PlayAGS, Inc. (AGS) on Q1 2021 Results - Earnings Call Transcript
Operator: Good afternoon. Welcome to PlayAGS First Quarter 2021 Earnings Conference Call. . Please note, this event is being recorded. I would now like to turn the conference over to Brad Boyer, Vice President of Investor Relations, Corporate Development and Strategy. Please go ahead. Brad Boyer: Thank you, operator, and good afternoon, everyone. Welcome to AGS' First Quarter 2021 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 first quarter of 2021 can be found on our Investor Relations website, investors.playags.com. David Lopez: Thanks, Brad, and good afternoon, everyone. As I sit here and reflect on the past 12 months, I'm amazed at how well the gaming industry has endured throughout the COVID-19 pandemic. It's hard to believe it has only been a year since we and our industry peers were talking about the steps we were taking to preserve our liquidity in the face of unprecedented adversity. At the onset of COVID, as casinos across the country began shutting down, I often heard industry executives and other constituents utter the phrase, "Never underestimate the spirit of the gambler." Judging by our first quarter financial performance, the gambler spirit is alive and well. As you have heard from our casino operator partners and seen in the state-reported GGR data, the first quarter was all about momentum. Although lingering casino closures, occupancy restrictions and several unprecedented weather events got the quarter off to a bumpy start, trends began to rapidly improve as the quarter progressed. To that end, relaxed COVID-related operating restrictions, declining case counts, improved vaccination efforts and other macroeconomic tailwinds, allowed our U.S. casino partners to benefit from the release of significant pent-up demand across their businesses throughout the month of March. Kimo Akiona: Thank you, David, and good afternoon, everyone. I'm proud of the way our team came together to deliver strong first quarter financial performance. Our results, once again, serve as a testament to the resiliency and durability inherent to our company's recurring revenue-centric business model. Although it remains difficult to predict the degree to which changes in the macroeconomic environment, including those directly related to COVID-19 protocols might impact our customers' operations or demand for our products, I am confident our improved execution and strong liquidity position will allow us to deliver more consistent financial performance and in turn, further enhance shareholder value. Turning to our first quarter 2021 operating results. We generated consolidated revenue of $55.4 million, representing an increase of 2% versus the prior year's quarter. Our gaming operations or recurring revenue improved 4% year-over-year. Easing COVID-19-related operating restrictions and ongoing vaccination efforts unlock significant pent-up demand across our U.S. operator partners businesses as the quarter progressed, in turn, strengthening our domestic EGM gaming operations revenue. Continued rollout of our industry-leading table game progressive products, broadening of our penetration into the lucrative EGM premium games segment and enhanced execution within our real money iGaming business further supported our improved recurring revenue performance in the quarter. Operator: . Our first question is from Chad Beynon from Macquarie. Chad Beynon: Nice results. Guys, understanding that you're not giving guidance, I wanted to focus on the installed base outlook. David, you noted that the premium market comprises roughly 70,000 units in North America. And it sounds like Starwall is performing well and Curve is right around the corner. Can you just kind of help us think about long term, maybe what the market share goals could be? And then near-term, how are you thinking about rolling out some of the titles that have been successful and could drive some growth in your installed base this year? David Lopez: Thanks, Chad. So we'll start with sort of the second half of the question there. Because I think on the first half, we're not really offering any particular guidance on what we're aiming for on market share of that sort of premium base, that premium lease based. As a reminder, we're just getting started. I think as Kimo and Brad and I were talking the other day, we're probably a solid 6 months into the launch of our premium product campaign. We're happy with how it's going so far. We've been happy with the momentum of the Starwall. We just launched Curve Premium. Too early to tell there. Of course, happy because it's early, and usually, we see good results early with our products like that. But we'll be rolling out Curve Premium throughout the back half of the year, additional in Q2. We think we've got a great lineup, quite honestly, not just in the slots, but we're very pleased, Chad, with our R&D effort there on games and really what their focus has been on since COVID. And of course, I'm just going to sort of plug the other 2 divisions, too, for Online and Tables have done a fantastic job in R&D. But I know I'm giving you a high-level answer here, but yes, we're not guiding on market penetration or ship share rate or anything like that just yet. It's too early in the game. But as you see on Starwall, so far, so good. We're very pleased with results. And it's early on Curve Premium, but again, we're confident that, that's going to do well. Our first game that we're launching there is Rakin' Bacon Deluxe. It's a known product. It's sort of, we'll call it, a fan favorite with our players. So, so far, so good. And obviously, you'll get more updates on that down the line. Chad Beynon: Okay. Great. And then the other side of that, just on the strategic pruning. I know you guys went through a lot of time with this during the past 6 to 9 months, does the elevated RPD levels that we're seeing right now, given strong regional gaming trends, does that kind of change how you were thinking about maybe pruning more? And where does this stand as you kind of look at it now? David Lopez: Yes. Good question and something we've obviously discussed, but we're pretty confident that the pruning process and what we've embarked on here, Chad, is the right thing to do. As far as the integrity base and what we've done there, we think it's been very effective. We're in the closing innings of that. We'll continue to look at other areas of the business. If something is not generating revenue or it's generating very low revenues because of location or something of the like, we're still going to get after and prune it because from a capital allocation and efficiency point of view, we want to be smart with our money and with shareholder money, and we continue to think it's the right strategy to get underperforming units out. And as we continue to roll out, whether it's Class II for lease product or if it's Class III lease and Class III premium lease, we think this is going to continue to improve our performance, efficiency, RPD and the like. So we're sticking to our guns on it. And obviously, the - it does change the equation when you look at a particular unit at any particular point in time. So of course, if our team, - we have our team and product management and game ops, if they're looking at a unit now, of course, it might not look like it's ready to be pruned versus maybe what it looked like in the past. So it does impact some things, but the high-level strategy we're sticking to, yes. Operator: Our next question is from Barry Jonas from Truist Securities. Barry Jonas: David, as the industry starts to recover, can you maybe talk about the general pricing environment? I imagine there was some pricing and discounting pressure on the height of COVID, but where are we now? David Lopez: So thanks, Barry, and thanks for being on mute because we do that all the time. It wouldn't feel like anything near COVID if somebody wasn't on mute, right? So I think pricing is - has not really changed a whole bunch from even 2019, 2020, 2021. Obviously, during 2020, that's like, hey, we can sort of take that off the table and set it aside. But I don't see average sale prices changing dramatically. You can look at certain pockets with certain vendors and, of course, see some change and some modulation there in pricing. But I think that largely, it will be rather consistent, and we don't have anything in our plan to say there's going to be some dramatic shift in pricing. From, I think, what's good, and it was in the prepared remarks, is that, number one, we're starting to see, obviously, with this performance, everybody listens to the operator calls with the performance we're hearing from the operators on their calls, it's freeing up some capital. It's not just sort of looking down the pipe and saying, "Hey, we're starting to see sort of some capital loosening up. It's loosening up. I think it's due to, obviously, their great performance. So for us, Q2, we could say is going to be something better than a modest improvement over Q1. And it will be - although O&E is part of our Q2 numbers, O&E should be a modest portion of those figures that we do in Q2. So ASPs in line, no big changes, and - but capital allocation improving. Barry Jonas: That's great. And then as a follow-up, hey, look, I know margins can move on mix, but you guys - and frankly, the whole industry, I think, has done a great job rainy and costs as a result of COVID, but as we look forward, are there meaningful items you can call out that are starting to come back? Or are you going to need to come back? Kimo Akiona: Yes. I would say if you look at the cost structure, right, I think it's fairly evident things like T&E have been seriously reduced, right, as we come off of last year. But as the sales force starts meeting with customers even more so face-to-face and you got trade shows start picking back up, you'll see some of that sales-type related cost structure come back into the organization. I think as, obviously, the macro environment improves, we get more comfortable spending in some areas that we probably maybe tightened up or overtightened up right coming off of last year. So you'll see some costs come back into the business. I think that's why, Barry, we tried to give some parameters, right, like historically, we've always spoken about the 45% to 47% margin. But for the full year, we're trying to talk more down towards the 45% range. Barry Jonas: And anything you'd call out that you think is permanent that doesn't have to come back? Kimo Akiona: I mean across the organization; we did do some headcount reductions. I think we were pretty loud though about - we reinvested some of those savings we took in certain areas back into R&D, right? So although maybe permanent in 1 sense, we kind of just reallocated back to R&D. I want to, if David, you had anything else to add? David Lopez: I mean, Barry, I think - I'm not trying to send any message here anything, and I know our marketing folks listen. I think our marketing spend and how we approach it might shift going forward. We might see some dollars reallocated from something like G2E, meaning we'll spend either modest or significant portion less than what we used to at G2E and really reallocate those dollars in a number of different directions. I would say most of them are in marketing itself. But I think that COVID has taught us a few things. And we believe this might be one of the areas where it may not be a true claw back, but reallocation of dollars to become more efficient and more effective with our spend to get a better ROI on the dollars. So we'll probably see at G2E this year and next year, and we'll let you be the judge of the direction we're taking with that. Operator: Our next question is from David Katz from Jefferies. David Katz: I wanted to just talk about something a bit more specific, which is the Kentucky historical racing machine market, which seemingly is growing and getting some traction. What updated thoughts or initiatives might you have around participating there with some of your stronger content? David Lopez: So the HHR space, we're solidly squarely in the middle of that with one of our partners that sort of enables our games to be served up in those jurisdictions. Our HHR game content and performance has been phenomenal. We're in Kentucky now. We do quite well down there. We will see orders throughout the balance of the year. And there's some new jurisdictions that are also opening up over the next, I'll call it, 6 to 9 perhaps as long as 12 months, I'll say, over the next 6 to 9 months, we'll probably see another jurisdiction or two open up. So we're bullish on HHR. We like it. It's, obviously, there in our prepared remarks that we've invested there because it helps bolster our product sales. We look forward to the new jurisdictions opening up. And everywhere where we are right now, our game performance is nothing short of fantastic. Operator: . Our next question is from Jeff Stantial from Stifel. Jeffrey Stantial: I wanted to start and ask on the international operations. You talked to it a bit in the prepared remarks, still lag in the U.S., just where Mexico stands, like to see a closure restrictions type basis. But my question is, David, as we look further out and you sort of see the market opening back up, should we expect to see a similar of pent-up demand unwinding as we saw here in the U.S.? I know you called out a lack of stimulus, but just curious if there's anything else to contemplate as well as you weigh the potential for your international ops to sort of mirror what we're seeing here right now in the U.S., just more on a lagged basis? David Lopez: Yes. I need to give you this answer, but I have no idea. I don't predict a huge pent-up demand in Mexico and in Latin America. I don't see that. The vaccine rollouts are slow. I think they're going to drag out for quite some time. So I think it's going to come back sort of in patches or in smaller geographies within Mexico and Latin America. Stimulus dollars don't really exist there. So there could be a little something there, but to predict something like that, I think the dynamic in the U.S. versus Mexico and Latin America is very different. Now if you were to go up north of the border to Canada, I think the interesting news there is not a lot of Canadian casinos have come back yet. It's sadly, COVID has sort of re-spiked there again. I think you could see some pent-up demand in Canada, but the good news is our Canadian customers have remained active with us and haven't really gone away. There's been a little bit of business going on there. And we hope as the casinos reopen there, we'll see some capital dollars release and things like that. But if we're looking for this the surge that we saw in the U.S., I'd say that's unlikely to be the case. Jeffrey Stantial: Okay. That's helpful. And I appreciate offering comments in spite of pretty limited visibility for everyone here on the call. So that's really helpful. Switching gears here over to your premium lease growth strategy. In particular, I wanted to talk about how you guys do Class II versus Class III markets for those product segments? I think in the past, you commented on something to the tune of 15% of Starwall units being placed in Class II markets, so just sort of consistent with how you view the mix of the total premium lease exposure and the growth opportunity moving forward? Just trying to get a sense of where the most upside potential here is as you look to grow your footprint there? David Lopez: So without getting into the specifics of what percent is in which jurisdiction because I don't have it in front of me right now, and I'll spend up quoting and number incorrectly. I would say in Class II, we continue to be pretty strong. When I look at Starwall and would I anticipate with Curve Premium, I anticipate that those products will do very well on Class II. So it will have a pretty significant representation of our footprint. That said, Class III is, I don't want to say, the prize, it is one of the prizes because Class II is very productive for us. But Class III is a very nice prize for us as we move into the jurisdiction, roll out more Starwall. At the moment, we're actually rolling out a new configuration, and we sort of refer to it as a football shape Starwall, which creates a little more, I know social distancing is not a turn we may feel like we used forever, but it takes the middle seat of Starwall and it makes it much more productive. In other words, it performs more like an NCAP seat. So we expect some good things from that in Class III. And as we roll out Rakin' Bacon blocks on the Curve Premium, we're going to be attacking the Class III market with that. No - again, no bold predictions about the mix. We're going after both markets. We're certainly very strong in Class II, and we're looking to improve our situation in Class III. Jeffrey Stantial: Okay. Great. That's really helpful. And congrats, really nice quarter. David Lopez: Thanks. Kimo Akiona: Thank you. Operator: . Okay. The conference is now concluded. Thank you for attending today's presentation.AGS Ratings Summary
AGS Quant Ranking
Related Analysis
AGS Surpasses Earnings and Revenue Estimates
On Thursday, May 9, 2024, AGS (NYSE:AGS) reported earnings per share (EPS) of $0.1104, surpassing the estimated EPS of -$0.05. This performance indicates a positive shift in the company's financial health, especially when considering the anticipated loss of $0.05 per share for the upcoming quarter. The company also reported revenue of $95.97 million, exceeding the estimated revenue of $87.39 million. This growth in revenue, alongside the EPS beat, showcases AGS's ability to outperform market expectations and suggests a robust demand for its offerings.
The anticipated quarterly report for AGS was expected to show a significant decline compared to the same period last year, with a forecasted loss of $0.05 per share, marking a 400% decrease. However, the company's recent performance has evidently defied these expectations, highlighting its resilience and potential for recovery. Despite the forecasted decline, revenue forecasts suggested an increase of 6% year over year, with expected revenues of $88.18 million. This projected growth in revenue, coupled with the actual revenue of $95.97 million reported, underscores AGS's ability to generate higher sales and possibly indicates a trend of continuous growth.
The stability in earnings projections, as noted, plays a significant role in influencing investor reactions to the stock. The consensus EPS estimate for the quarter remaining stable over the last 30 days, despite the anticipated loss, suggests that analysts have confidence in the company's underlying strength. This stability, combined with the actual earnings outperformance, could positively impact investor sentiment and the stock's short-term price movements.
AGS's financial metrics further illuminate the company's market position and valuation. With a price-to-earnings (P/E) ratio of approximately 88.24, AGS is valued higher than some of its peers, indicating investor optimism about its future growth prospects. The price-to-sales (P/S) ratio of about 1.25 and an enterprise value to sales (EV/Sales) ratio of around 2.62 reflect a moderate valuation in terms of sales. The enterprise value to operating cash flow (EV/OCF) ratio of approximately 8.94, alongside an earnings yield of about 1.13%, offers insights into the company's valuation relative to its operating cash flow and the earnings generated per dollar invested, respectively. Despite a high debt-to-equity (D/E) ratio of 7.49, suggesting a higher level of debt, AGS's current ratio of approximately 3.38 demonstrates a strong ability to cover its short-term liabilities with its short-term assets, indicating good financial health.
In summary, AGS's recent earnings report not only surpassed analysts' expectations but also highlighted the company's potential for sustained growth and profitability. The stability in earnings projections, despite anticipated losses, and the company's solid financial metrics, suggest that AGS is well-positioned to navigate future challenges. As AGS continues to outperform and grow its revenue, it remains a company to watch in the coming quarters.
