PlayAGS, Inc.
Q4 2020 Earnings Call Transcript

Published: 4 Mar 2021

[Operator:]

Good day and welcome to the AGS Fourth Quarter Earnings Conference Call. All participants will be in a listen-only mode. Please note that this event is being recorded. I would now like to turn the conference over to Brad Boyer, Vice President of Investor Relations and Corporate Strategy. Please go ahead sir.

[Brad Boyer:]

Thank you, operator and good afternoon everyone. Welcome to AGS' fourth quarter and full year 2020 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 2020 can be found on our Investor Relations website investors.playags.com.

[David Lopez:]

Thank you, Brad and good afternoon everyone. To say 2020 was an unprecedented year might be the understatement of the century. That said, I'm a big believer in a famous quote

[Kimo Akiona:]

Thank you, David and good afternoon, everyone. Overall, I'm deeply encouraged and proud of the way our team came together throughout 2020 to overcome the unprecedented operational and financial hurdles introduced by the spread of COVID-19. Not only were we able to nimbly streamline our business to preserve liquidity at the onset of COVID, but we opportunistically shored up our balance sheet in May and successfully ramped operations as our casino operator partners gradually brought their businesses back online throughout the second and third quarters. Turning to our fourth quarter of 2020 financial performance. We generated consolidated revenue of $46.6 million representing a decrease of 40% versus the prior year's quarter. We attribute the majority of the year-over-year revenue decline to COVID-19's ongoing impact on operator demand for new slot equipment purchases and to a lesser extent the continued disruption to our recurring revenue business as a result of COVID-related capacity limitations and casino closures. To that end, fourth quarter EGM gaming operations revenue of $35.9 million reached 76% of prior year's level whereas total EGM sales of 283 units amounted to 22% of the level achieved in the fourth quarter of 2019. In aggregate, we derived 86% of our fourth quarter revenue from recurring sources, compared to 66% in the prior year's quarter. On a quarterly sequential basis, consolidated revenue decreased 5% as compared to the $49.3 million achieved in the third quarter of 2020. Sequential improvement in Table Products revenue and EGM gaming operations revenue of 13% and 12% respectively was more than offset by a 104-unit quarter-over-quarter decrease in slot unit sales, predominantly a function of a softer new casino opening and expansion calendar. Additionally, we strategically pruned and sold 476 lower-yielding units from our installed base in the third quarter of 2020, which negatively impacted the quarterly sequential revenue comparison. Adjusted to exclude the impact of these onetime sales, consolidated revenue would have increased by approximately 5% sequentially. For the full year 2020, we generated consolidated revenue of $167 million, compared to $304.7 million in 2019. The COVID pandemic's negative impact on our EGM and Table Products business both of which directly cater to our brick-and-mortar casino operator customers paced our year-over-year revenue decline.

[Operator:]

We will now begin the question-and-answer session. And our first question today will come from David Bain with ROTH Capital Markets. Please go ahead.

[David Bain:]

Great. Thanks so much. David, you mentioned that a few have opined that potential return to slot buying normalcy could occur in the back half. I think, we've all heard encouraging comments from 4Q calls with operators. I know there may not be anything substantive yet, but is there anything that you're hearing anecdotally on the ground from your sales guys? And then looking at the casino floor performance focus by operators versus nongaming amenities that have been mostly closed and maybe a hesitancy to reopening them, do you think that the return could prove even maybe more aggressive just given there's been such a significant pause in orders?

[David Lopez:]

Yeah. So thanks David. The first part of your question there is, yeah, the genesis of the comment comes from the ground from the boots on the ground. Our salespeople do a great job. We, obviously, talk to a number of different operators. And we just feel like we can see the momentum building up towards the second half of the year and that's what gives us confidence to say that. And on the second half of your question, we certainly hope that's the case. I think that when you look at the operators and how things have been for them post reopening, I don't want to use the word post-COVID, but post reopening after the COVID shutdowns their margins have been high. It's mostly driven by gaming amenities a.k.a. gambling. And we certainly hope that that can be something to propel things in the second half and beyond, as far as their focus goes for capital expenditures. It's a good sort of comment and question and we hope that that is recognized via their financials over the past couple of quarters.

[David Bain:]

Right. And then just my one follow-up would be, as we assume a normalized buying environment let's call it early '22 or late hopefully 2021, you have Oklahoma now stabilized improving the premium segment entrants and everything else happening with your product lines. I'm wondering will you be dusting off the road to 250 EBITDA? Is that something that you can even today, sit here and say is achievable by '25, '26 with small tuck-ins or maybe even without?

[David Lopez:]

Yes. I'll probably stay away from in this environment right now David from the road to 250 answer. I think that, what you're talking about with 2022 and beyond obviously, I think the things for us to focus on without speaking about tuck-ins or M&A is that, we have a very promising situation with our premium slots obviously starting with the Starwall launch. But now we're going to see a full year of the Starwall launch. That will be followed up by some other premium products obviously. Our pruning which you're somewhat referring to when you talked about Oklahoma, but our pruning has been rather effective. Asnd I think we're confident that that's adding additional stability and that should prove to help us with RPD long-term as we move forward. Our table electronics business, if you want to say our progressives etcetera are very promising as well. We just launched Bonus Spin Xtreme. I know it was in the prepared remarks, but that looks very good for us. And all of our progressives we think they're the best in the industry and they're performing very well. Along with that is our shuffler launch. I know again mentioned that in the prepared remarks. But the Pax S, we're excited that's a very nice segment. I'm familiar with it and so is our Head of the Division. And last but not least is the Interactive Division really performing stabilizing and showing promise for the future. So when we think about those four or five things and then yes maybe a tuck-in of course we're excited about our growth prospects. But I won't -- we won't really dust off 250, just yet. We want to get out of the woods here in 2021, look forward to some good things happening in '22 and '23. And with these things and yes some tuck-ins obviously growth is in the cards. But we're excited about the things obviously that I mentioned. It's all very positive.

[David Bain:]

Very good, thank you.

[David Lopez:]

Thanks David.

[Operator:]

And our next question will come from Barry Jonas with Truist Securities. Please go ahead.

[Barry Jonas:]

Hey guys, how’s going. Just a couple of questions. So David just a high-level one, as the world hopefully gets back to normal soon, do you see any permanent structural changes in the business as a result of COVID? And if the answer is yes how have you -- or rather would you like to adopt AGS to respond?

[David Lopez:]

So it depends on sort of what you're referring to. I mean we could -- if you're referring to our cost structure and expenses that's sort of one answer. If you're talking about directionally where are we aiming the boat right now right there's a difference. So I'll just answer them both Barry. From an internal expense and structural perspective, I think it will long term mirror the second part of the question but we were pretty lean to begin with. I think that there are some companies out there that have done some judicious or aggressive cutting. And although, we've done some very judicious cutting, we were pretty lean to begin with. What we saw was a shift maybe from one department to another where we moved some of our money and our spend around. So, that's really what we've done there. I think longer term, it will start to reflect, where the opportunities are. So, our opportunities clearly are in our slots, and in our premium product. Obviously, we're going to continue to focus on our Class II business as it's very good for us. But along with premium, we'll see – I think we see the world going in a direction. There's a bit of online surge now. We're already in that business. Maybe more content, maybe we see a little bit more investment there over time, and I think that's just following the money a little bit. Online is going to be a big part of the future. I think the absence of an online presence for any one of the slot vendors is a mistake. That's why, we're in it now, and I think that – to answer your question, we'll probably be in a bigger way going forward.

[Barry Jonas:]

That's great. And then just – can you give us an update on the Naskila machines? And, does your – does Kimo's commentary around 2021 trends assume any movement there?

[David Lopez:]

So, Naskila is largely just on hold and open. There's nothing definitive at the moment. I think there's some somewhat positive signs, and we're just in a bit of a holding pattern. Right now, they're a great customer. We like the relationship with them. They've always – we've always had a great working relationship with the folks down there. So at this point, we're in a bit of a holding pattern. But generally speaking holding, but a bit positive, so we'll wait – it's sort of a wait-and-see mode.

[Barry Jonas:]

Okay. Got it. So, sort of status quo with that 2021 commentary on margins and everything?

[David Lopez:]

Yeah, right. Exactly. Yeah.

[Barry Jonas:]

Great. Thanks so much, guys.

[David Lopez:]

Thanks, Barry.

[Operator:]

And our next question will come from Chad Beynon with Macquarie. Please go ahead.

[Chad Beynon:]

Good afternoon, and thanks for taking my question, all the commentary. David, Kimo I wanted to ask about the Orion Starwall footprint. I believe you said that's up to 300 units now. Impressive given the current situation, but how should we think about a goal or a ceiling on this product? And then more importantly, as the pruning continues, and you kind of ramp this premium segment, how should we think about what your premium portfolio could look like as a percentage of your units in the medium to long term? Thanks.

[David Lopez:]

So, Chad good questions. I think it's so early in the game. As far as, if you want to use the old innings analogy, we're probably in the first inning of our premium strategy. I think the thing to focus on in this at the moment is sort of what we said on the call, which is we've got that 300-plus installed right now. We've got a pretty good crew working. We're confident we're going to continue to grow it. We're going to release other products such as Curve Premium going forward. We know that with Curve Premium, we're kicking it off with one of our best brands which is Rakin' Bacon. Probably, not quite to the point now where we can talk about what percentage of the business it's going to represent, because we really truly are in the first inning, but we're excited and encouraged because the Starwall has done well. We've got two or three configurations of the Starwall that are in the field. And we have, I think a newer configuration that's coming out in the next 90 days or so that will be very helpful from we'll call it a social distancing perspective, and just what the trends are that we see in the casinos today. So we're encouraged by, a, the performance; b, the variations that we put out there and also of course Curve Premium about to launch as well. So, we'll probably get back to you on that answer, but that's probably something. Let's wait for the third or fourth inning, before we can predict what percent of the business it will be as far as recurring revenue goes.

[Chad Beynon:]

Okay. Thanks. Yes. Happy that baseball is back. And then with respect to 45% to 47% margin, so you generated 46% in this recent quarter. In the third – in the quarter prior to that you were at 55%. So, obviously with the leased to sale units it sounds like the first quarter of 2021 will be an elevated margin quarter. So, as we get past that this range of 45% to 47% is the reason why it is what it is, is that mainly just because of a mix issue as product sales start to account for a bigger percentage, or should we think about this potentially as being conservative given the first quarter should probably be higher than that or at the higher end of the range? Thanks.

[Kimo Akiona:]

Yes. Hey Chad. So, I mean in our -- in the prepared remarks, it's pretty key words that I chose to use -- we used the term bracketed. When we talk about margins, historically, we've always talked about 45% to 47% for EBITDA margin. But some of the commentary we made earlier about choosing to strategically invest for the long-term like R&D, like investing in product management, our sales force, some of the commercial team as we move through 2021, what we're trying to say is margins will probably end up being closer to the 45% range give or take. And it is because of the current revenue environment that we're in. And like we said, like look, if in the second half, we see the market come back stronger than anticipated, right, I think margins will improve. Like we don't expect expenses to outpace that revenue growth, but I think we want to make sure we highlight for the year where our expectations are for consolidated margin because of the strategic decision to reinvest in the business in areas like R&D. So, I think as you think about margin you should probably think more in the -- closer to that 45% range.

[Chad Beynon:]

Okay. That makes sense Kimo. Thanks guys. Best of luck. Appreciate it.

[Kimo Akiona:]

Thanks Chad.

[Operator:]

And our next question will come from Jeff Stantial with Stifel. Please go ahead.

[Jeff Stantial:]

Hey, great. Thanks. Afternoon everyone. So, I just wanted to follow up on David's question earlier. When your sales guys are talking to the various operators, is there any difference in tone between tribal versus a commercial regional operator, whether in terms of the recovery cadence for capital budgets longer term structural changes to kind of slot reinvestment levels? Anything like that?

[David Lopez:]

So, I think it sort of comes down to what tribe and what jurisdiction and what state. It really is all very regional and it's texture of that answer. And without going through it all, I would say this. Oklahoma is one of the stronger jurisdictions out there right now. I believe Oklahoma, California, the Northwest Florida will all be very strong, and continue to be strong here throughout 2021. So, there -- I'd say they're out in front of the pack. The regionals also are very strong. We know that Vegas will very likely be the ones to sort of be the tail end of this recovery if you will. But generally speaking, we can feel the momentum across the board. We mentioned on the prepared remarks, HHR has been strong. We see those businesses doing very well. And again tribes in the jurisdictions that I mentioned along with the regionals would sort of be in there as well at the top end. And yes, Vegas is going to be a little slower to recover. But we can -- we see these conversations improving across the board pretty much.

[Jeff Stantial:]

Okay, great. That's helpful. Thanks. Switching gears over to the premium leased segment. I'll try to ask a prior question a little bit differently. If you think about the 1% historical share, you've had in that product segment, what do you think is a reasonable target for where that could go longer term in your view just given the competitive nature of that specific product segment?

[David Lopez:]

Listen, obviously, we're so low in that segment. This play -- this cuts both ways, right? As operators are examining their floor very closely to look at premium product and determine on premium recurring product what stays on the floor, right, we're not really in the crosshairs of that conversation. So, we have a very low-risk profile when it comes to premium content on the floor. On the flip side, we have something unique. One of our things that's very unique in Starwall, where even if some things are being removed off the floor or there's a little bit of pruning by the operators for additional efficiencies, we believe that we've got an opportunity to get in there with the Starwall and maybe some of our premium Curve units. So, it's all upside for us. I mean we're probably under 1% of the market right now. And we haven't really talked publicly about a target specifically about where it can go, but we know with our products that we can do pretty well. Our goals are really related to product release, putting out the best unit the best games and a little less focused on where we're going to go three or four years from now. But we'll have those internal targets and we believe that you'll see the results in the financials over the coming years.

[Jeff Stantial:]

Okay, great. Thanks. That’s really helpful. Appreciate all the color.

[Operator:]

And our next question will come from David Katz with Jefferies. Please go ahead.

[David Katz:]

Hi, everyone. Good afternoon.

[David Lopez:]

Hi, David.

[David Katz:]

I wanted to go back to the Interactive business, if I may. It obviously is an extraordinarily hot topic. And I'm wondering if my headset is perhaps a problem.

[David Lopez:]

It's buzzing a little bit, but we can bear it here. Let's go for it. We're good.

[David Katz:]

All right. The handset is good.

[David Lopez:]

Yes.

[David Katz:]

I wanted to ask about the Interactive business, which is, what is involved with getting some of your top content into the system and into the ecosystem? Is there a capital investment involved? What would it take for you to decide that you want to just make it a big business or a bigger business and grow it?

[David Lopez:]

Right. Good question, David. For the most part, it's a function of how large your development or your team that translates these games from the brick-and-mortar business into the online world. Obviously, it's not a straight port. There's work to be done there. So we moved pretty quickly on this. But what we're doing is, we're just trying to optimize and just make sure we're efficient with the use of our capital, not to just go out there and we'll say, develop or program or port over 12 or 15 titles overnight and then hope for the best. I think that we've done a nice job so far, being efficient, picking the best titles. Some of the things that work online David, it's very interesting. Our top game online is probably in the bottom 10% of performers in brick-and-mortar. So this is why we have to be smart. We have to be efficient and not rush to judgments on what our plan is. But in order to really turbocharge the business, the short answer is, maybe another studio or development team for online to get more content into the system. At this point, like you can just pick a jurisdiction like a Michigan or something and the like. Right now, I think we're live with one of the operators, but we'll eventually be live with all of them. We're pretty much signed up with everybody. It's just a process of time to get approved, to get integrated and to get online. But outside of that, it really does come down to content studios. And even though our content already exists, again, don't want to rush into it, because as I said, our best games in the casino have not been our best games online. It's actually one of our bottom tier performers that's sort of crushing it online.

[David Katz:]

Understood. And frankly, I think that’s all I had. Appreciate it. Thanks very much and good luck.

[David Lopez:]

All right. Thanks David. Have a good one.

[Operator:]

And our next question will come from John DeCree with Union Gaming. Please go ahead.

[John DeCree:]

Hi, everyone. Thanks for taking the question. David, I wanted to ask you about your customer demand. In recent history customers have -- casino customers have typically had an affinity, at least, public casino customers to buy games over lease, given they were so focused on margin. Now that they found a lot of margin presumably in -- during the lockdowns and they're keeping a tight grip on their wallets from capital constraints have you seen any preference or operators moving more towards leasing versus buying and if that's an opportunity for you and for the industry to get a lot more of those premium units out this year with that environment?

[David Lopez:]

So I think they're looking for efficiencies across the board John. It's actually an interesting question. With some meetings that we've had over the past, probably even just few weeks, we can see on one end -- and it's very sort of tight group when you talk to these folks. In one end they're looking for, hey, where is the biggest chunkiest expense on the floor from a recurring premium point of view? And then they're looking at performance and saying, hey, how are they performing? And what are we paying? Is it worth it to have it on the floor, right? On the other side, early in the year -- here in the first half we're not seeing a lot of capital expenditures, all right? And you've covered that. So you should, sort of, cover both of those restating what you said. But in the middle there's this, sort of, narrow group that we can talk to that might be looking to because they don't have a lot of capital at the moment -- at the moment. They might be willing to look into some we'll say like efficient leases and trying new things and talking to AGS and saying, hey, we don't have a lot of your premium or lease product at this point. And I think they're looking for something in the tier of premium that we exist in. We don't have unreasonable minimums on our participations. Our flat fees when we are in a jurisdiction where this flat fee is very reasonable as well. So I think that your question is interesting. I think it's a small slice of the market. But interestingly enough, it is happening to an extent. It's not -- this is not a wildfire. This is not running rapid. But very interesting question and we do see a little bit of it yes.

[John DeCree:]

Thanks. It seems like it might be an opportunity or window of opportunity given the dynamics, but I appreciate your color. If I could ask maybe a quick tack on to that. Your ASP in the quarter was quite strong as it was in 3Q as well. And there's a little bit of I think mix you've mentioned too on HHR, but probably pretty small. I guess the broad question is your success in keeping pricing power in spite of kind of limited replacing demand for the quarter and your thoughts on maintaining that ASP for 2021 would be helpful.

[David Lopez:]

Right. So I think what you're getting at is that we didn't compromise ASP in order to sell more units over the past couple of quarters. And we're going to do our best as we always have to avoid that because we believe you have to play the long game here John. And you can't go the 10-cup approach and try to go over the water all the time. We got to lay up here, right? And so that means you go a little -- you take it a little easy. Why go out there and compromise price for more units, right when you know that COVID is not going to last forever. The operators are not going to be in the same position forever. We have a great belief in the quality of our product that we're selling and we don't think that it should be a discount-type product. Therefore, we are doing our best to maintain those ASPs. Now that said, with low quantity sales you're going to see a little bit of turbulent ASP from time to time. It might pop-up a little higher. And I think that our ASP that you've seen of late is going to be, sort of, still our average. But from time to time it might pop-up just because we're not selling high-volume at the moment. But, yes, we're going to maintain our pricing integrity. We believe in our products and we think that we have a fantastic product offer to the casino. So we're, sort of, sticking to that.

[John DeCree:]

Thanks, David. That’s really helpful. Appreciate that color. Thanks.

[Brad Boyer:]

Thanks, John

[Operator:]

And this will conclude our question-and-answer session also concluding today's call. We'd like to thank you for participating on today's call. And at this time, you may now disconnect your lines.