Q4 2023 PlayAGS Inc Earnings Call
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Ladies and gentlemen, please made holding your conference call will begin shortly.
Again, please remain holding your conference call will begin shortly.
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Hello, everyone.
Thank you for attending today's play a G S 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.
If you'd like to ask a question. Please press star followed by one on your telephone keypad.
I would like to pass the conference over to our host Brad Boyer Senior Vice President of Investor Relations.
Okay.
Thank you operator, and good afternoon, everyone welcome to the play Ags incorporated fourth quarter and full year 2023 earnings Conference call with me today are David Lopez, CEO and chemo achiote CFO of <unk>.
<unk> 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 play Ags Dot 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.
As 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.
The 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 the subs.
For financial information prepared in accordance with GAAP reconciliations between GAAP and non-GAAP metrics for our reported results can be found in our earnings release issued today. Please refer to our filings with the SEC for more information with that I would like to turn the call over to our CEO David Lopez.
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 Q.
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 then 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 AGM sales increased 36% year over year to a record 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 of 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 BTB content provider within the global real money gaming market.
Third payroll product 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.
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.
<unk> 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 three two times down from three eight times at the start of the year and slightly below the low end of our targeted three to five times to three five times range, we have considerably improved our leverage profile over the past several years and will continue to prioritize further deals.
Leveraging as our preferred use of excess capital for the foreseeable future with a path to below three times well within our sight.
With all of 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 multiyear growth trajectory.
Within our <unk> segment, the expanded scale and scope of our game content and cabinets 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, <unk> 43, and spectrum 49 with deep game library targeting the most in demand products segments.
Additionally, as we progress into the back half of 2024, we remain on schedule to make our initial push into the mechanical real and jumbo segments with our Mac real 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 fast 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 <unk>.
Utilize the added diversity and quality of our product offerings to increase the average order size within our activated customers.
I'm confident successful execution of our strategy will not only lead to shift 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 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 RPT and within our domestic ECM 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 right.
<unk> a change observed in the market level GTR.
Moving on to tables, although we've 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 extreme progressive continue to be well received as evidenced by the 5% sequential growth in our <unk> installed base achieved in the fourth quarter.
Additionally, customer adoption of our efficient and effective paxos shopper 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, <unk> packs 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 our reported market share of approximately 5%.
Additionally, we produced the fourth best overall slot performance in the report where the reported index of one six 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, and 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 in 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 chemo.
Thank you David and good afternoon to all of you on the call as.
As in prior quarters I'll 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'll 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 AGM equipment sales fourth quarter Global unit shipments increased 36% year over year to a record 1519 units, representing our third consecutive quarter of growth in excess of 30% sustained.
Sustained spectra 43 momentum supported by the continued strong performance of the cabinets expanded suite of game content.
Initial sales of our successfully launched spectrum 49, covenant and 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 2700.
<unk>, 7% versus the prior year.
Greater mix of higher priced 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 HCM unit sales by approximately 3% over our just reported full year 2023 total of 5244 units.
That said, we believe our ability to increase average order size through concurrently delivering a variety of high performing titles on both spectra, <unk> 43 and spectrum 49.
Further activation of new customers continued outsized share capture within the growing HHR market are scheduled back half launch into the mechanical reel and jumbo product verticals.
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 Asps, the $20 level should serve as a good proxy for 2024 supported by the premium pricing. We continue to command on our spectrum family cabinets and further execution of our price integrity strategy.
Shifting to game ops, the positive underlying trends within our domestic EGF gaming operations business continued in the fourth quarter with RPT topping $30 for the 11th consecutive quarter, while our domestic AGM 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 spectrum cabinet and increasingly diverse game content library and relatively stable market level GCN trends GR trends pushed domestic RPT to fourth.
A 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, <unk> expect it 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 EGF gaming operations business. In 2024 are high level growth algorithm remains relatively consistent with the prior years, notably we expect to leverage our growing suite of premium AGM products with multiple new premium form factors entitled 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 AGM cabinet and content portfolio to execute upon the continuous installed base optimization strategies.
Combined we believe these mixed driven initiatives should allow us to once again deliver domestic RPG that outperforms relative to the market level of <unk>, our forecasts I provided.
While also keeping our domestic AGM installed base on a modest long term growth trajectory.
Turning to our international AGM 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.
Turning to our international AGM 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.
A 16% year over year increase in fourth quarter gaming operations revenue.
International RPT 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 EGF RPT for the full year.
Looking beyond Agm's table product revenues increased more than 20% year over year to a record $4 8 million.
Greater customer adoption of our reliable and efficient packs as card shuffler innovative bonus extreme progressive technology, and then all inclusive Ags Arsenal site license offering pushed recurring revenue to a record of nearly $4 million.
Equipment sales revenue also established a new high watermark in the quarter supported by the sale of more than 20 <unk> units in conjunction with a recent high profile Las Vegas strip casino opening.
Turning to 2024 unwavering packs interest and demand a favorable customer response to the enhanced features and functionality recently added to our bonus spin extreme progressive tar.
Targeted jurisdictional expansion opportunities and a compelling pipeline of Arseno activations should keep our table product 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.
And accelerating cadence of new game launches, including the introduction of the company's first online first game theme double Shamrock improving.
Improving efficacy of are more tactical and targeted business development activities within our BDC operating partners. The continued strong performance of franchise brands, including capital gains in the online channel and the activation of more than 10, new <unk> operate our partners globally paced our record setting performance in the quarter.
<unk>.
The outsized revenue growth once again flow 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.
An improving margin profile within our interactive business supported by the segments continued outsized revenue growth.
Superior gross margins under highly modular and efficiently designed spectra family of AGM cabinets and.
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 five 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 the resources necessary to remain on an upward sloping multiyear 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 billion of used Orion family of 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 capitalize 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 five 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 repaid $15 million of our total debt outstanding.
Combine 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 of 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 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 three two times at year end compared to three eight times at the start of the year and below the low end of our targeted three five times to three five 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 in customer purchasing demand the growing appeal and strong performance of Ags's deeper and more diverse suite of AGM cabinets.
In game content, the anticipated continued outsized growth in interactive revenues and 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 two seven 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.
Absolutely.
We will now begin the question and answer session, if you'd like to ask a question at this time. Please dial star one on your telephone keypad. If for any reason you would like to remove that question you can do so by dialing start too.
Again, it is star one to ask a question.
I'll pause here briefly ask questions generate in the queue.
The first question is from the line of Barry Jonas with Truest. Your line is now open.
Great. Thank you guys, what do you see as the implications for Ags from the IGT every deal I guess, both in the short term and the long term. Thanks.
Hey, Barry Thanks, I think I.
I think history has instructed us here a little bit on this.
<unk>.
If we look back.
To that sort of 2012 to 2014 period, where there was a lot of consolidation. It was also a time, where we had acquired Cadillac Jack and neither one of US we're very big in class III following that that consolidation period.
The non big four suppliers.
Nearly tripled or actually about tripled their ship share from that period going up to about 2017 2018.
So we think that this fall create a little bit of.
Air Pocket here for some smooth sailing and have given us an opportunity to sort of step up.
In this case from a shipyard perspective, and get more eyeballs from the customers. So we feel pretty good about that but I think the key is for US is to run our playbook and do what we do best which is invest in.
R&D invest in our sales and product management teams and obviously great people across the organization not just in those three areas and sort of stick to that plan, which is putting out great content leveraging it not just in the casinos in the online space, but also eventually we have a very big opportunity to go abroad with it and we haven't.
Really gone past, Mexico, and a bit of Latin America to.
To do so so.
We like we like it for us.
It's probably good for the industry consolidation is long term good for the industry because it does sort of refresh the lower base of the non big four where youll start to see some smaller companies pop up and really come up with some some good gains in some innovation.
That's how I feel about it.
That's great really appreciate your thoughts there and then just a follow up I think there's probably some Asia specific tailwind set for this year, but maybe David maybe talk a little bit about how you see the health of the overall market right now.
So I think the health of the market Q1 is stable.
I think.
Barry everything we see it looks pretty good there and we don't see a whole lot of change I think others have commented the same on their earnings calls.
But I think we're focused on is our growth drivers and a little bit of what we said in the prepared remarks, which as you know.
This is sort of the first time, where we've had two cabinets that are right in the hotspot of what's going on with spectrum, <unk> 43, and spectra <unk> 49, we have some great opportunities there that just gets back to if you look at us on the island's reports you look at our performance on these cabinets very early days with spectrum 49, but spectra <unk> really been crushing it firm.
Lack of better term the content has been fantastic I don't think are I'm sure that we have never had a situation where we have had this many core games.
And on top of that.
Now we have another premium gains come hot out of the gate and the performance is from a premium perspective, the best performance, we've ever had in our organization. So.
Yes market stable and Ags.
Think better than stable, we're looking pretty good with our product line in the pipeline.
Perfect. Thanks, so much.
Thanks, Barry Thank you.
The next question is from David Katz with Jefferies. Your line is now open.
Hi afternoon, everyone. Thanks for <unk>.
Including me.
Look I wanted to talk about how you think about market share right.
Probably.
We spend a great deal of time thinking about gaining share losing share et cetera.
It is important as we think it is or are you just.
Making gains selling games driving profits driving cash flow.
And sure does what it does.
Yeah, Dave that's a good that's a great question.
We haven't really gotten this one before but thank you for the question I like it because we sort of should be running our playbook right and we should do what's best for us.
And at the end of the day.
Creating value generating free cash flow improving margins and all the things that you mentioned right.
We've been demonstrating EBITDA growth revenue growth free cash flow improvement has been a huge.
Focus of ours.
I think that we don't obsess with chip share right because of ship share wobbles, one quarter versus another quarter and it's not like maybe something that you guys would deem fantastic.
We're still looking at our financials right and we're looking at the Eilers report and we're looking at what's going on because the.
The proof is in our performance of our games and right now, we probably track performance of games a lot closer than we do ship share long term, yes ship share could come should just follow that nicely.
In in draft that very closely over time, yes, David I would just add this is Brad.
Another thing about the ship share metrics.
I encourage everyone to keep in perspective is that there are big segments of the market in North America that we currently do not sell into that our competitors are selling a significant number of games into including.
The route market here in the United States and in Canada.
Additionally.
From a swim lane perspective.
We're not fully penetrated at this point, we're making some strides here in the back half of this year getting into Mac grill and jumbo but.
Still there are some other categories.