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Edited Transcript of AGS.N earnings conference call or presentation 5-Mar-19 10:00pm GMT

Q4 2018 PlayAGS Inc Earnings Call

Mar 11, 2019 (Thomson StreetEvents) -- Edited Transcript of PlayAGS Inc earnings conference call or presentation Tuesday, March 5, 2019 at 10:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David B. Lopez

PlayAGS, Inc. - CEO, President & Director

* Julia Boguslawski

PlayAGS, Inc. - CMO & Executive VP of IR

* Kimo Akiona

PlayAGS, Inc. - CFO, CAO & Treasurer

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Conference Call Participants

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* Barry Jonathan Jonas

SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst

* Brad J. Boyer

Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst

* Cameron Philip Sean McKnight

Crédit Suisse AG, Research Division - Research Analyst

* Carlo Santarelli

Deutsche Bank AG, Research Division - Research Analyst

* Chad C. Beynon

Macquarie Research - Head of US Consumer, SVP and Senior Analyst

* David Brian Katz

Jefferies LLC, Research Division - MD and Senior Equity Analyst of Gaming, Lodging & Leisure

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Presentation

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Operator [1]

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Good afternoon, and welcome to the AGS Fourth Quarter 2018 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Julia Boguslawski, Chief Marketing Officer and Executive Vice President of Investor Relations. Please go ahead.

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Julia Boguslawski, PlayAGS, Inc. - CMO & Executive VP of IR [2]

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Thank you, and good afternoon, everyone. Welcome to AGS's Fourth Quarter and Full Year 2018 Earnings Conference Call.

With me today are David Lopez, President and CEO; and Kimo Akiona, CFO.

We posted a slide presentation reviewing our key operational and financial highlights for the fourth quarter and full year 2018, which can be found on our Investor Relations website, investors.playags.com.

Now, I will quickly cover the safe harbor. Today's call is to provide you with information regarding our fourth quarter and full year 2018 performance in addition to our financial outlook. This conference call includes 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 actual results to differ materially from forward-looking statements, please refer to the earnings release that we issued today as well as risks described in our Form 10-K filed today, 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. 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'd like to turn the call over to David Lopez.

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David B. Lopez, PlayAGS, Inc. - CEO, President & Director [3]

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Thank you, Julia, and thank you, everyone, for joining AGS's Q4 and 2018 year-end earnings call.

For those using the slide deck, please turn to Slide 3. I'll start by providing a brief overview of our fourth quarter and fiscal year 2018 operational highlights, along with an update on some of our recent strategic initiatives. After a financial overview from Kimo, I'll close the call by sharing our growth drivers and business outlook for 2019 followed by a review of some annual guidance metrics.

I'm pleased to announce that Q4 capped another record-breaking year for AGS. In our first year as a public company, we set records across nearly every key performance category: Revenue, adjusted EBITDA, EGM sales, recurring revenue, table units, slots ASP to name a few.

Slide 3 shows that Q4 revenue of $72.1 million was up 25% year-over-year. Net loss of $10.3 million increased year-over-year from a net loss of $8.5 million in the prior year period, which Kimo will touch on later. Adjusted EBITDA grew to approximately $31.5 million, up 19% over last year. The double-digit gain in revenue and adjusted EBITDA were led by the continued performance of our Orion Portrait cabinet in both new and early-entry markets, strong contributions from our new Orion Slant cabinet, solid growth of progressives and our Table Products segment and a full quarter of contribution from the Rocket Gaming assets we acquired in December 2017.

For the full year 2018, total revenue grew 35% year-over-year to $285.3 million, of which more than 70% was recurring. Adjusted EBITDA of approximately $136.2 million grew 27% year-over-year.

We are pleased with our performance in 2018 and in the fourth quarter, ending an eventful year in which we achieved many major milestones, some of which are listed on Slides 4 and 5 and include: Surpassing 5,000 placements of our award-winning Orion Portrait cabinet. We introduced Orion Slant in May 2018 and ended the fiscal year with more than 1,500 units placed. We once again were awarded the Best & Brightest Places to Work for in the Nation, recognizing our commitment to maintaining a best-in-class corporate culture. Our slot division achieved domestic ship share of 6%. We also achieved a record 4,387 sold EGMs, which is more than 70% higher than 2017 and is nearly 10x of what we sold in 2016. Net debt leverage ratio improved to 3.4x at year-end 2018, that's down from roughly 6x at year-end 2017. We launched the Dex S card shuffler in December, which represents the first competitive shuffler from a major supplier in a great number of years. We officially entered the global real-money online gaming space. We sold our first EGM units into Alberta and Ontario, representing our first big push into Canada. Also, we secured our long-awaited licenses in Pennsylvania, British Columbia and Ohio. Table Products revenue grew 88% year-over-year to approximately $8 million in 2018, 96% of which is recurring revenue. We optimized nearly 1,100 units in the U.S. and Mexico increased its recurring installed base by more than 620 units.

In addition to the 2018 milestones I mentioned, we started 2019 by successfully closing the acquisition of Integrity Gaming in February, which currently adds approximately 2,600 recurring revenue units to our installed base and will contribute roughly $9 million in annual adjusted EBITDA in 2019. Bolstering our recurring revenue footprint, we are now live in the Philippines as well. We cleared customs and completed the multilayered regulatory requirements and we're now ready to start gauging performance of our initial Alora video bingo installs.

With that, I'll now provide an update on our segment performance for the quarter. Turning to our EGM segment on Slide 6, we sold 1,159 units in the fourth quarter, up 66% year-over-year, resulting in placements at nearly 100 casinos across 30 states in Canadian provinces. We achieved approximately 5% ship share in the fourth quarter based on the estimation of total slot units in the latest EILERS-FANTINI Quarterly Slot Survey, which is in line with our normal ship share range.

This ongoing momentum in the fourth quarter is a strong indicator that AGS has some of the highest performing products in the industry and plenty of opportunities to grow our footprint. Orion Portrait lead the placements with more than 600 sold in the quarter in addition to strong sales of Orion Slant, which added more than 300 units in Q4. Due to this heavy mix of premium and core-plus products, our ASP of $18,782 rose to a record high, up more than $1,000 from the prior year period. 50% of Orion Portrait sales were reorders, a trend we see ramping and believe we'll feel growth throughout 2019. We've seen early success with the recent launches of new titles, including Rakin' Bacon, which is performing around 2x house average. This demonstrates our commitment to develop high-quality game content to support our exceptional hardware. Nearly 90% of Orion Slants wants customers who have had success with Portrait on their floor, which helped drive the launch of this product in the market.

Additionally, momentum has been building for Slant due to the strong performance of a couple of new titles from the Fa Cai Shu family of games, most notably Eastern Dragon and Emerald Princess, which have been performing at approximately 1.7x house average. This family of games was developed by our new Australian game studio, which we believe will broaden and deepen our content library for years to come as we continue to roll out new cabinets and form factors. We now have 19 titles available for Slant, with approximately 25 more planned for release in 2019.

We reported a total EGM recurring base of 24,647 units, up roughly 4% year-over-year and more than 460 units higher than Q3 2018. These placements were all organic growth and do not include the contribution from Integrity. Of the quarterly growth, Mexico contributed to 235 of those units and domestic contributed 228 placements, inclusive of the end of lease buyout of 420 VLTs from Illinois that we mentioned on last quarter's call. These VLTs are not included in our sold units number as they were sold at a nominal price as part of a long-term agreement.

In summary, Q4 was a very strong quarter for recurring revenue units as we communicated to the street that we would end the year net positive. Annually, we added 842 incremental recurring units despite the voluntary removal of approximately 500 units from Texas earlier in the year as well as the 420 VLT conversions out of the leased base.

In 2019, we expect to convert approximately 300 more VLTs from the leased base. However, we have multiple opportunities to grow our recurring footprint throughout the year.

Mexico unit growth of 8% year-over-year was driven by the rollout of our ICON cabinet in the market. As of year-end, we have approximately 520 ICONs in Mexico and the customer reception and game performance have been very positive.

Recurring revenue in Mexico grew 8% year-over-year bolstered by the higher-yielding ICONs as well as continued optimization efforts with our Halo cabinet. This growth occurred despite negative FX. If normalized for FX, revenue growth would have been about 14%.

The results of the Q4 EILERS-FANTINI Survey shown on Slide 7 highlighted that more than 2 years, AGS continues to have the industry-leading casino-owned game performance at 1.6x house average. Our premium leased game performance has remained second only to Aristocrat for roughly the same duration.

Slide 12 shows our recent ship share gains as we made strides through our 5% market share goal. In 2018, we grew our domestic market share from 1.9% to 2.5% within a market that has approximately 1 million machines. Our annual ship share contributions from California, Nevada, Canada and Florida represent the greatest growth markets in 2018.

Moving on to the Table segment on Slide 8. Revenue and adjusted EBITDA were up 32% and 34% year-over-year, respectively. Our Table Products footprint grew 32% year-over-year to more than 3,162 units, fueled by exceptional growth in progressive placements. Super 4 continues to be our fastest growing table product with 490 installs across 9 states, including a recent entry into Michigan and North Carolina.

Last week, we proudly announced a major milestone in our Table Game Product business. In just over 2 years, we have achieved more than 1,000 progressive installs with a healthy backlog of orders planned throughout 2019.

We not only installed approximately 70 progressive units in the fourth quarter, but we also recognized 65 conversions to our progressive platform. These 65 units were in our installed base as part of the In Bet acquisition in August 2017 but were previously installed on a competitor's progressive system. We have now converted those games to our STAX Progressive platform, allowing customers to take advantage of our innovative features such as must-hit by feature, defined independent meters and updated graphics. These conversions will contribute additional profitability from our existing installs and we expect to make further conversions in 2019.

In the Interactive segment, as you see on Slide 9, we reported $1.3 million in revenue in the quarter, which was nearly all recurring and which was down $600,000 year-over-year. The decline is in line with our continued strategy of decreasing marketing spend in B2C Social and pivoting to other Interactive revenue models such as B2B Social and real-money gaming. We currently distribute real-money gaming content for more than 10 suppliers with more than 500 games on our AxSys platform. We made progress in the quarter by signing more online operators such as Relax and Rank and we started generating revenue from 888.

In total, during the quarter, we increased our distributed game content by 49%, increased monthly coin-in by 45% and increased monthly gross gaming yield by 34%. We continue to receive interest in our ConnexSys Social White-Label Casino solution and Q4 was highlighted by the global launch of The Stars Group social casino.

With that, I will now hand the call over to Kimo for discussion of financial results.

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Kimo Akiona, PlayAGS, Inc. - CFO, CAO & Treasurer [4]

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Thanks, David, and good afternoon, everyone. The fourth quarter of 2018 marked yet another impressive quarter for AGS and Slide 15 in the appendix provides a comprehensive operational summary.

For the fourth quarter, total revenues were up 25% to $72.1 million, of which $68.7 million was from EGMs, $2.1 million from Table Products and $1.3 million from Interactive. The increase in revenues in the fourth quarter were driven by EGM equipment sales, primarily in early-entry markets such as Canada and Nevada as well as ramping markets like California and Florida. We also experienced increased performance in our gaming operations business, which grew by 8% year-over-year.

Growth in our recurring revenue was driven by several factors. First, the contribution of a full quarter of EGMs purchased from Rocket Gaming last December. Second, an increase in Orion Portrait and Orion Slant cabinets on lease year-over-year. We ended the year with nearly 1,900 Orion Portrait cabinets on lease, up 100% year-over-year, and over 840 Orion Slant cabinets on lease, highlighting the successful rollout of this new cabinet. Third, continued year-over-year growth in our domestic and international RPD performance. And fourth, an increased installed base of Table Product units on lease, up 762 units year-over-year, driven by the In Bet assets, new openings and the continued success of our progressives and side bets.

For the fourth quarter, net loss of $10.3 million increased year-over-year from a net loss of $8.5 million in the prior year period, primarily caused by a pretax impairment of goodwill of $4.8 million from our Interactive Social reporting unit that we recorded in the quarter to be discussed later.

Total adjusted EBITDA was up $5.1 million in the quarter, driven primarily by our EGM segment, which grew revenues by $14.5 million, gross profit by $9 million and was partially offset by increased adjusted operating expenses of $3.3 million, primarily due to increased headcount-related costs in SG&A and R&D. Included in that amount was approximately $1 million of operating costs from Gameiom.

Total adjusted EBITDA margin decreased to 44% in the fourth quarter 2018 compared to 46% in the prior year period due to several factors: First, increased headcount-related costs in both SG&A and R&D as previously mentioned; second, increased professional fees; third, operating costs associated with Gameiom; and fourth, the increased proportion of equipment sales to total revenue. Total adjusted EBITDA margin for full year 2018 was 48% compared to 50% in the prior year.

Now turning to our EGM segment. Fourth quarter EGM equipment sales increased 86% year-over-year to $23.2 million due to the sale of 1,159 units as compared to 697 in the prior year period. Our Orion family of cabinets and our core ICON cabinet continue to drive our ongoing success in penetrating the Class III market in which many customers prefer to buy rather than lease EGMs.

Our domestic EGM installed base grew by over 200 units year-over-year despite the voluntary removal of 500 machines in Texas earlier in the year and the reduction of 420 VLT units in Illinois through an end of lease buyout by a customer. As David mentioned earlier, these units were not counted in our sold unit count. Excluding the end of lease buyout of the Illinois VLT units in the fourth quarter, we would have had net placements of 650 recurring units sequentially, with the majority of those units being placed in Oklahoma.

Domestic RPD for the current quarter increased by $0.53 to $26.41 compared to the fourth quarter of 2017, driven primarily by our new product offerings through the ongoing optimization of our installed base with our leading EGMs. When normalized for fluctuations and exchange rates, our international RPD for the current quarter increased by $0.40 or 5% compared to the fourth quarter of 2017, driven by the optimization of our installed base.

Now turning to Table Products. Fourth quarter revenues increased by $0.5 million or 32% year-over-year, primarily due to the 32% increase of our installed base, which grew to nearly 3,200 units compared to 2,400 in the prior year. The increase was driven by growth in each of our product categories: Progressives, driven by the success of our Bonus Spin and Super 4 games; side bets, most notably Buster Blackjack; as well as our premium table games and signage sales.

For a fifth quarter in a row and the first full fiscal year since inception, Table Products segment contributed positive adjusted EBITDA.

Interactive revenues were $1.3 million in the fourth quarter compared to $1.9 million in the prior year period. The decline was due to a $0.8 million decrease in our B2C Social business due to the continued optimization of user acquisition spend. Revenue from our real-money gaming business was $0.2 million in the fourth quarter.

Interactive adjusted EBITDA declined mainly due to $1 million of additional operating costs from Gameiom. On the Q2 call, we stated that our real-money gaming business would contribute to a $2 million adjusted EBITDA loss in the back half of the year or roughly $1 million a quarter.

Turning to operating expenses. SG&A expenses increased in the fourth quarter by $2 million or 15% to $15.6 million. The increase in SG&A is primarily due to $1.2 million of noncash stock-based compensation expense as compared to 0 in the prior year period as well as an increase of $0.6 million in sales commissions and $0.3 million in headcount-related expenses to support our growing business. Professional fees also increased by $0.9 million, primarily related to acquisition and integration costs. These expenses were offset by a reduction in user acquisition costs of $0.3 million in our Interactive Social B2C business as well as decreased state and local taxes and bad debt expense compared to the prior year period. Adjusted SG&A expense for the fourth quarter 2018 was $13.5 million compared to $11.5 million in the prior year period.

R&D expenses increased by $0.6 million or 7% in the fourth quarter of 2018 to $8.4 million. The increase in R&D is primarily due to $0.5 million of noncash stock-based compensation expense as compared to 0 in the prior year period. As a percentage of total revenue, R&D expense was 12% for the fourth quarter of 2018 compared to 14% for the prior year period. Adjusted R&D expense for the fourth quarter 2018 was $7.9 million compared to $6.6 million in the prior year period. Adjusted R&D expense as a percentage of revenue for the fourth quarter was 11% compared to 12% in the prior year period.

In the fourth quarter of 2018, we recorded a pretax impairment goodwill for $4.8 million related to our Interactive Social reporting unit. This goodwill was directly related to our acquisition of RocketPlay back in 2015. This impairment is a result of our strategic initiative to significantly cut user acquisition spend in our B2C Social business by placing more emphasis on B2B Social as well as our real-money gaming business. This impairment was recorded within write-downs and other charges line item on our consolidated statements of operations and comprehensive loss for the year ended December 31, 2018, and had no effect on adjusted EBITDA or operating cash flows.

Moving on to our capital structure update on Slide 10. Total net debt, which is the principal amount of total debt less cash and cash equivalents, was $468.1 million as of December 31, 2018, compared to $648.7 million at December 31, 2017. This substantial reduction was driven by the IPO and related redemption of our HoldCo PIK notes during the first quarter. In the fourth quarter, net debt decreased by over $8.8 million due to a higher balance of cash and cash equivalents and mandatory principal payments on our term loans.

As a result of the above transactions and our strong operational performance, our total net debt leverage ratio, which is total net debt divided by adjusted EBITDA for the trailing 12-month period, decreased from 6.1x at December 31, 2017, to 3.4x at December 31, 2018.

Capital expenditures were approximately $22 million for the fourth quarter of 2018, which comprised of $15.2 million for growth machine CapEx, $1.9 million for intangible CapEx, $3.7 million of corporate CapEx and $1.2 million of maintenance CapEx. Growth machine CapEx grew due to the strong recurring placements that we made during the fourth quarter.

Capital expenditures were approximately $66.2 million for the year ended 2018, which comprised of $44.1 million for growth machine CapEx, $11.6 million for intangible CapEx, $7.4 million of corporate CapEx and $3.1 million of maintenance CapEx.

Free cash flow of $10.2 million in the fourth quarter was significantly improved compared to the prior year period, driven primarily by strong operating cash flow. For the year ended 2018, free cash flow also improved to $17 million.

With that, I will turn the call back over to David for closing remarks.

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David B. Lopez, PlayAGS, Inc. - CEO, President & Director [5]

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Thank you, Kimo. 2019 is already off to a strong start and we feel very confident about our levers for growth this year and beyond. I'll list a few at a high level as outlined on Slide 11.

The first strategic initiative I'll talk about is continued penetration of Orion Portrait. Due to its outstanding game performance, innovative lighting and eye-catching hardware design, the Orion Portrait has become a staple on the casino floor. We still have several casinos in markets that have yet to add Portrait, however, the biggest opportunities we see for growth are secondary orders for Portrait based on customers having too few on the floor. Bolstered by the fact that we expanded the content library with 24 titles currently available and another 15 to 20 rolling out this year, Portrait remains underrepresented on many floors. Of the casinos that have Orion Portrait, coverage have, on average, about 6 to 12 units on the floor. Based on current performance numbers, we believe many properties should have at least 18 to 24 units on the floor.

The second initiative is the ramping of Orion Slant and our STAX Table Progressive, 2 relatively new products that are seeing strong momentum as we start 2019. We highlighted the progress both products made in the fourth quarter, exiting the year strong to prepare for an even better 2019. With 25 titles planned for launch on Orion Slant throughout the year and a growing number of compelling case studies that prove STAX drive increased revenue for customers, we believe both products will be significant needle movers in their respective business segments this year.

The third initiative is new product introductions, and we have several that we're excited about this year. We saw the first unit of Dex S card shuffler go into a select couple of properties on trial in December. The feedback has been encouraging, consistent and informative in this introductory stage. We're currently in a handful of properties and right where we want to be with the rollout, having just completed some enhancements to prepare us for a broader launch. By Q2, we believe we'll be in position to ramp up the rollout to several jurisdictions, including California, Florida, Oklahoma, Nevada, Michigan and New Mexico to start.

The Orion Upright, the third cabinet in the Orion family which debuted at G2E, is scheduled for commercial rollout in the second half of the year and we feel confident with that timing. We are excited about the strong value proposition for the cabinet, hosting both new trials and proven ICON favorites like the Golden Wins family of games. Our new Orion Upright will serve as a compelling high-performance core cabinet in a market that desperately needs strong core performance.

We also look forward to launching our AGS content in the real-money gaming space within the next few weeks, which will address pent-up market demand for our game titles and provide us with the most favorable economics. We believe this will be one of the strongest growth drivers in the Interactive segment in 2019.

The fourth initiative is penetration into new and early-entry markets. Slide 12 shows the many markets where AGS remains well under our 5% market share goal. We remain focused on working to secure some new licenses this year, but we believe that the bigger opportunity is placing incremental EGM and table units into new markets like Canada, Pennsylvania and Ohio as well as further growth in Oklahoma, California and Wisconsin to name a few.

We're looking forward to placing our first units in British Columbia in the first half of 2019, representing a new Canadian province for AGS to help drive growth throughout the year. I previously mentioned our official entry in the Philippines and depending on performance, we believe this market has the potential to serve as a significant recurring revenue contributor over the coming years. In our Interactive business, we look forward to completing license requirements to enter new markets with our RMG platforms such as New Jersey, Malta, Canada, Spain and Pennsylvania. These markets provide considerable reach with multiple online operators.

Our fifth initiative centers on bolstering recurring revenue across all business segments. Our recent acquisition of Integrity is a great example of our commitment to strategically grow our EGM installed base. The Integrity units also provide a way for us to grow recurring revenue through yield optimization of underperforming units over time. The introduction of Alora, our entire suite of Table Products, our RMG business and the introduction of both ICON and Orion in Mexico present various levers for growing recurring revenue on an absolute dollar basis. Additionally, we see domestic opportunities to grow recurring revenue in our EGM business with some Class II expansions taking place in 2019.

Our sixth initiative is to strengthen the balance sheet to further provide -- further optimize financial performance. Because of our ramping free cash flow generation, we're in a position to pay down debt this year while still investing in the business to capitalize on growth opportunities. We will strategically manage CapEx to enable growth in the gaming ops business, thoughtfully pursue synergies with the Integrity acquisition and continue to drive efficiencies in our business. We're laser-focused on internal systems and processes this year such as ERP, warehouse management, CRM, material resource planning and product life cycle management, which we believe, over time, will help with our inventory efficiencies and overall cost reductions.

And finally, our last, but certainly not least, growth initiative centers on our tireless commitment to maintain and strengthen our corporate culture. We passionately believe that this is a key differentiator for us and the stronger and healthier our culture is, the more we can grow in a meaningful way. And we will continue to focus on attracting and retaining the best talent using our growth trajectory and award-winning culture as 2 major incentives. Our unique culture enables us to have one of the strongest and most empowered R&D teams in the industry and we will continue to invest in key development talent and further studio expansion to help sustain our momentum for years to come. We understand that culture starts with the ones at the top and we will continue to aggressively ensure AGS senior leadership is consistently practicing our core values on a daily basis.

If you turn to Slide 13, you will see that given many levers for growth across all segments that I just covered, and we believe that we are in position in 2019 to produce between $160 million and $164 million in adjusted EBITDA, which includes approximately $9 million in contribution from the Integrity acquisition. And we believe that adjusted EBITDA will be similar to 2018 in the 47% to 48% range. We believe the right way to think about annual CapEx is approximately $65 million to $69 million as we pursue strategic growth opportunities in the gaming ops business.

Kimo mentioned our year-end leverage ratio of 3.4x. We have consistently communicated that we're comfortable with our leverage ratio being under 4x. However, given our growth prospects and continued product performance entering 2019, I believe that our increased adjusted EBITDA as well as free cash flow generation will enable us to put us in position to be under or equal to 3x in 12 months pending any potential M&A activity.

And finally, before we move to Q&A, I want to thank our shareholders and our customers for their support and confidence in AGS as well as the entire AGS team, now more than 700 employees globally, who made 2018 yet another historic year for us and are working tirelessly to deliver an even better 2019.

With that, we thank you for listening and we'll move to the Q&A portion of the call.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from Barry Jonas of SunTrust Robinson Humphrey.

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Barry Jonathan Jonas, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [2]

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Just a couple of questions. First on the guidance, maybe talk about the difference between the top end and the low end? And also, I think, for 2018, your CapEx guidance came in a little higher than guidance. So maybe just -- why is that?

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David B. Lopez, PlayAGS, Inc. - CEO, President & Director [3]

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I'll let Kimo start with our CapEx, and then I'll answer your guidance.

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Kimo Akiona, PlayAGS, Inc. - CFO, CAO & Treasurer [4]

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Barry, so for CapEx I think -- we came in a little bit higher, I think for a good reason, which you saw a lot of really good momentum in Q4. So you know when we were out saying that we were going to end the year domestically, net up in lease placements year-over-year, we did that a lot of that hard work at Q4. So the extra CapEx came in primarily from incremental leased units out in the field. There was a little corporate CapEx related to vehicles and service infrastructure. But most of it, again, was from growth machine CapEx.

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David B. Lopez, PlayAGS, Inc. - CEO, President & Director [5]

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Right. And then on the guidance range, Barry. I think the things to focus on there, from a variability point of view, is obviously slot sales is a big driver of that. RPDs overall could drive us up depending on how things go this year. The Interactive division for sure could be a bigger contributor than anticipated or be it a piece of that. We're just entering the Philippines. It's very early in the game. We're not counting on a whole lot there. So we've got some levers for upside there. And then of course, you've got the shuffler business and the table game business that's really firing up. The table business right now are progressive businesses on fire. And we're just launching the shuffler. So we've got some upside there, and that's sort of the bottom end to the top end of that range is depending on how bunch of those levers go up.

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Barry Jonathan Jonas, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [6]

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Got it. And then I guess just from a seasonality perspective. I know in the past you said not too much seasonality, but given the timing of Upright in the second half of the year, I guess what's the best way to think about seasonality in 2019?

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David B. Lopez, PlayAGS, Inc. - CEO, President & Director [7]

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I think, there's probably a couple of things as we look at 2019. 2019 could be a little smoother than we've seen in the past, the way that we're looking at it. You look at Q4, we saw some seasonality in Q4 on our lease business again. I think that was pretty clear in the numbers. I don't know that you have to look at Upright and think that the launch of the Upright will be affected, necessarily positive or negatively. I think that we'll have a good backlog of orders when we launch the product. You have to keep in mind that, that product was shown at G2E of last year. It probably had an even better reception than the Slant, and it's for showing. I think that just the design of the cabinet, it's fantastic. Our R&D team did a fantastic job with that. So I don't know that seasonality is going to have any big impact on that second half launch.

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Barry Jonathan Jonas, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [8]

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Got it. And then just last one for me. Another strong quarter for ASPs, but maybe can you just talk about the pricing environment out there? Are you seeing any pressures from any customers?

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David B. Lopez, PlayAGS, Inc. - CEO, President & Director [9]

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Thanks, Barry. So nothing specific. I think that there is the usual. I think that there's always a corporate or 2 that will take some shots at the end of the quarter and try to be opportunistic. We don't really fall into that because, as you know, that's trap, and that's something that we stay away from. We'd rather take out that we just took a pass on some units than giving away units that are cheaper at a lower margin, cheaper price. So I think the environment for pricing is fine. I think that we'll be sort of pressing that in the future with new cabinet design. And we'll try to press that pricing up even further in the future. So Upright is not a higher end, higher price cabinet. But in the future, I think there's still room for some upside on pricing.

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Operator [10]

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Our next question comes from Brad Boyer of Stifel.

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Brad J. Boyer, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [11]

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First question is just around the margins. Another quarter where you guys had exceptional revenue growth, but some of the corporate level costs came in a little bit ahead of kind of where we were modeling and I think where The Street was modeling. And so appreciate the fact that you guys are investing in the business for the long term. But just kind of curious how we should be thinking about the cadence of margins for 2019 and beyond? And when we -- you guys think we should start to be able to see some leverage in the business from the improved revenue environment?

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David B. Lopez, PlayAGS, Inc. - CEO, President & Director [12]

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So I'll just add. Kimo will start on your cadence question, and then we'll sort of come back to maybe your Q4 comment.

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Kimo Akiona, PlayAGS, Inc. - CFO, CAO & Treasurer [13]

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I think cadence, Brad, when we look at '19, I think as we moved through '18, one thing we kept saying related to '19 was that we look for '19 to look like full year '18. We know that Q3 came in a little lower. We talked about Gameiom and some other additional operating expenses we took on. I think Q4 is kind of more of the same. Remind everyone that we have G2E at Q4, and we're a company of a certain size that G2E does matter, and you do see it in our margins. But when you look for next year, we'd point you back to 48% kind of the range that we came in full year this year at just 48% -- so 47% or 48%. I think as far as cadence, you should see margins, EBITDA margins through the year be a little smoother than they were this year for a number of reasons. But that's how we look at 2019. Hopefully, that answers your question.

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David B. Lopez, PlayAGS, Inc. - CEO, President & Director [14]

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I think that answered both questions, Brad. So sorry, let us know.

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Brad J. Boyer, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [15]

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Yes -- no, that was great. I appreciate the color there. And then just around Integrity. I think you called out roughly 2,600 units. Just curious how you're thinking about approaching optimizing that installed base year as we look out over, say, the next 12 to 24 months?

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David B. Lopez, PlayAGS, Inc. - CEO, President & Director [16]

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Yes. So I think the entire Integrity acquisition and that project comes in phases. We'll start with low-hanging fruit early, which is sort of like some bad -- some public costs and some corporate public costs. We want to sort of monitor here -- early on here. Andrew and the team will watch very closely what's going on with the Integrity units, the installs. We really need to get to other customers. We want to make sure we don't just run out there and start optimizing things sort of willy-nilly. We want to be very measured. This will go into our bucket of everything else that gets optimized. It's not like we're specifically going to target Integrity units. We're going to put it into the hopper. As we like to say, turn it over to our team of nerds, on Andrew's team and then finance, they'll analyze things, and then we'll optimize appropriately and judiciously throughout the year and make sure we don't jump out there and do anything too soon. But I think that that's the way we look at it. We -- as far as growth goes in the Integrity acquisition, we talked about somewhere around on the upper end of what we're looking for organic growth like around that 15% mark. And we expect to be able to execute on that. If you sort of take 2018 EBITDA for them and you pro forma it for the partial year and then you add back some growths, that's essentially what we've gotten the number for us this year.

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Kimo Akiona, PlayAGS, Inc. - CFO, CAO & Treasurer [17]

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And to be clear, Brad, I think, when we gave CapEx guidance for the year of $65 million to $69 million, that is inclusive of anything we will do with Integrity. So it's all-in.

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Brad J. Boyer, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [18]

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Okay, helpful. And then last question for me is just around the environment today for game development talent. Clearly, you guys have made some significant investments there. You have a nice product road map, content road map here for 2019. Just curious, do you feel like today you have the personnel in-house to sort of, let's say, hit the objectives that you laid out in your Road to 250 presentation? Or is this still an ongoing process? Or are you still going to need to be actively recruiting new talent to the platform? And maybe just talk a little bit about what you're seeing out there today from a competition and expectation perspective from the game development personnel?

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David B. Lopez, PlayAGS, Inc. - CEO, President & Director [19]

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Yes. So a few things here. I think that in light of your sort of 250 or Road to 250 comment, that's something that we will just build over time. For starters, our team is fantastic. I would take our -- what I referred to as a relatively small team and put them up against any light-sized team or even bigger team in the industry. I think they're fantastic. I think Sigmund has done an amazing job assembling talent. And I'm really pleased with where we're at today. In order to get to 250 and really beyond, we don't want to just think about 250, we do need to continue to focus on recruiting in R&D. I would say this. That is a very competitive environment. But I would argue that we're winning. Looking at the talent that we've brought on in the last 12 to 18 months, I cannot be any happier with it. When I look at the talent that we're looking to recruit right now, I think that it's real deal first year talent, and I'm confident that that's -- those are the people along with our existing group that are going to help us get to that 250 number. And this really comes back to your 2 questions ago, right, that maybe we didn't fully answer. But you said, hey, corporate costs, can you talk about that, and this is really sort of coming full circle there is to talk about tech. That's where we're really investing now for the future so we know that we can get to that 250 mark and beyond. That's why you see a little of that cost in there now. And that will sort of have a slinky effect at times. We'll expand and then that number will look a little bit better, and that will be happening, and we'll expand again. We always talk about that. So I think that's how to look at that little bit higher cost right now. Why that cost is there. And hey, I think, we're winning on that R&D recruiting front.

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Operator [20]

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Our next question comes from Cameron McKnight of Crédit Suisse.

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Cameron Philip Sean McKnight, Crédit Suisse AG, Research Division - Research Analyst [21]

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So a question to David or Kimo. Just to follow on from the prior question. Did I hear it correctly, in terms of full year guidance of $160 million to $164 million, of that 19% growth, about 15% of that is organic, and the rest is the Integrity acquisition?

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David B. Lopez, PlayAGS, Inc. - CEO, President & Director [22]

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It's about right. Roughly. I mean we can break that down for you a little bit finer.

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Kimo Akiona, PlayAGS, Inc. - CFO, CAO & Treasurer [23]

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Yes, so in the number -- in the guidance number, a couple of data points. So David pointed out that $9 million is coming from Integrity. I think on an organic basis, I think, we're looking at a range between maybe 12% and 15%.

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Cameron Philip Sean McKnight, Crédit Suisse AG, Research Division - Research Analyst [24]

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Okay, great. Perfect. And David in your prepared remarks you mentioned on the recurring side of the business you see multiple opportunities to expand the footprint in 2019. Could you expand on a couple of those?

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David B. Lopez, PlayAGS, Inc. - CEO, President & Director [25]

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Yes. So I think that when you look at recurring -- our recurring footprint, and I'll speak to that number sort of globally. When we're expanding in 2019, obviously, it's going to be sort of like equal opportunity sort of like placements for leases. But again, we're going to be right back in our very strong jurisdictions like Oklahoma. We're going to see real growth in Mexico again. We're obviously going to see some international or what I'd say is true international growth because I sort of look at Mexico as almost domestic, but we'll see some true international growth with leased units in the Philippines. So when you put those all together, we've got real opportunities for recurring revenue growth in 2019 that, I think, that will shape up very nicely versus what we did even in 2018. But I think it's the usual suspect that can -- when you look at the domestic opportunities being led again -- once again by the state of Oklahoma.

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Cameron Philip Sean McKnight, Crédit Suisse AG, Research Division - Research Analyst [26]

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Okay. Perfect. And then finally, in terms of the leverage target of sub-3x by the end of the year, would that imply around about $40 million to $50 million of levered free cash flow and a modest amount of debt paydown?

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David B. Lopez, PlayAGS, Inc. - CEO, President & Director [27]

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So I think we said like right around, yes, it's probably a little bit less than that, right. But you can sort of work it out. You take our range. I think you just probably backed into the math there. You can take our range for next year, you can take the leverage ratio and then you can see where the gap is and you can sort of fill it in. And of course, our range is $160 million, $164 million, so that leaves a little bit of variability. And I think that also gives you the variability for cash flow next year, right, free cash flow. So -- but I think that we're targeting that 3-ish range, and that is obviously in the absence of any M&A.

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Operator [28]

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Our next question comes from Carlo Santarelli of Deutsche Bank.

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Carlo Santarelli, Deutsche Bank AG, Research Division - Research Analyst [29]

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David, just when you think about some of the puts and takes for the growth this year. And obviously, there's some organic and the $9 million you referenced from Integrity. But when you think about the Table Products and the Interactive divisions contribution to the overall growth or I should say to the organic growth. In 2018, I think the net of those 2 was about $1 million loss. How much do you think in 2019 those 2 segments on a combined basis could contribute to the year-over-year EBITDA growth within the range of your guidance?

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David B. Lopez, PlayAGS, Inc. - CEO, President & Director [30]

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So we'll probably not break that down that finite at this point in time. But I think if you look at it -- you summed it up nicely. I think that between the 2 is a negative $1 million or so. If you break down Table games, I think it was a much better results, right. If you look at Interactive, the second half of the year alone was about minus $2 million. So our growth year-over-year is really lapping some negatives. On the Interactive segment, I think that you'll see a little bit of loss once again in Q1. And then by the time we're exiting Q2, we should be EBITDA neutral. And then in the second half of the year, that's where you'll really start to see the Interactive segment and mainly driven by real-money gaming, really start to churn from. On the Table Products segment, I think, I'll refer to as being a real contributor. In this -- both in mid-single-digit-ish range or better. And I think that if you look at our progressive performance and the opportunity, and not to just focus on progressives because we have a lot of great products in our Table segment, but the progressive performance along with the shuffler opportunity, it's a little bit of a wildcard. And that's why when I was asked earlier about the range that could drive us to the upper end of our range, Tables could be an even bigger contributor. I've always said, I felt like 2018 we were just coiling up, right. And I think that we proved that 2018, we coiled up at the end of the year, we're starting to launch. And then in 2019 here, it's really going positive for us.

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Carlo Santarelli, Deutsche Bank AG, Research Division - Research Analyst [31]

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Great. That's super helpful. And then just one follow-up on the upside. Obviously, you guys have a -- what's going to look like a year-end, significant year-over-year installed base growth between both the domestic footprint with the Integrity acquisition plus anything organic you do as well as the Philippines opportunity. My question is, I believe -- and correct me if this is wrong, but I believe the Integrity acquisition may be the -- those units are like $14 a day or something like that? And I believe that the Philippines units, you guys have talked about before as maybe being like $12 a day. So when you think about the mix of those units on a combined basis, are you -- do you believe you'll be able to show gaming ops yield growth year-over-year in '19?

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David B. Lopez, PlayAGS, Inc. - CEO, President & Director [32]

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So if you're talking about actual RPD growth, right. I guess it's -- there's a few ways to look at it, right. If you put it on the hopper, we look at the domestic RPD and then we look at our blended RPD and then we start looking at Mexico RPD. But at the end of the day, if you look at domestic and you just keep the Philippines out of it and maybe Mexico out of it, for now, Integrity, obviously, creates a drag, right. Because it's much lower from an RPD perspective. But then you've got VLTs being removed. VLT removals drive us the other way. You've got new installs in some jurisdictions that might pull us actually down a little bit considering Oklahoma tight market and then new products and other jurisdictions forcing us back up and once again, one that is a positive indicator. Speaking Rock being out, that was a lower RPD. And that would be something that drives us up again. And so overall, for the year, we think we can pull around some modest RPD growth of maybe 1% or 2% on what we exited 2018 with.

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Operator [33]

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Our next question comes from David Katz of Jefferies.

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David Brian Katz, Jefferies LLC, Research Division - MD and Senior Equity Analyst of Gaming, Lodging & Leisure [34]

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I think from a full year perspective based on what you've guided, we have our numbers in approximately the right place. The question is, when I look at the quarterly breakdown from '18, you know what I see is around 25% of the earnings in the first quarter, 27% in Q2. Can you talk more about the cadence of the year for 2019 as you're thinking it through? And whether -- I think you've indicated the fourth quarter is usually the strongest because of G2E. A little cadence help would be welcome.

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David B. Lopez, PlayAGS, Inc. - CEO, President & Director [35]

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Yes. So I just think that, in general, we talked a little bit earlier about EBITDA margins, right. And how EBITDA margins will be a little bit smoother. I think, generally speaking, you might be looking at a little bit smooth of a year. If you look at 2018, I'm pretty sure, what, 2018, our best quarter was Q2, if I'm correct, on just the EBITDA basis. And then it might have been Q1 was the second best and then Q3. So honestly that seasonality was really, really dramatic. I think that you'll see things look a little bit more smooth throughout the year, and some of that is driven by the fact that our acquisition of the real-money gaming business, the impact in Q1 sort of draws it down, and Q2 was sort of like a little bit more neutral and then we have some other things coming into play and then it starts to go positive in the second half of the year. So it's very interesting, in 2019, it's going to change our sort of normal cadence and texture of our EBITDA production. And so I'd refer to it right now, without breaking it down by quarter, as to just be a little bit smoother than we've seen in the past. And somewhat or mostly affected by that online business and the release of shufflers and somethings as well like the Upright cabinet in second half of the year.

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David Brian Katz, Jefferies LLC, Research Division - MD and Senior Equity Analyst of Gaming, Lodging & Leisure [36]

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So can I be just a bit more direct about it? Is there a bit more of a tipping towards the earnings to the back half of the year within that improved smoothness?

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David B. Lopez, PlayAGS, Inc. - CEO, President & Director [37]

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I think a smidge towards the back end of the year is fair to say, yes.

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Operator [38]

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Our last question comes from Chad Beynon of Macquarie.

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Chad C. Beynon, Macquarie Research - Head of US Consumer, SVP and Senior Analyst [39]

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Just following up on the seasonality questions that have been asked. Anything that you could point out just in terms of newer expansion opportunities for EGMs in 2019? I believe there's a few expansions in Oklahoma, obviously the Win opening. I'm not sure if placements will come in the first or second quarter. But just any more color there. And could you just remind us, you are licensed in Massachusetts, is that right?

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Kimo Akiona, PlayAGS, Inc. - CFO, CAO & Treasurer [40]

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Yes. Yes, we are.

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Julia Boguslawski, PlayAGS, Inc. - CMO & Executive VP of IR [41]

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Yes. So Chad, for 2019, you asked kind of our expansions and some new openings and there are several I think we talked about some good recurring revenue opportunities with some units this year, and some of those are driven by some of these expansions. So you have Golden Mesa, which I think will probably happen around Q3, Harrah's NorCal, probably Seminole's NorCal, Border Casino, which is part of WinStar expansion. We've got [Megastar], which I believe is in Northern Oklahoma. And so there are some other things possible, Choctaw expansion, Valley View in California. There seems to be a lot of good expansion opportunity that will help drive our recurring revenue units in '19.

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Chad C. Beynon, Macquarie Research - Head of US Consumer, SVP and Senior Analyst [42]

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Okay. That's great. And then on the CapEx guidance, is there anything in there with the change in placement fees? And what's the update on the placement fee partnership economics, and if there's anything to talk about today?

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David B. Lopez, PlayAGS, Inc. - CEO, President & Director [43]

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So placement fee is sort of going to a different category, and Kimo can explain that a little bit more, but that sort of falls into the financing category there. He can walk you through that as need be. As far as like our -- I guess, our biggest partner and all, Chickasaw, we've been working diligently to deal with that. It's -- as we said, it expires sort of at the end of the year of 2019. We've had plenty of time. But we've gotten focused on it because we know that it's a focus for our investors. And at this point, we've got a contract. Terms and conditions are locked and loaded. Everything as agreed to. We have paper. Everyone's got paper in front of them, and we're just waiting for a very high-ranking official to come back into the country from, I think, the U.K. And as soon as that's ready, we lock and load and we sign. And so that will be happening in the near future here. Anything, Kimo, you want to add to that? I'm not going to go deeper on that...

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Kimo Akiona, PlayAGS, Inc. - CFO, CAO & Treasurer [44]

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Chad, I was going to say, so for us related to the agreement David just mentioned, the Chickasaw arrangement, because of the way we pay for that arrangement, you'll see our placement fees, remember, in the financing section. So we don't consider that -- we don't call that out as CapEx. And our expectation is that it will remain the same with the renewal.

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Operator [45]

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This concludes our question-and-answer session. The conference has now also concluded. Thank you for attending today's presentation. You may now disconnect.