amount of leverage on our balance sheet, the shrewd expense management and the careful and calculated reinvestment in our products and install base. To wrap up my comments, I would like to thank our AGS team members for their hard work and dedication throughout 2022.

Without you, we cannot deliver the type of record results we reported today. I truly believe we have the strongest team and deepest product lineup in my tenure as CEO and I am greatly encouraged by what lies ahead for our company in 2023 and beyond. With that, I will turn the call over to Kimo.

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Kimo Akiona: Thank you David. And good afternoon everyone. I would like to start off today’s call by reviewing a few highlights from the fourth quarter and providing some perspective on how we see each of our business segments trending as we look forward into 2023. I will also address a few items related to our balance sheet and close by sharing some thoughts on our free cash flow outlook for the current year. Unless otherwise noted, all of my forward-looking commentary contemplates macroeconomic conditions that are relatively consistent with those we are experiencing today. Turning first to our domestic EGM gaming operations business, fourth quarter revenue increased 8% year-over-year and 13% versus Q4 of 2019 to a new company record of approximately $47 million.

Our domestic EGM installed base increased sequentially for the third consecutive quarter while domestic EGM RPD exceeded $30 for the seventh quarter in a row. Further penetration of the higher-yielding premium game market segment continues to simultaneously drive growth in our domestic installed base and reported RPD. At the end of the fourth quarter premium games accounted for 15% of our domestic EGM installed base compared to 10% in the prior year period. In addition to our sustained premium unit momentum, the successful launch of our initial games in the higher-yielding, high-denomination game segment, the strong performance of our launch titles on the recently introduced Spectra cabinet, continued implementation of our installed based optimization initiatives and consistent GGR trends across our served markets, further supported our record setting recurring revenue performance in the quarter.

Looking ahead to 2023, we expect a strong pipeline of premium unit demand and an increasingly stable core unit footprint to support consistent sequential growth in our domestic EGM install base at a level similar to what we achieved over the past several quarters. As it relates to domestic RPD, we believe we are uniquely positioned heading into 2023 as our ability to leverage multiple company specific catalysts should allow us to consistently deliver performance that exceeds broader industry level revenue trends similar to what is reflected in our Q4 2022 results. While encouraged by our sustained premium game momentum to-date, our enthusiasm does not stop there. As we see an equally compelling opportunity to leverage our new chart-topping Spectra gaming cabinet, increasingly deep and diverse core game content portfolio, including our first ever high denomination games and the enhanced capabilities of our product management team to further optimize the RPD performance of our core unit footprint.

All told, we believe these catalysts position us to comfortably sustain our domestic EGM RPD above the $30 level for all four quarters of 2023 even in a scenario in which market level GGR trends were to moderate slightly from 2022 levels. Shifting to EGM equipment sales. Fourth quarter global unit sales eclipse 1,000 units for the second consecutive quarter reaching their highest level since Q4 2019. We successfully launched our chart-topping Spectra gaming cabinet during the quarter with over 150 units sold into the market. Additionally, we benefited from the introduction of our first ever high-denomination game content as we continue to leverage the added product diversity resulting from our recent R&D investments to capture a greater share of our customer’s slot capital spend.

Finally, our strategic focus on broadening our customer account penetration both inside and outside of North America, further supported our Q4 unit sales performance. As we look ahead to 2023, overall market level purchasing demand continues to prove resilience as we have yet to observe any material change in our customers purchasing behavior to-date. That said, provided the current purchasing resiliency persist throughout the remainder of the year, we believe the company specific catalyst David laid out earlier in his prepared remarks uniquely positioned us to achieve global EGM unit sales that far exceed 2022 levels. Turning to pricing. Fourth quarter global average selling price or ASP eclipsed 19,000 for the fifth consecutive quarter. Q4 ASP benefited from initial sales of our premium-priced Spectra cabinet, which carries a higher ASP relative to Orion Curve.

Additionally, we were able to leverage our price integrity initiatives and the strong performance of our newly launched high denomination games to hold the line on curve pricing throughout the quarter. Looking out over 2023, as Spectra grows to comprise a greater portion of overall sales unit mix; we would expect ASP to drift slightly ahead of full year 2022 levels, all else being equal. Moving to our International EGM segment, total International EGM recurring revenue increased 12% year-over-year to $4.4 million supported by the consistent macroeconomic recovery we continue to observe throughout Mexico. Additionally, our holistic approach to optimizing our global fleet of recurring revenue EGM units has allowed us to continuously strengthen the quality of our Mexico installed base in a capital efficient manner, further supporting the consistent improvement in our Mexico performance.

To that end, International EGM recurring revenue has now increased sequentially for 10 consecutive quarters dating back to Q2 of 2020. A trend we expect to continue throughout the current year. Looking beyond EGM, our Table Products business remains on an encouraging trajectory with fourth quarter revenue and adjusted EBITDA each increasing by over 20% versus the prior year. While we achieve year-over-year growth across all of the table products verticals, shuffler and progressives remain our two largest strategic growth drivers. Our PAX S single-deck card shuffler footprint approached 150 units at quarter end nearly doubling versus the prior sequential quarter. While our progressive installed base increased by over 25% year-over-year surpassing 1,800 units for the first time.

Looking ahead to 2023, we expect further customer adoption of our PAX S shuffler, Bonus Spin Xtreme progressive and AGS Arsenal site license program to result in consistent sequential growth in both our table products revenue and adjusted EBITDA as we progress throughout the year. Shifting to Interactive, trends within the business remain stable throughout the fourth quarter as revenue exceeded $2.5 million for the third consecutive quarter. While adjusted EBITDA was positive for the 12th quarter in a row. Real Money Gaming or RMG revenues increased by 7% versus the prior year supported by continued outsized growth within the North American RMG channel, which accounted for over nearly 90% of Q4 RMG revenue mix compared to 67% in the prior year period.

Looking ahead, as David indicated in his comments, we’re excited by the growth prospects for our RMG business in 2023. Turning to margins. Fourth quarter adjusted EBITDA margin was approximately 46% nicely ahead of the expectations articulated on our Q3 call. We attribute our relative outperformance in the quarter to a combination of revenue upside better than anticipated EGM sales gross margin performance and the timing of new hires. For the full year adjusted EBITDA margin was approximately 45%. Looking ahead to 2023, we expect our full year adjusted EBITDA margin to land in the 44% to 45% range. Our current margin outlook contemplates the following. Mixed headwinds resulting from an anticipated increase in EGM product, sales revenue to exceed the rate of growth in our EGM recurring revenue business additional investment into our R&D organization, albeit at a more moderate rate than in 2022 to support our future growth initiatives and the impact of market level inflationary cost adjustments on our business.

We believe the realization of improved EGM product sales, gross margins driven by a greater mix of our value engineered Spectra cabinet sales, and further supply chain normalization and implementation of additional operating efficiency measures should help to offset a significant portion of the impact of items I described to have on our reported margin performance. While it’s too early to formally comment on our outlook for 2024, we do believe the operating leverage we’re expecting to realize as we progress throughout 2023 should continue into the next year, all else being equal, allowing for additional margin expansion. Looking at the balance sheet, we ended the year with total liquidity of just under $80 million inclusive of the $40 million available under our undrawn revolving credit facility.

Net leverage at year end was 3.8 times in line with our expectation to exit the year with net leverage inside of four times. Supported by the company specific catalyst emerging across all three operating segments of our business, the resilient trends we continue to observe within our day-to-day operations and our cautiously optimistic outlook for the remainder of the year, we expect to exit 2023 with net leverage in the range of 3.25 times to 3.75 times. I would note the assumptions underpinning the 3.5 times midpoint of our targeted leverage range contemplate a modest pullback in prevailing market level conditions as compared to those encountered in 2022 and in the 2023 year-to-date period. That said, should broader market conditions or trends remain consistent with those we are currently experiencing, we would expect to exit 2023 with net leverage in the bottom half of the range.

Looking beyond 2023, our organization remains squarely focused on reducing net leverage to inside of three times. A goal, we believe is attainable over the next 18 months to 24 months based upon the current trajectory of the business. Before closing, I would like to address a few items related to our cash flow performance in the quarter and provide some perspective on our outlook for the current year. Fourth quarter, capital expenditures totaled $19 million, bringing full year 2022 capital spend to approximately $70 million. Looking ahead to 2023, we expect to incur full year capital expenditures of $65 million to $70 million inclusive of anticipated capitalized R&D expenditures. As a reminder, we continue to target cash on cash payback of less than 12 months on all equipment related capital deployments.

We generated approximately $6 million of free cash flow in the fourth quarter, pushing full year free cash flow to $8.5 million, excluding one-time cash cost associated with our February, 2022 debt refinancing full year free cash flow would’ve been approximately $15 million. Turning to 2023. Although recent moves higher in market level, interest rates are expected to increase our debt service costs relative to the levels incurred in the prior year. We believe the anticipated growth we expect to achieve in our operating cash flows coupled with our targeted level of capital investment, should allow us to deliver a year-over-year increase in our normalized free cash flow output. From a quarterly cadence perspective, we expect to be free cash flow positive in all four quarters of 2023 after normalizing for seasonal employee bonus payments in Q1 and expect free cash flow generation to build sequentially throughout the year with Q4 serving as the high water mark for the year.

Operator, this concludes our prepared remarks. We would now like to open the lineup for questions.

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Q&A Session

Operator: Absolutely. Our first question comes from David Bain with B. Riley. You may proceed.

David Bain: Great, thank you. First I just want to congratulate you on the quarter on where I believe you guys are now. It seems like the last few years have been about stabilization execution improvements and just a lot of building blocks being put in place and were kind of a new position now, and I guess the question is you commented David and Kimo a little bit about the differences in product and positioning today versus 2019. In 2019 you pointed about; I think it was $146 million of EBITDA. Maybe you can walk through some of the largest, and again, you may repeat yourself here, but segment differences today versus then. And one reason I ask is, when we look at consensus, it’s at 142 , I look at your 4Q run rate, which is above 2019 levels, in your quarter-over-quarter track record of growth here.

Maybe there are some other factors outside of macro that we should consider there. So, I’m just trying to understand if the trends and setups €“ set up looks good if not better in that period from a company specific perspective.

David Lopez: All right, David, appreciate the question. I think, I know that’s a multipart question there, I think, but just from a, I’m going to talk about products just a little bit and then I’ll turn it over to Kimo if he’s got anything in reflection to your 2019 EBITDA commentary and everything. So obviously from a product perspective, quite a bit’s changed on a few fronts, right? Table games was in its infancy. Also we did not have the PAX shuffler. We were nowhere near the momentum we have now on our progressives, so that’s a big change in the business there. If you turn the clock back, I mean, we’re just talking about, we’re comparing and comping the 2019 the premium business wasn’t really in its infancy, it didn’t exist.

And so we’ve come quite a ways there now when you look at the number of premium units we have installed rather impressive. So that’s €“ that mix has changed for us considerably on the slot side, and then as we know interactive as well you know, that’s a whole new line of business for us compared to 2019 from a real money gaming perspective. So I think the setup is good for us. I think when you look at our product mix and between new products and that didn’t exist back then, but even just thinking in the last year or so, you look at the product mix with premium and the setup we have there and how it’s still new business and we’ve got a lot of white space ahead of us. I think we’re sitting pretty well. I mean, even I’ll sort of pivot a little bit to Q4 and Q1, if you don’t mind.

Q4, if you look at macro GGR numbers not us, but macro GGR numbers; I think year-over-year if you look at that macro GGR was up, I mean, a percent or two, and if you look at Q3 to Q4, macro GGR will argue flat or down a smidge. And in both those instances we were up 8% year-over-year, and I think we were up about 2% Q3 to Q4 from a game-ops perspective. So I think all the fruits of the labor and everything are working out and going back to 2019, we might have had two studios up and running and I think we’re right around seven now. And as I’ve always said, hey, well, we’ve got seven studios, but only five cylinders firing. We got seven out of seven now, and not only are they all firing away and making games, but they now all, each and every one of those seven are producing content and their content is in the field.

Now, I’m going to turn it over to Kimo for latter part of your question I missed. And maybe he can snatch that, I’m not sure.