PlayAGS, Inc. (NYSE:AGS) Q4 2023 Earnings Call Transcript
PlayAGS, Inc. (NYSE:AGS) Q4 2023 Earnings Call Transcript March 5, 2024
PlayAGS, Inc. beats earnings expectations. Reported EPS is $0.05574, expectations were $0.02. PlayAGS, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Hello, everyone. Thank you for attending today's PlayAGS Fourth Quarter and Full Year 2023 Earnings Call. My name is Sierra, and I'll be your moderator for today. All lines will be muted during the presentation portion of the call, with an opportunity for questions-and-answers at the end. [Operator Instructions] I would now like to pass the conference over to our 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 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 fourth quarter and fiscal year ended December 31, 2023 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 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 obligations 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.
Reconciliation 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. The fourth quarter capped off an exceptional year for AGS, with revenues and adjusted EBITDA increasing 15% year-over-year. Q4, represented our 11th consecutive quarter of double-digit growth, and our fifth consecutive quarter of double-digit adjusted EBITDA growth. The strength in the quarter was broad-based, with all three operating segments, setting new quarterly records for revenue, and adjusted EBITDA. The quality and consistency, of our financial performance is a true reflection, of our incredibly talented and focused team, increasingly deep and diverse product offerings, across all three segments, and the improving efficiency and effectiveness of our execution. Before providing some perspective on the current year, I would like to highlight a few notable achievements for the fourth quarter.
First, global EGM sales increased 36% year-over-year, to a record 1,519 units, surpassing the 30% growth level for the third consecutive quarter. Just like Q3, our record performance was not driven, by a concentration of sales to any one customer, or within a jurisdiction, as we sold units to nearly 180 unique customers in the quarter, a new record for the company. Second, our Interactive revenue grew by over 30% versus the prior year to $3.4 million, with strong flow through increasing Interactive adjusted EBITDA by nearly 160% year-over-year to a record $1.3 million. Our refreshed and energized Interactive team, continues to further cement our position as a leading B2B content provider within the global real money gaming market. Third, Table Products sales and recurring revenue reached new records in the quarter, producing an approximately 20% increase in adjusted EBITDA, to a record $2.8 million and pushing full year adjusted EBITDA, to approximately $10 million.
I think it is important to remind everyone our table segment, was doing less than $1 million of annual EBITDA in 2018, with the 60% growth CAGR, over the past five years reflecting the incredible work, from our entire tables team. Fourth, free cash flow increased more than 45% year-over-year to $11 million, topping the $10 million for the third consecutive quarter. We are encouraged by the progress made improving the consistency, and magnitude of our free cash flow generation over the past several quarters, and I believe our organizational focus on this key metric, will continue to drive consistent growth, in our free cash flow conversion in 2024, and beyond. Kimo will provide some context around our free cash flow outlook for 2024, in his prepared remarks.
Finally, we ended the year with net leverage at 3.2 times, down from 3.8 times at the start of the year, and slightly below the low end of our targeted, 3.25 times to 3.5 times range. We have considerably improved our leverage profile, over the past several years, and we'll continue to prioritize further deleveraging as our preferred use of excess capital, for the foreseeable future, with a path to below 3.0 times, well within our sight. With all that said, I would like to turn my attention to 2024 and the exciting path forward for our company. As you have heard me say on prior calls, I continue to believe we have the strongest, most diverse product offerings in our company's history. Additionally, the quality of our team, across all three operating segments, and at the corporate level, has never been better.
Lastly, the consistency and quality of our execution, continues to steadily improve, as evidenced by our recent string of record operating performance. Collectively, I believe the three Ps of people, product and process position us, to not only improve upon our record 2023 results in the current year, but also set us up for compelling multi-year growth trajectory. Within our EGM segment, the expanded scale and scope, of our game content and cabinet portfolio, focused go-to-market strategy, and driven sales team, have us well positioned on both sides of the business. For the first time in the company's history, we've had two high-performing cabinets, Spectra 43 and Spectra 49, with deep game libraries, targeting the most in-demand product segments.
Additionally, as we progress into the back half of 2024, we remain on schedule, to make our initial push, into the mechanical reel and jumbo segments with our mech reel cabinet recently receiving GLI approval. Collectively, these two segments account for over 15% of the total units sold into the North American market, dramatically expanding our addressable market. Ultimately, our growth algorithm and slot sales is simple. First, further leverage our focused and targeted sales strategy, and the recent strength of our product performance, to broaden our customer base. And second, utilize the added diversity and quality of our product offerings, to increase the average order size within our activated customers. And confident, successful execution of our strategy, will not only lead to ship share gains in 2024, but it will also set us on a path to becoming a top five supplier of choice, for many years to come.
On the recurring revenue side of our domestic slot business, the outlook is as equally as compelling. We have demonstrated over the past several quarters, our unique mixed-driven growth catalysts, including an increasingly powerful premium game offering, and more diverse array of core content, have armed us with the necessary tools to deliver consistent, modest growth in both domestic RPD, and within our domestic EGM install base. Looking to 2024, I believe the unprecedented depth and diversity, of our cabinet and content roadmaps, across both the core and premium market segments, should allow us to utilize a similar growth algorithm, to deliver relative outperformance and domestic gaming operations revenue, as compared to the rate of change observed in the market level GGR.
Moving on to tables, although we have come a long way over the past five years, I believe our recent momentum will continue throughout 2024, as we further solidify our position as a partner, and innovator of choice within the market. The enhanced features and functionality of our Bonus Spin Xtreme progressive continue to be well-received as evidenced by the 5% sequential growth in our BSX install base, achieved in the fourth quarter. Additionally, customer adoption of our efficient and effective PAX S shuffler continues to surge, with our footprint surpassing 330 units at year end, and a healthy pipeline building for Q1. Finally, we continue to drive greater adoption of our AGS Arsenal site license offerings, with several notable launches lined up for the first quarter.
All told, I believe the unwavering strength of our three growth pillars, BSX, PAX, and Arsenal, coupled with our strategic focus on broadening, our geographic and customer account reach, and our continued progress on the development of a new multi-deck shuffler, keep our table game business, on a compelling multi-year growth trajectory. Finally, I'm greatly encouraged, by the increasingly consistent and efficient execution, with our Interactive segment, where our run rate of annualized revenue and adjusted EBITDA, is now topping $13 million and $5 million, respectively. Although Interactive is in the early innings of an outsized multi-year growth cycle, I think it is important to highlight the February 2024, Eilers Industry Survey ranked us as the sixth largest provider of slot content to North America online market with a reported market share of approximately 5%.
Additionally, we produced the fourth best overall slot performance in the report, with a reported index of 1.6 times site average, with our capital gains theme performing, as the second best slot overall. Looking ahead, I believe the quality of our Interactive team, and the great number of strategic growth objectives, in our line of sight positions AGS to emerge as a leading share gainer within the high growth RMG channel, in both 2024, and beyond. In closing, I would like to thank our team members around the globe for their commitment, focus and dedication throughout 2023. The record setting performance, we have been able to achieve, is a true reflection of the quality products you have developed, the successful strategies, you have orchestrated, and the efficient execution of your plans.
With the most exciting lineup, of new products and the highest quality team in my tenure as CEO, I remain extremely excited, about what lies ahead for AGS, and I look forward to sharing our progress with you on future calls. With that, I will turn the call over to Kimo.
Kimo Akiona: Thank you, David. And good afternoon to all of you on the call. As in prior quarters, I will review a couple of highlights, from our reported results, and provide perspective, on how we see each of our business segments trending, as we look ahead to the current year. I will also share some thoughts, on our free cash flow outlook for 2024, and close by addressing a few items, related to our balance sheet. Turning first to EGM equipment sales, fourth quarter global unit shipments, increased 36% year-over-year, to a record 1,519 units, representing our third consecutive quarter of growth, in excess of 30%. Sustained Spectra 43 momentum, supported by the continued strong performance of the cabinet's, expanded suite of game content, initial sales of our successfully launched Spectra 49 cabinet, a more than 70% increase in our total customer count to nearly 180 unique customers, and stable market level demand trends, once again contributed, to our outsized unit sales growth in the quarter.
Fourth quarter global ASP was approximately 20,700, up 7%, versus the prior year. A greater mix of higher price Spectra family cabinet sales, which accounted for over 80% of total unit sales in the quarter, and further implementation, of our price integrity initiatives contributed, to our improved ASP performance in the quarter. Looking ahead to 2024, current consensus estimates project we should be able to grow Global EGM unit sales by approximately 3% over our just reported full year 2023 total of 5,244 units. That said, we believe our ability to increase average order size through concurrently delivering a variety of high-performing titles on both Spectra 43 and Spectra 49, further activation of new customers, continued outsized share capture within the growing HHR market, our scheduled back-half launch into the mechanical reel and jumbo product verticals, a slightly more robust set of international sales opportunities and the relatively consistent market-level customer purchasing behavior observed 2024, to-date should allow us to surpass the level of growth currently reflected in consensus.
From a cadence perspective, we expect 2024, to follow a similar seasonal pattern to 2023, with Q1, serving as our lowest volume quarter of the year, and volumes building, as we progress throughout the year. With respect to ASP, the $20,000 level should serve as a good proxy for 2024. Supported by the premium pricing, we continue to command on our Spectra family cabinets and further execution of our price integrity strategies. Shifting to game ops, the positive underlying trends within our domestic EGM gaming operations business, continued in the fourth quarter, with RPD topping $30 for the 11th consecutive quarter, while our domestic EGM installed base, increased sequentially, for the seventh consecutive quarter. Continued growth in our high-yielding premium game footprint, further optimization of our core unit installed base, supported by deployment of our Spectra cabinet, and increasingly diverse game content library, and relatively stable market-level - GGR trends, pushed domestic RPD to a fourth quarter record of $31.68.
Looking out over 2024, current Wall Street estimates project, full year market level gross gaming revenue, to be flat to up 1% year-over-year, with Q1, GGR expected to be down, 1% to 2%, versus the prior year, as a result of the heavily discussed, weather disturbances in January. As we reflect on the outlook for our gaming, our domestic EGM gaming operations business in 2024, our high-level growth algorithm, remains relatively consistent with the prior years. Notably, we expect to leverage our growing suite of premium EGM products, with multiple new premium form factors, and titles scheduled to launch, throughout the year, to thoughtfully and consistently expand, the mix of higher-yielding premium games within our domestic installed base, building on our 16th consecutive quarter, of premium unit growth.
Additionally, we plan to utilize the enhanced scale and scope, of our core EGM cabinet and content portfolio, to execute upon the continuous installed base optimization strategies. Combined, we believe these mix-driven initiatives, should allow us to once again, deliver domestic RPD that outperforms, relative to the market-level GGR forecasts I provided, while also keeping our domestic EGM installed base, on a moderate long-term growth trajectory. Turning to our international EGM business, the continued strong performance of our established AGS franchise game themes, throughout the Mexico casino market, further execution of our global installed base optimization initiatives, a stable macroeconomic backdrop, and favorable foreign exchange fluctuations, contributed to a 16% year-over-year increase, in fourth quarter gaming operations revenue.
International RPD, increased over 15%, versus the prior year, or approximately 4% on a constant currency basis, to a fourth quarter record of 8.86. Looking ahead to 2024, we expect our international installed base, to remain relatively consistent with year-end 2023 levels, while our ongoing optimization efforts and stable market-level trends, should contribute to a modest growth in constant currency international EGM RPD, for the full year. Looking beyond EGMs, Table Products revenues, increased more than 20% year-over-year, to a record $4.8 million. Greater customer adoption of a reliable and efficient PAX S card shuffler, innovative Bonus Xtreme progressive technology, and an all-inclusive AGS Arsenal site license offering, pushed recurring revenue to a record of nearly $4 million.
Equipment sales revenue, also established a new highwater mark in the quarter, supported by the sale of more than 20 PAX S units in conjunction with a recent high-profile Las Vegas Strip casino opening. Turning to 2024, unwavering PAX interest and demand, a favorable customer response, to the enhanced features and functionality, recently added to our Bonus Spin Xtreme progressive, targeted jurisdictional expansion opportunities, and a compelling pipeline of Arsenal activations, should keep our Table Products lease revenue stream, on a trajectory of consistent and predictable growth, similar to the one demonstrated in 2023. That said, I would encourage everyone, to keep the timing and magnitude of sales revenue, related to 2023 new casino opening activity in mind, when putting together segment-level projections, for the current year.
Shifting to Interactive, revenues grew by over 30%, versus the prior year, and 8% sequentially, to a record $3.4 million. An accelerating cadence of new game launches, including the introduction of the company's first online first game theme, Double Shamrock, improving efficacy of our more tactical, and targeted business development activities within our B2C operating partners, the continued strong performance of franchise brands, including Capital Gains, in the online channel, and the activation of more than 10 new B2C operator partners globally, paced our record-setting performance in the quarter. The outsized revenue growth once again flowed through, to segment-level EBITDA, which more than doubled year-over-year to a record $1.3 million.
Looking ahead to 2024, we believe the added depth, and diversity of our content roadmap, planned new customer and jurisdictional launches, and increasingly effective business development efforts, put our Interactive business on a path, to delivering the highest level of year-over-year revenue growth, amongst our three operating segments, with consistent sequential growth anticipated as we progress throughout the year. Additionally, as demonstrated over the past several quarters, we expect to flow through a significant portion of the incremental revenues, generated throughout the year, contributing to a considerable adjusted EBITDA margin expansion, and adjusted EBITDA growth within the segment. Turning to margins, fourth quarter adjusted EBITDA margin surpassed 45%, exceeding the expectations articulated on our Q3 call, and improving margin profile within our Interactive business, supported by the segment's continued outsized revenue growth, superior gross margins, on the highly modular and efficiently designed Spectra family of EGM cabinets, and operating leverage resulting from the over 15% year-over-year increase in total revenues, all contributed to our solid margin performance, in the quarter.
As it pertains to 2024, we expect to achieve an adjusted EBITDA margin, in the range of 44.5% to 45.5%, representing a modest lift over 2023 at the midpoint. Our margin outlook incorporates, the revenue growth expectations articulated in my segment level remarks, which should allow us to realize operating leverage, on our corporate SG&A expenditures. With respect to R&D, we expect to reinvest behind growth, to ensure we are arming the business, with the products and resources necessary, to remain on an upward sloping multi-year growth trajectory. As a result, we anticipate 2024 expense R&D, remaining relatively consistent on a percentage of revenue basis, at approximately 12%. Finally, we expect to execute upon the sale of approximately $1 million of used Orion family cabinets, to a distributor in Q1.
These sales, which will not be reflected in our reported KPIs for the quarter, are likely to push first quarter margins in line with, to slightly below the low end of our targeted full year range. That said, we expect margins to steadily expand, as we progress throughout the year, pulling us comfortably into the targeted range, by year end. Fourth quarter capital expenditures totaled $15 million, bringing the full year capital spend to just under $62 million. Turning to 2024, we expect full year capital expenditures, inclusive of anticipated capitalized R&D, to land in the range of $65 million to $70 million. Cash interest in the quarter, was approximately $14 million, increasing the full year cash interest expense, to just under $54 million.
On February 5, 2024, we successfully completed, a repricing of our term loan credit facility, which effectively reduced the interest rate spread, applied to our term loan borrowings, by 35 basis points. Additionally, in conjunction with the repricing transaction, we elected to voluntarily repay $15 million, of our total debt outstanding. Combined, the repricing and repayment, are expected to reduce our annualized cash interest expense, by approximately $3 million at current market level rates. Fourth quarter free cash flow, defined as net operating cash flow, plus proceeds from payments on customer notes receivable, less CapEx, reached $11 million, surpassing the $10 million level, for the third consecutive quarter, and pushing the full year 2023 free cash flow, to approximately $27 million.
Looking ahead to 2024, we believe our consistent operating momentum and execution, heightened focus, on efficient and effective working capital management, continued CapEx deployment discipline, and anticipated cash interest savings, from our recent debt repricing and repayment, should allow us to grow a full year free cash flow, by 25% or more, with material levels of positive free cash flow generation projected, in all four quarters. Finally, net leverage fell to 3.2 times at year end, compared to 3.8 times, at the start of the year, and below the low end of our targeted 3.25 times to 3.5 times range. Supported by the relative resiliency observed, across the broader North American gaming complex 2024, to-date, both with respect to gross gaming revenue trends, and customer purchasing demand, the growing appeal and strong performance, of AGS as deeper and more diverse suite of EGM cabinets and game content, the anticipated continued outsized growth and Interactive revenues, an unwavering commitment to cost containment, and operational efficiency, and steadily improving free cash flow conversion, we expect to exit 2024 with net leverage in the range of 2.7 times to three times.
Finally, I would like to reiterate our approach, to deleveraging remains unchanged, as we continue to target, a combination of adjusted EBITDA growth, and consistent free cash flow generation. Operator, this concludes our prepared remarks. We would now like to open up the line for questions.
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