Q2 2023 PlayAGS Inc Earnings Call
Okay.
Hello, and welcome to the play H S. Q2, 2023 earnings Conference call. My name is Alex there'll be coordinating the call today.
I asked a question at the end of the presentation you can press star one on the telephone keypad. If you like to remove your question you May Press star followed by two.
I'll now hand, it over to your host Brad Boyer SVP Investor Relations. Please go ahead.
Thank you operator, and good afternoon, everyone. Welcome to the play Ags incorporated second quarter 2023 earnings Conference call with me today are David Lopez, CEO and chemo.
CFO a slide presentation, reviewing our key operational and financial highlights for the second quarter ended June 32023 can be found on our Investor Relations website investors play Ags Dot com.
On today's call, we will provide an overview of our Q2 2023 financial performance and offer perspective on our current financial outlook for the business. This conference call will include the use of forward looking statements any statement that refers to expectations projections or other characterizations of future events, including financial projections or future market conditions is a forward looking statement.
Based on assumptions today actual results may differ materially from those expressed in these forward looking statements and we make no obligation to update our disclosures for more information about factors that may cause our actual results to differ materially from our forward looking statements. Please refer to the earnings press release, we issued today as well as risks described in our annual report on Form 10-K.
Particularly in the section of these documents titled risk factors.
Our commentary today will also include non-GAAP financial measures. We believe the use of these non-GAAP financial measures provides an additional tool for investors to use in evaluating ongoing operating results and trends in our business. These measures should not be considered in isolation from or as a substitute for financial information prepared in accordance with GAAP reconciliations between GAAP and non-GAAP metrics for.
The 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.
Thanks, Brad and good afternoon, everyone. Today I will keep my remarks brief as I believe our record setting financial performance clearly demonstrates the strength of our products team members and strategy, which.
Which is creating significant momentum within all three segments of our business over the past several quarters I have talked about our commitment to recruiting and hiring the best R&D sales and product management talent to join our team.
The culmination of these efforts is reflected in our second quarter performance as we established 10, New records in the quarter.
I will start with total revenues, which increased 17% year over year to nearly $90 million improving sequentially for the 10th consecutive quarter.
Adjusted EBITDA grew 16% year over year to approximately $40 million.
Domestic game ops revenue increased 7% year over year to $49 $3 million, establishing a new record for the third consecutive quarter.
Domestic RPG reached $33 48 <unk>.
So passing $30 for the ninth consecutive quarter.
Our premium <unk> installs grew to over 2700 units increasing for the 14th consecutive quarter.
<unk> sales revenue surpassed $28 million up more than 40% year over year and more than 7% ahead of the previous record set in Q3 2019.
<unk> eclipsed $20000 for the first time ever.
We sold units to nearly 150 unique customers, 60% higher than the numbers sold to in Q2 of 2019.
Table revenues reached $4 4 million up over 25% year over year.
And last but not least RMG revenue increased 10% year over year to $2 $3 million.
Looking beyond records, we also delivered on Delevering.
During the second quarter, we executed with EBITDA, moving higher and free cash flow, surpassing $12 million.
As a result.
Net leverage improved to three six times down from three eight times at the start of the year.
Supported by our record setting first half performance and our ability to generate free cash flow over the remainder of the year. We now expect to exit 2023 with net leverage in the range of three to five times to 350 times.
This equates to a quarter turn reduction at the top end of the range.
Before turning the call over to chemo I'll highlight a few things and each product segment that I'm most excited about.
Starting with <unk>, our new spectrum 43 Cabinet continues its hot Street topping the July Eilers survey for the seventh consecutive month.
So far we have placed over 16 150 spectra units and.
And demand for the cabinet remains robust.
While our two launch titles long Val Val and Shamrock <unk> continued to deliver exceptional performance with each averaging over 175 times House average the key to spectrum success extends well beyond our strong games.
It has been our R&D expertise product strategy and operational execution that is aided and performance that is hands down better than anything I've ever seen.
All of which will position us for success over the long term.
Turning to table products, our Pax Shuffler continues to take the industry by storm.
Pushing Q2 sales and recurring table revenues to new records.
To date, we've placed over 265 packs units.
And with our footprint increasing by approximately 30% since Q1.
While some folks may take a successful launch for granted I cannot overstate when the accomplishment and has been to successfully design develop manufacture sell and service our competitive shuffler product and an industry long dominated by one company.
That said I would like to congratulate the engineers software programmers testers assemblers and the service and sales team for their contributions to the success of this product.
Looking ahead at our trial activity and the.
The growing operator interest I'm confident <unk> will continue to serve as growth catalysts for many quarters to come.
Finally, I'll move to our interactive segment.
Returns on our highly focused talent investments pushed Q2, RMG revenues to a new record.
As the old saying goes records are made to be broken and I do not expect our Q2 record of hold up for very long as just last week, we launched our first new game, leveraging our revamped RMG gaming development team.
In addition to benefiting from our first collaboration between our land base and interactive teams. The game was the first developed on our completely redesigned online platform and serves as our first title in the popular three reel slot segment.
Looking forward I believe we have a strong and passionate team in place to consistently deliver a steady supply of great content.
In closing I would like to thank our teams around the globe.
<unk> focused on their specific goals and delivering on the high level objectives. The company has put before them.
It truly is our products and our people that I'm excited about the remainder of the year and well beyond with that I'll turn it over to chemo.
Thank you David and good afternoon to everyone on the call.
As in prior quarters I'll review, a couple of highlights from our reported results and provide a perspective on how we see each of our business segments trending as we look ahead to the current quarter I will also share some thoughts on our free cash flow outlook for the year and close by addressing a few items related to our balance sheet.
Turning first to our domestic <unk> gaming operations business second quarter revenue increased 7% year over year to a record of nearly 50 million well ahead of the 2% to 3% increase and market level gross gaming revenues or GTR.
The growth algorithm driving our relative outperformance in Q2 remained consistent with the past several quarters modest installed base growth led by further expansion of our premium unit footprint at spectra deployment and sustained strength in our reported domestic RPG supported by growing spectra.
And premium mix.
Other capital efficient optimization, and a relative stable <unk> environment.
Looking ahead to Q3, we believe the momentum behind our premium products, coupled with the relative stability of our core unit footprint and scheduled new casino openings and expansions should allow us to grow our domestic installed base for a sixth consecutive quarter.
As it relates to RPT trends observed Q3 to date continue to convey stability and market level GTR.
The broader market resiliency, coupled with our ability to further leverage multiple company specific catalysts, including our high performing spectra cabinet increasingly deep and diverse core content portfolio and consistent premium gain market penetration momentum should allow us to deliver Q3 domestic RPT.
That is in line with to slightly ahead of the 31 13 achieved in Q3 of 2022.
I would remind everyone Q2 has historically served as the seasonal high point for our domestic game ops business and we expect normal seasonal trends to prevail this year.
Shifting to AGM equipment sales, we sold over 1250 units globally in the second quarter up 35% year over year and 7% ahead of Q2 2019 the.
The momentum building behind the continued strong performance of our spectra cabinet.
More than 65% increase in the number of customers sold to the ability to leverage a deeper and more diverse product portfolio and relative stability and market level demand trends all contributed to our outsized unit sales growth in the quarter.
As we look ahead to Q3 accelerating demand for spectra that continued strategic focus on broadening our customer account penetration and consistent market level demand trends should allow us to deliver global AGM unit sales volume that modestly exceeds Q2 levels.
Moving onto AGM pricing as David mentioned earlier.
Quarter global average selling price or ASP surpassed $20000 for the first time ever driven by a greater mix of premium price spectra cabinet sales and continued implementation of our price integrity initiatives.
Looking to Q3, although we expect domestic unit pricing to be relatively consistent with the prior quarter a modest projected increase in our international market sales is likely to produce a global ASP that is slightly below the level achieved in the second quarter.
Turning to our international ECM business recurring revenue increased nearly 20% year over year and improved sequentially for the 12th consecutive quarter.
The continued strong performance of several established Ags franchise game themes throughout Mexico.
Further installed base optimization stage.
Stable macroeconomic trends and favorable FX movements contributed to our improved recurring revenue performance in the quarter.
International RPE topped $8 for the second consecutive quarter and surpassed the $8 22 achieved in Q2 of 2019 by more than 8%.
As we look ahead to Q3, we believe our stable installed base and resilient market level revenue trends should allow us to deliver our 13th consecutive quarter of sequential international game ops revenue growth.
Looking beyond <unk>, our table products business delivered another record quarter with equipment sales and recurring revenue, both reaching new highs.
30% sequential increase in our <unk> S shuffler footprint to over 265 units over $2 million of high margin progressive revenue and growing contribution from our Ags Arsenal site license offerings, all contributed to our record performance in the quarter.
Supported by the consistent momentum, we continue to observe of cross sales and recurring revenue channels, which should be able to further improve upon our record setting Q2 performance in the third quarter.
Shifting to interactive as David indicated our RMG business set a new revenue record in the second quarter, while our interactive segment continued to generate positive adjusted EBITDA.
Beginning in Q3, we expect to realize a more pronounced lift in our RMG revenues as the payoff from recent investments into our technical and commercial teams and upside from recent new customer activations become better reflected in our quarterly results.
Turning to margins second quarter adjusted EBITDA margin was slightly above 44% ahead of the expectations articulated on our Q1 call. A continued organizational focus on operational efficiency better than expected performance across our higher margin recurring revenue businesses and <unk>.
Stronger than anticipated product sales gross margins drove the relative upside in our Q2 margin performance.
Although we continue to expect our full year adjusted EBITDA margin to land in the 44% to 45% range. We believe recurring revenue seasonality and our anticipated AGM unit sales mix could produce a Q3 margin that looks relatively similar to the 44, 1% delivered in the <unk>.
Quarter.
Second quarter capital expenditures totaled approximately $16 million, bringing our year to date capital spend to just under $30 million. While we continue to project full year capital expenditures inclusive of anticipated capitalized R&D to land in the range of $65 million to $70 million, our companywide commitment.
To capital deployment discipline has us trending towards the lower end of the targeted full year range.
Cash interest in the quarter was approximately $13 million, increasing our year to date cash interest expense to roughly $26 million.
Looking to the back half of the year, we believe the recent move higher and market level rates could modestly increase our quarterly cash interest payments relative to the $13 million incurred in the second quarter.
Second quarter free cash flow defined as net operating cash flow plus proceeds from payments on customer notes receivable less capex surpassed 12 million increasing year to date free cash flow to approximately $4 million looking.
Looking out over the remainder of 2023, we believe the combination of our continued operating momentum capital deployment discipline and a heightened organizational focus on working capital efficiency should allow us to consistently generate positive quarterly free cash flow with full year 2023 free cash flow.
<unk> on pace to exceed the approximately $15 million of normalized free cash flow delivered in 2022.
Finally, although David stole a little bit of my Thunder here I want to reinforce we now expect to exit the year with net leverage in the range of three to five to three five times consistent with our prior range and commentary the assumptions underpinning the midpoint of our revised targeted leverage.
Range continue to contemplate a modest pullback in prevailing market level conditions over the remainder of 2023 as compared to those encountered in 2022 and 2023 year to date period.
That said should broader market trends remained relatively consistent with those we are currently experiencing we would expect to exit 2023 with net leverage in the bottom half of the range.
Finally, 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.
As a reminder, if you'd like to ask a question you can press star followed by one on the telephone keypad.
Like to remove your question you May press, so I'd like to pay.
And so you're on mute locally when taking your question.
Our first question for today comes from Ed angle of Russell and Cam.
Please go ahead.
Hi, Thanks for taking my question and congrats on a nice quarter.
Just wondering how youre thinking about leverage here and I guess for next year <unk>.
Progress kind of come into the low end of your targeted range hopefully within a year.
As you look into 2024 is there any opportunity to maybe get some interest rate savings. There I guess do you have kind of.
Have a target leverage ratio in mind, you'd like to achieve before you even start to consider something like a refinancing.
Good question I mean, obviously top of mind for us right, but we put out our target for this year, but as we look forward I think definitely top of mind has been what will be the right leverage target what is the right market conditions to start looking at refinancing our debt and getting.
Something that maybe needs where the business is at that time as far as like an exact number I couldnt give you like an exact leverage target where it makes sense because I think there's a lot of things to consider right, including our credit rating and other things like that but what I would say as we look into next year like I think we've always said that.
One of our call it medium term targets and a big thing for us would be to get below <unk> three times leverage so I think again.
What we are driving and I think that kind of.
Permeate through the organization right and a lot of different decisions that we've made so next year I think one of our targets would be to get get down to that three times leverage target.
Great. That's helpful. And then again really good kind of momentum across the business in terms of get market share gains.
How do you think about your R&D levels here do you think that kind of continue to grow with revenue or might you need to kind of ramp that up a notch to kind of maintain some your momentum.
So we think we're in a good spot right now obviously.
We can be opportunistic from time to time, if we see talent on market as we said in the prepared remarks.
This is a big focus for us we always we always want to be better we always want to be top tier as far as talent goes.
But I think that right now we're comfortable with where we are as far as studios and bandwidth and our ability to put out quality content not just.
Game content, but also the hardware, we put out and I think that's sort of reflected.
And the performance, but it's what we talked about with spectra <unk> 43.
Not just one thing and I know the question specifically about R&D.
But how we're focused as just infrastructure around product distribution service, and obviously game and cabinet creation, and that's where we that's where we made our investment and I think that we're reaping the benefits right now and at the appropriate time, obviously, we can scale up a little bit more but we're very.
Thoughtful about how we're going to do that going forward. We know we're in a very good place right now with the number of studios, we have and not just the number but the quality of the things that we have on the team.
Great. Thanks again congrats.
Thank you next.
The next question comes from Chad Beynon of Macquarie.
Please go ahead.
Okay.
Afternoon, Thanks for taking my question and nice quarter guys.
Wanted to start with your Premier premium installed base. This appears to be kind of the big segment that everyone's focused on and it seems like as long as the games are performing and operators are making money from these games, they're going to continue to to add the product so given where some of your competitors.
Yeah.
The current markets are there current percentages or whats kind of a near term goal for you guys because if youre performing well there is certainly going to be demand here can this can this continue to move up through 'twenty, three and 'twenty four.
Yeah, Hey, Thanks, Chad, Yes, we can continue to move up and we really don't I think we've got some internal aspirational goals we.
We look at our competition as far as you know what their premium base is as a percentage of their entire install base. We know we have some bandwidth still when we look at those numbers both from a unit standpoint, and sort of revenue premium revenue as a percentage of all game ops revenue.
That's all I would say aspirational, but yes, there is upside here for sure and sort of we know we've got quite a ways to go but we don't really give that percentage the way the year looking for love to but we're not there as.
As far as public statements will say.
Okay, but it's safe to assume that it can still move higher.
Oh, yes, no I mean, we're confident.
We've got the right.
Silver mine up and.
And if you look at our pipeline of games that are coming in sort of show up at <unk>, you'll see some real fresh new premium content, but performance is still strong for us and we anticipate.
Content to keep flowing for us there.
Thanks, David and then chemo within your guidance you talked about flat to slightly higher <unk> unit sales for the third quarter that kind of goes against wood.
Normal seasonality may be for some others. So so clearly it shows that you are taking market share and given your broader customer penetration. That's certainly shining through is it fair to assume that the fourth quarter could still be.
Seasonally the highest quarter just given how strong the operators are doing and given <unk>.
New product that comes in the fourth quarter.
Yes, I mean I think.
One of the themes, we've talked about I think last quarter and this quarter is that normal seasonality across different parts of our business still holds strong right. So I think your assumption about Q4, possibly being the high watermark for sale is a good assumption.
Our commentary about our beliefs on Q3.
Minutely driven by spectra.
If you look where spectra is in its lifecycle I mean, it's a fair.
Early newly launched product and with the momentum gained performance. These are just the initial gains that are not spectrum and we have a whole roadmap of games to back up. This hardware, we feel really good about where we are and where the product is headed right now.
Thanks, Chemo I appreciate it guys.
Thanks, John .
Yeah.
Thank you. Our next question comes from Barry Jonas of Trust. Your line is now open. Please go ahead.
Yes.
Hey, guys just wanted to follow up on Ed's question, and a really nice quarter with free cash flow generation and the deleverage improvement just curious at what point do share repurchases, yet interesting given where valuations are.
It's always a final question right.
Again come back.
Leverage targets and where we feel.
We feel good about where the company can get to and when you talk about something like refinancing our debt and that type of savings we can realize from that event.
For me personally I think for the company, we get more excited about that so I think our focus is really going to be on again deleveraging I mean your question about this magic number of warehouses that equity gets to where it makes sense I mean, I'm not ready to give that number either but I will say were just 100% focused on deleveraging.
And deleveraging and accumulating cash on the balance sheet right now again that refi event I think will be essentially a good event for the company and that will yield some great cost savings at some point, so I think again, 100% of our focus.
Great and then just for a follow up we're not modeling any thing in Texas, but I think investors are very excited about the potential there just curious if there are any updates you can share there.
Yes, Thanks, Barry the scale, primarily is probably your question, there's a couple of others as well.
But at the moment, we're sort of standing fast as Ive said waiting for any sort of news on that front nothing to report on at this time I think the good news is since.
Things have obviously settled in after the Supreme Court decision, we're starting to see some marketing activity at <unk> and <unk>.
We are.
Leasing machines down there participating so we can see the results of that in the numbers and that market seems to be maintaining and improving and strength.
It is good news on that front, but as far as any expansionary measures. We're waiting we are waiting patiently.
Great, Thanks, and a nice quarter.
Thanks Barry.
Thank you. Our next question comes from Jeff <unk> from Stifel. Your line is now open please.
Please go ahead.
Hey, good afternoon, everyone. Thanks for taking our questions.
And you started out here on the GM business gross margins were really nice performance in the quarter by my math up over 500 bps versus Q1, and well ahead of 2019 levels chemo could you just expand a bit more on the drivers here and is there any reason to think why this won't be a sustainable level moving forward.
Yes, I mean, I think if you look at one of the themes again, we've been talking about spectrum right and I think the power of the waste spectra was built and designed and that type of margins. We were expecting even before we launched it I think it's holding true and you can see Q2 is definitely a testament.
We have a strong quarter of spectra sales as far as the mix right like we want to emphasize mix too because we definitely don't want to deemphasize curve like Orion curve is still an active great product in our portfolio, but does carry a different margin. So and we have a quarter that has a strong spectrum quarter, that's where I think youll see that sales margin come.
Even stronger by this quarter I think gross margin on our slot product sales was near 55% right. I think if you look at verticals going forward. It probably will always have a five handle in front of it so it'll be within the 50% to 55% range and again, we will highlight it will be dependent on mix.
And I think as we move forward as well I think one thing we've been focused on as well as capturing a little more international sales right. So if there is a quarter, where we get a little more international sales generally those carry slightly lower gross margin so that could affect gross margin as well.
I'd only add a little bit to that varian that as far as margins go looking into the future.
We look at these cabinet spectrum 43 is our current release, we sort of referred to it as a working name as Nextgen cabinets and the thing that we've done is excuse me <unk> Barry is gone now thanks.
So Jeff the one thing to keep in mind here is that.
As we talked about that R&D and in particular, our hardware teams.
We've made sure that our our development of these cabinets have a lot of shared parts and it seems like every iteration, we come out with.
We're at Orion and now we're in the spectra, we get better at this every every sort of next generation of cabinet that comes out and as the next versions of spectrum Nextgen come out I think you'll continue to see those efficiencies there.
That's helpful and encouraging.
Thanks for that color.
Moving over to the interactive business.
You called out in the release and during the prepared remarks, some investments into growth impacting margins during the quarter.
Chemo could you just provide some color on sort of how you see these investments phasing out and when do you expect to see maybe some more typical operating leverage for that type of business start to come back.
Yes to your question and I'm, sorry, just to be clear your question specific to interactive and the investments we've been making there.
Correct, Yes, some of the some of the investments you made on the interactive side of things.
Yes, I mean, we started sort of I'll say, our incremental investment journey last year right related to interactive we sorta Bill basically built another game studio build up our commercial team and did some we'll call it restructuring there as.
As we move through this year, we're excited about age too right. Because if you look at where we are now we're just starting to release, we will see some new content from our new studio and Theres. Some original content coming out as well. So I think as we move forward looking into next year I think is when you'll start to see call. It some operating leverage.
<unk> from that business, but again equally important to emphasize right, but I think where we've been in the business long enough to know that you need to keep incrementally investing at a certain rate to ensure the long term success of that business, but we would expect some operating leverage starting maybe next year for interactive.
And Jeff This is David again, but I think this is an area, where we're very excited going forward.
We always talk about volume and sort of velocity of putting games out there.
But I think what's equally as important is that our game selection from brick and mortar the way that we interact with our teams that are that are reporting that content over.
User interface and all that and then as I've said in the past chemo comment like original content for online like unique original content for online gaming. So we anticipate some really good things are going to happen here over the next 12 months and obviously, some operating leverage will come out of that but.
We're super excited about this one.
Great. Thanks, again nice quarter.
Thanks.
Thank you next.
Our next question comes from David Katz of Jefferies. Your line is now open. Please go ahead.
Hi, Thank you for working me in.
I wanted to just get a little more color on the pipeline obviously.
We don't want to see.
<unk> any thunder that may be coming from <unk>, but just give us a sense of the scale and scope.
What.
The magnitude of.
What you're following up obviously on the strong momentum that you already have.
Yeah, Thanks, David So yeah.
We'd all like to spoiler alert the <unk>.
Situation at <unk> like to say, it's always just everyone show up at <unk>. So we have to show their I would say that we've got a lot of.
Interesting things that will we will show at <unk> and in the coming I'll call. It six to nine months.
And this is again a reflection of the investments that we've made we got the question earlier about hey are we comfortable where we sit in R&D right now and I'd say, we're really pleased with where we're at and not.
Not just productivity from our games point of view, but I think that you are talking mainly about cabinets and so we think we're sitting in a good place.
There will be some really nice things coming down.
The road here, but I don't want to upset R&D and product management by spoiling their big reveals.
Okay.
Okay.
Can we talk then perhaps about alright.
Sure sure and I, but.
Okay.
Okay.
Alright.
It just sounded disappointed.
I didn't mean to tip that.
But look I'd like to just get a little more sense of your kind of medium term aspirations in terms of scale and market share et cetera.
Where do you think you can take this what's your vision.
A little bit like we said earlier, we know theres a lot of upside David I think that.
Both on the premium side, which was a specific question. We got earlier like age we haven't when do we have a specific target there.
On just ship share being another figure I think there's a whole bunch of Kpis and I also think tenants. We look at it's always going to look at some of our competition and as we do in the future or open up some new swim lanes for ourselves and the product categories.
Underneath EGF specifically.
I think that that's going to help us pick up additional ship share not so long ago, we were.
Really only in.
Really selling portrait only now we're selling.
Portrait on the spectrum 43, we're selling curve on on the Orion side, we'll continue to sort of like probe into new whereas we like to say the swim lanes and the GM space and I think as you see that unfold.
Over the next let's say year, or so youll see sort of where the potential is for market share gains and just improvements overall I really think it's going to be exciting times over the course of the second half of this year and moving into a good chunk of 22024.
There is some good upside here for us.
Okay, I'll take that and our ratings speaks for itself.
Yes.
Thank you.
Thank you. We currently have no further questions for the state.
That concludes today's conference call. Thank you all for joining you may now disconnect your lines.
We currently have no further questions for state so that can go.