PlayAGS, Inc. (AGS) on Q2 2022 Results - Earnings Call Transcript
Operator: Good afternoon. And thank you for attending todayâs PlayAGS Q2 2022 Earnings Call. My name is Austin, and I will 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. I would now like to pass the conference over to our host, Brad Boyer, SVP, Corporate Operations and Investor Relations. Brad, you may begin.
Brad Boyer: Thank you, Operator, and good afternoon, everyone. Welcome to the PlayAGS Incorporated second quarter 2022 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 second quarter ended June 30, 2022, can be found on our Investor Relations website, investors.playags.com. On todayâs call, we will provide an overview of our Q2 2022 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 you substitute 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 press release issued today. Please refer to our filings with the SEC for more information. With that, I would like to turn the call over to our CEO, David Lopez.
David Lopez: Thanks, Brad, and good afternoon, everyone. As I reflect upon our second quarter financial performance, I canât help but think back to the sentiment in the market exactly one year ago. As you may recall, most investors were wondering if the trends that weâre seeing across the broader U.S. game industry were as good as it gets. The stars all aligned for our casino operator partners in Q2 of 2021, resulting in record setting of gaming revenue for nearly every operator in the major U.S. markets. At the time, though we were able to leverage the strength in the broader market to establish some new records of our own, I was fairly confident Q2 2021 did not reflect peak performance for AGS. Our 2022 second quarter results validated those views from one year ago as we were able to build upon several records established last year. Letâs take a few minutes to review some of the record-setting highlights from the quarter. First, Q2 2022 domestic EGM gaming ops revenue increased 1% year-over-year to a new company record of $46.2 million. Although modest growth, we are extremely encouraged by this accomplishment considering it was achieved against the prior year period that comprised the greatest three months in the history of gain. Second, our installed base of premium EGM products nearly doubled year-over-year, accounting for 12% of our domestic EGM installed base at the end of Q2 2022, compared to 6% this time last year. Our continued success in the premium game category serves to highlight the strong returns we have been able to generate on tactical investments into R&D, sales and product management teams. Third, our Table Products segment continues to fire on all cylinders, with revenues and adjusted EBITDA set a new all-time record in the quarter. Early commercialization of our PAX Ssingle-deck card shuffler, accelerating demand for our bonus spend extreme progressive and growing customer adoption of AGS site licenses drove our record-setting table games performance. With all that said, I imagine some of you are probably wondering that Q2 2021 wasnât as good as it gets for AGS, how should we think about Q2 of this year. From my perspective, though several new records were established in the quarter, I believe we can significantly build upon our recent success moving forward. Looking ahead, while Iâm encouraged by our recent financial performance and excited about the direction which we are heading from a product perspective, Iâm evenly as enthused by the sales and product management teams we have in place to monetize our R&D investments. Over the past 24 months, we have added considerable talent to the front end of the business, which has directly supported our impressive premium installed base growth and record domestic gaming ops revenue. Our recent success clearly demonstrates the power of having our R&D team work in concert with the front end of the business to allow our products to reach a broader subset of key customers. In addition to our execution led growth catalysts, we continue to search for strategic opportunities capable of transforming the long-term growth trajectory of our business. Recent examples of these types of opportunities include our successful expansion into the historical horse racing or HHR market and continued exploration of avenues to accentuate growth outside of our core North American markets. Additionally, we continue to look for opportunities to further leverage key competitive advantages, including our extensive game content portfolio, unique development capabilities and deeply rooted customer relationships to strategically broaden our Class II business. Recently, these efforts have extended well beyond the borders of our largest Class II markets, as we were able to benefit from a favorable June Supreme Court ruling to execute growth opportunities presented to us within the Texas Class II market, a market we have steadfastly supporting for a very long time. While itâs still too early to put hard numbers around what the Supreme Court ruling will mean for us in terms of incremental revenue or EBITDA in the long run, we believe our historical support of tribal operators within the state could present us with meaningful growth opportunities as our customers elect to expand the scale and scope of their existing Class II operations. Looking beyond EGMs, we see an equally compelling growth trajectory with our Cable Product and Interactive businesses. Supported by the 3 times growth engine of Taxes Bonus Spin Xtreme and AGS Arsenal, we continue to identify a long runway for growth within our table games division. Over the past few years, we have proven to be the most innovative product company in the industry, most recently highlighted by the launch of a homegrown shuffler the PAX S. I know we have covered it on previous calls, but this is the first competitive single-deck specialty shuffler to be released in North America in over 15 years, breaking up the dominant position held by one of our competitors. Turning to Interactive, we continue to make progress on our strategic plan to further leverage our high performing game content and strong customer relationships to significantly grow our share of the North American RMG market. Q2 provided a glimpse of where we believe our RMG business is heading as North American RMG revenues increased by over 15% sequentially. As with the land-based business, we continue to be encouraged by the strong performance and AGS game content in the online channel. To that end, I think itâs important to remind everyone that we have achieved a top five supplier ranking in the Eilers Online Gaming Performance Report for six consecutive months. Moving forward, as we execute upon initiatives to accelerate the flow of AGS content, broaden our B2C operator partner relationships and expand our reach into untapped North American jurisdictions, we believe we will see a material acceleration of growth within our Interactive business in the quarters ahead. Before closing, I would like to share some perspective on the trends we have observed within the business through July. Despite strolling uncertainty over the health of the consumer and the direction of the global economy, we have been encouraged by the incredible consistency demonstrated within our business quarter-to-date, as we have witnessed no meaningful change in July trends as compared to our strong June results. Finally, I would like to remind everyone we drive over 70% of our annualized revenue from recurring sources and our balance sheet is in great shape, with over $70 million of available liquidity at quarter end and no maturities until 2027. With that, I will turn the call over to Kimo to walk you through our second quarter results in greater detail.
Kimo Akiona: Thank you, David, and good afternoon, everyone. I would like to start off todayâs call by reviewing several highlights from the second quarter and providing some perspective on how we see the business trending as we look forward into Q3. I will also address a few items related to the balance sheet and close by sharing some thoughts on our capital allocation priorities for the remainder of the year. It is important to note my forward-looking commentary assumes no material change in prevailing global macroeconomic conditions. Turning first to our domestic EGM business. Second quarter domestic EGM RPD increased 6% on a quarterly sequential basis to $32.55 topping $30 for the fifth consecutive quarter. The sustained strength in our domestic EGM RPD performance reflects continued successful execution of our premium game growth initiative with premium units increasing by 15% sequentially, the compounding benefit of our installed base optimization efforts and resilient industry-wide GGR trends. Looking ahead to the third quarter, as David mentioned, trends within our domestic EGM recurring revenue business remained remarkably consistent through July. That said, we do expect industry-wide domestic gaming market revenues to moderate slightly as the quarter progresses following a historically normal seasonal pattern. Accelerating demand for our premium EGM products and further implementation of our optimization initiatives should offset a good portion of these seasonal influences, in turn allowing us to sustain third quarter domestic EGM RPD comfortably above $30. Shifting to our domestic EGM installed base, we had a total of 16,027 units installed at the end of the second quarter, representing an increase of 112 units sequentially, upside resulting from our outsized growth within our premium EGM installed base, supported by the strong performance and growing customer adoption of Orion Curve Premium and the modest expansion of our Texas Class II footprint on the heels of the recent favorable Supreme Court ruling was partially offset by the impact of our continuous fleet optimization efforts. We expect our domestic EGM installed base to further expand in the third quarter, fueled by accelerating customer demand for our high performing premium EGM products. Looking at EGM sales, we sold a total of 934 units globally in the second quarter, representing an increase of over 50% versus the prior year. Our global unit sales performance continues to benefit from the strategic broadening of our customer account penetration, the harvesting of initial returns from our accelerated R&D investments, further leveraging of our exceptional HHR gain performance and complementary unit sales into select international markets. Additionally, we believe our manufacturing teamâs ability to maintain lead times in line with pre-COVID norms has created a key competitive advantage for our EGM sales business. Looking ahead to the third quarter, we expect to further benefit from the strategic initiatives I just described. Additionally, we have yet to observe any meaningful change in operatorâs capital spending behavior in response to the recent global macroeconomic volatility. Combined, we believe these factors should allow us to offset a good portion of the seasonal moderation in sales activity that often occurs in the lead-up to G2E, resulting in Q3 global unit sales volumes that are relatively consistent with Q2 levels. Second quarter domestic average selling price or ASP eclipsed 19,000 for the third consecutive quarter, supported by steady demand for our premium priced Orion Curve Cabinet and continued implementation of our Price Integrity program. Although, anticipated composition of changes are likely to moderate our Q3 2022 domestic ASP performance relative to Q2 levels, we believe we should be able to stay around the 19,000 level for the fourth consecutive quarter. Turning to our International EGM segment, RPD increased 8% sequentially to $6.69, reflecting the consistent recovery we continue to witness within our Mexico business. International EGM RPD has now increased sequentially for eight consecutive quarters. We estimate approximately 93% of our international recurring revenue units were active and playable at the end of the second quarter, compared to 80% at Q1 quarter end. Our International EGM installed base decreased by 428 units sequentially, predominantly driven by the imposition of a new gaming tax in one Mexican state. Looking ahead, our outlook for the remainder of the year remains unchanged, as we expect International EGM RPD to continue its gradual recovery with full retracted to pre-pandemic levels occurring sometime in 2023. We sold a total of 76 EGM units into international markets in Q2 2022, bringing our year-to-date international sales to 94 units. We have identified additional international EGM sales opportunities, which we expect to execute upon throughout the back half of the year. Looking beyond EGMs, our Table Products business delivered second quarter revenue of $3.5 million, establishing a new company record for the fourth consecutive quarter. Quarterly segment adjusted EBITDA exceeded $2 million for the first time, supported by a record-setting revenue performance and the businessâ strong margin profile with Q2 adjusted EBITDA margin exceeding 57%. Looking ahead to Q3, we expect accelerating PAX S shuffler rollout momentum, steady Bonus Spin Xtreme progressive demand and additional AGS Arsenal site license adoption to increase the rate of quarterly sequential revenue growth achieved within our Table Products business. Shifting to Interactive. Trends within our business continue to reflect early returns from our decision to strategically refocus our resources to better capitalize upon near- to immediate-term growth opportunities within the regulated North American RMG market. We generated Q2 RMG revenue of $2.1 million, representing an increase of 7% sequentially. Looking more closely to our North American RMG business, revenue increased by over 15% sequentially, reaching a record $1.8 million. We derived approximately 85% of our Q2 2022 RMG revenue from North America end markets, compared to 66% in Q2 2021. Importantly, we expect our improving R&D revenue trend to continue into Q3, supported by the improved flow of AGS content into the online channel, the activation of new B2C customer relationships and the expansion of our online content reach into the additional North American jurisdictions. Turning to margins. Second quarter adjusted EBITDA margin was approximately 45%, relatively consistent with the prior sequential quarter. We estimate transitory costs related to global supply chain and logistics disruption impacted our adjusted EBITDA margin performance by approximately 100 basis points on a year-over-year basis. Looking ahead to the third quarter, while we are witnessing further moderation in global supply chain and logistics disruption, we continue to work through component inventory that was procured when supply chain disruption was more acute. Additionally, we also intend to make incremental R&D investments to support our long-term growth initiatives. As a result, we believe we could temporarily experience modest compression in our Q3 adjusted EBITDA margin as compared to the 45% margins achieved in the first half of the year, with improved operating leverage and further supply chain normalization producing a Q4 margin that is more in line with first half levels. Looking at the balance sheet. We ended the second quarter with net leverage of 4.1 times, supported by our solid financial performance through the first six months of 2022. The product momentum building within multiple segments of our business and the consistency we continue to observe within our day-to-day operations. We remain on pace to deliver upon our previously issued year-end 2022 net leverage target of less than 4 times. Before closing, I would like to offer some perspective on Q2 capital expenditures and help frame our capital allocation outlook for the remainder of the year. Second quarter capital expense -- $19 million, bringing our year-to-date capital spend to approximately $30 million. Gaming equipment related investments into our EGM and Table Product installed bases accounted for over 60% of capital expenditures incurred year-to-date. Driven by the accelerating demand we are seeing for our high performing premium EGM products and the emergence of incremental placement opportunities into the Texas Class II market following the favorable Supreme Court ruling in June, we now expect to incur full year capital expenditures of $62 million to $67 million, representing an increase of approximately $6 million at the respective midpoints versus our previously articulated range. We generated over $9 million of free cash flow in the second quarter, bringing year-to-date free cash flow to just under $5 million. Looking out over the balance of the year, even after taking into account our revised CapEx outlook and the recent move higher in global interest rates into account, we expect second half free cash flow to meaningfully exceed the level generated in the first half of the year. We continue to prioritize two channels for our excess cash flow, deleveraging and investing in ourselves. While we are on pace to achieve our year-end net leverage target of less than 4 times, our intermediate-term focus remains on restoring and subsequently improving upon the level of financial flexibility we had prior to COVID when our balance sheet was levered in the mid-3s. In addition to deleveraging, we continue to prioritize high return opportunities to invest in ourselves, both through continued optimization of our EGM installed base and the evaluation of strategic recurring revenue growth opportunities, both in new and existing end markets. Operator, this concludes our prepared remarks. We would now like to open up the line for questions.
Operator: Thank you. Our first question is with Barry Jonas from Truist Securities. Barry, your line is open.
Barry Jonas: Great. Thanks for that. I want to start with Texas. I know you said itâs really too early to quantify anything, but maybe can you give more color on the magnitude of opportunity we could see there for AGS near-term and longer-term? Thanks.
David Lopez: Thanks, Barry. So a few things here, first, obviously, this is Class II, which is great for us. Itâs right in our wheelhouse and our expertise. Also, within that sort of Class II commentary is, that, as we said in those prepared remarks that weâve really been sticking with these tribes in Texas and supporting their situation down there. We always believe firmly that they would prevail, which is really the rights that they have all along. So thatâs helping us as they expand and weâll say sort of that O&E aspect and certainly focusing on the letter E. The other thing is that, like weâve already started increasing our unit count there modestly. Iâd say, so the short-term effect will be modest. I wouldnât say itâs small, but itâs modest. And then the long-term effect hands-down should be one of our greatest opportunities over the next few years, depending on when that expansion comes into play. But when it does happen, itâs going to be exactly that hands-down one of our best opportunities, because; A, our commitment; B, weâre Class II and this is our expertise and see, we know these customers, I mean, the relationship on its own is fantastic. As far as giving you magnitude, itâs just a little bit early on that. But we could -- you could probably make some assumptions knowing that a couple of the locations have a lot more bandwidth for growth, and when I say a lot more, itâs really truly considerable. When we say an expansion, it would be obviously considerable expansions for some of these guys down there.
Barry Jonas: Yeah. Thatâs great. Appreciate that, David. Just as a follow-up question, I wanted to touch on supply chain. A competitor last week noted its sales have been impacted as a result of those issues. I know youâve talked about the margin hit. But are you seeing anything in terms of not being able to fulfill orders or maybe taking advantage of other peopleâs challenges? Thanks.
David Lopez: Yeah. So weâre not being affected at this point. And Iâd say, itâs been steady as she goes. Our team in Oklahoma is -- theyâre fantastic. Best most at hands now again, but that group, Iâve worked with and probably my entire career. Theyâre always out in front of the ball. Iâd like to say that by the time the senior team is asking them to jump on something, they had already jumped on it 60 days to 90 days ago. Our lead times are largely the same as theyâve always been. So weâre not losing any orders based on that. And I think we sneak in there and grab a couple of orders here and there. I know of a couple of instances where others could not deliver, and I know ourselves and maybe one other company that was able to do that. So four-week to six-week lead time still, thatâs very consistent within the range that we have promised customers for year -- years, I should say.
Barry Jonas: Great. All right. Thanks so much. Appreciate it.
David Lopez: Thanks, Barry.
Operator: Our next question is with Jeff Stantial from Stifel. Jeff, your line is open.
Jeff Stantial: Yeah. Great. Good afternoon, everyone. Thanks for taking our questions. Starting here on the game ops business, I wanted to unpack one of Kimoâs comments towards the end a bit more regarding yields stay comfortably ahead of $30 per day, levers the verbiage, kind of a two-parter here. First, can you just frame out some of the puts and takes youâre considering when you compare that commentary for Q3 to the $32.55 you reported for Q2? And then, second, is it reasonable to think you can revert back to positive year-on-year growth now that weâre mostly past the difficult stimulus compares? Thanks.
Kimo Akiona: Yeah. So a couple of things, Jeff. I think the comment being comfortably above $30. I think the way to think of it is, itâs important to remind people that coming off of Q2, right? So Q2 would normally be historically a seasonal high across the industry and most definitely for us. So I would say, Q2 generally the high watermark for the year. But offsetting that going the other way, we -- again, assuming a stable macro, right, and as David sort of commented, I think, in his prepared remarks, like we saw and have witnessed what July looks like and weâll say July was great. July was pretty consistent with what June looked like. But assuming stable macro, the ongoing initiative and momentum that we see in premium and additional placements, and Iâll say, higher yielding placements that weâve already made and will continue to make in the quarter will help us land at RPD for Q3 2022 that will be at or maybe even slightly above Q3 of 2021. So think thatâs probably a good way to frame up how we see RPD for Q3 of this year.
Jeff Stantial: Great. Thatâs really helpful. Thanks, Kimo. And then switching gears a bit, David, I believe you mentioned potentially exploring additional international markets that could complement the core North America market. Could you just expand upon that comment a little bit, any markets in particular that stand out that youâre referring to?
David Lopez: We always try to stay away from this question and I apologize, because in some we truly launch in those markets. We donât want to get carried away with mentioning them. Weâve been prepping in a couple of markets for years, three years, four year, and even, Iâd say, as much as five years for some market opportunities in Latin America. I think that weâre getting much closer to doing some soft launches. And when that time comes, weâre going to get it right on top of that communication with you should those launches -- weâll -- almost like doing test banks in America here. When we do test banks, we get our numbers, we determine how our games do and then we move forward based on how that performance is. So weâre going to get out there. Weâll do some test banks in Latin America and then weâll talk a little bit more about; A, how itâs going; and B, maybe the size of those opportunities as we begin in the world on out. I apologize for being so vague, but sometimes from a competitive aspect, weâd like to keep it a little covered up there.
Jeff Stantial: No. Thatâs great. I appreciate you taking a stat, I suspect the sensitivity. Both very helpful. Thank you, both, and congrats on a strong quarter.
Kimo Akiona: Yeah.
David Lopez: Thanks. Appreciate it.
Operator: Our next question is with Chad Beynon from Macquarie. Chad, your line is open.
Chad Beynon: Thanks for taking my questions. Good afternoon. I wanted to ask about the premium units, which continue to grow. I think in the prepared remarks, you said itâs at 12% right now. In the press release, you noted that you still have a good pipeline of new premium games. Can you just talk a little bit about maybe some near-term goals or kind of Kimo to your point on or can this continue to just account for a bigger piece of the portfolio through the rest of the year and then looking into 2023? Thanks.
Kimo Akiona: Yeah. So, I mean, we havenât thrown a target out there, right, Chad. So we havenât said like our short-term hurdle is to have our goal be 20% or something of our base. But what we will say is, looking in the short-term that the momentum we see going into Q3, weâll say, weâll see a slight acceleration in premium placements over what we just witnessed in Q2. So, I mean, I donât think weâre quite ready to throw a target out there yet as far as what our goal is for our mix in our base. But we will say itâs very encouraging the kind of momentum and the pipeline that we see specifically behind premium for us.
David Lopez: Iâll just add, Chad, and good afternoon. Iâll just add that, we know our competitors and we know one of our closest competitors, theyâre about 40% on that figure. Iâm not hanging out that out there as a goal. Iâm saying that, that means that, those kind of things are achievable in our industry for smaller gaming suppliers. So thatâs not a stated goal at this point, but with where we are right now. Weâre at 12%. Some others are above 40%. So we think we have some runway and weâre -- and thatâs driven not by that performance of other companies. But whatâs going to drive this whole thing is our commitment to investing in R&D, and quite honestly, the fact that we have supreme confidence in our team there and their ability to execute both from the core and premium side, but in this case, I know weâre talking about premiums. So we feel very good about the future there.
Chad Beynon: Perfect. Thank you. Appreciate that. And then separately on share repurchases, I think, last quarter, you talked about potentially dipping your toe in the water with a keen focus on that sub-4 times leverage, which youâre still on track to meet. With the CapEx increase because of the Texas opportunity, does that push repos kind of down the list just because of the strong returns that you expect to get on Texas, maybe thatâs a better use of the capital at this time?
Kimo Akiona: Yeah. I think you hit the nail on the head, right? I think itâs an iterative process as far as how we think of where userâs capital could be. But I think consistently the winners have been investing ourselves. And I think based on the momentum that we see in premium, most definitely, I think, the Supreme Court decision around Texas and the opportunities that, that opens up in the short-term and the longer term. I think it definitely puts that above something like share repurchases. But I think like in the prepared remarks, what we said, right, I think, to allocate -- our capital allocation strategy is invest in ourselves and then delever and then after that, I think, we would look at something like share repurchases. So in the short-term or mid-term, I think, share repurchases has pushed off a little bit. But most definitely, itâs important to remind everyone, right, that we have that flexibility should something come up that it makes sense to be opportunistic and go out in the market and do something like that.
David Lopez: And that doesnât mean in count some of and I know Jeff had asked the question that we give a bit of a failed answer on, but that doesnât count that if some of those things pop for us in our expansionary sort of areas, then we want to be mindful of what capital will need there as well.
Kimo Akiona: Yeah.
David Lopez: So weâre excited about a lot of these opportunities and I think Kimo obviously did a good job of framing up what our priorities are.
Chad Beynon: Thanks, guys. Nice quarter. Appreciate it.
David Lopez: Thanks.
Kimo Akiona: Thank you, Chad. Yeah.
Operator: Our next question is with Edward Engel from ROTH Capital. Edward, your line is open.
Edward Engel: Hi. Thanks for taking my question and congrats on another solid quarter. Some of the industry data on the slots, I mean, is really showing the replacement cycle. It feels like its recovered pretty well this year. Just kind of based on what youâre seeing on the ground, does it feel like the replacement cycle has kind of accelerated as we progressed or does it kind of just rebase at a higher level earlier in the year and kind of slowing from there?
David Lopez: So youâre asking, Iâm sorry, the line is a little off there, but youâre askingâ¦
Edward Engel: Sorry.
David Lopez: ⦠accelerating at this point?
Edward Engel: Yeah. And king of as we progress through the yearâ¦
David Lopez: Yeah.
Edward Engel: ⦠has that replacement cycle kind of accelerated or kind of stepped up early in the year than kind of plateaued?
David Lopez: I think itâs been firm and consistent. I donât know that itâs accelerating still at this point. I think itâs stepped up and now itâs been rather consistent. I think the driving forces from here on out will be some of our product releases that are coming up. So there are some things that weâre excited about. As far as product release, cabinets, games, et cetera, that generally speaking, should drive some. And we -- Brad just asked a little bit of that on to me that, Eilers does show some pickup. So whether we want to refer to that as acceleration or just maybe a modest pickup, thatâs probably the best way to put it. Thatâs the latest data from that front, which is an independent source, as we know.
Edward Engel: Perfect. Thanks for the color. And then just wondering, I know you kind of didnât want to get too into it, but just any update you have on Brazil, at least just bigger picture. It looks like there was some updates on the regulatory front this year and just kind of wanted to see what youâre seeing down there?
David Lopez: So I think that thereâs a few things going on in Brazil. I donât think that youâre going to see any big legislative changes at the moment. We are prepared for those, should they happen. But I think there could be some opportunities in Brazil over the coming years, if you want to call that. At the moment, we are -- weâll update as things transpire there, and you guys will be, I guess, you could say, the second or third to now, after our customers on this. But weâre prepared, this is one of the reasons that earlier in the call, I referred to it, and I said, hey, weâve been prepping for jurisdictions in Latin America for a number of years, some over three years, four years, and when I say over those figures to make sure that weâre prepared for those opportunities when they pop. So weâre ready and I think that weâre poised with the right products when that time comes.
Edward Engel: Great. Thanks. Appreciate it.
David Lopez: Thanks.
Operator: Our next question is with David Katz from Jefferies. David, your line is open.
David Katz: Thank you and good afternoon. Appreciate you taking the questions. So you talked a lot about the sort of RPD and premium mix relationship, which my sense is, probably, the largest earnings lever kind of in the model at this point? And have you done any math that youâve talked about, where if your mix got to 20%, how accretive it might be to your RPD or every -- so itâs such and such a number of units, ads, XY, any calibration might be helpful?
David Lopez: Yeah. So, I mean, weâve got some sensitivity analysis on that, but that spreadsheet is pretty good spreadsheet about how it might impact our revenue, our EBITDA, et cetera. I think being that I donât have it in front of me, itâs a little bit of a hard one to dig into at the moment. I think the thing that is most luring to me is that, one, itâs firming up our installed base in general, right? So weâre going to start seeing some sequential installed base growth here like we did from Q1 to Q2. Weâre expecting the same or a little bit better in Q3, right? From there, obviously, this is -- these are better opportunities than just your average install. So we know, as youâre saying, from a sensitivity point of view or how it will impact us that, that has a greater impact on us than anything else. And then, from there, we know that some of these installs that we can get out to such as Class II, where itâs true participation in many or most cases no cap on that 80-20, those, again, can drive much higher RPDs, which all leads to sort of our recurring revenue run rate. I donât have the math right in front of me and I donât want to do it off the top of my head. But if you look over time, where we used to sit in the past, sort of, Iâll say, in Kimo late 2019 or early 2020, I guess, the best way to say, David, would be late 2019. That -- we had retracted from a number of reasons. We have removed some integrity units. We had sort of reshaped the way we were doing business with a couple of customers, which contracted our recurring revenue just because of the texture and the mix of the business that we did. And now what weâve done is weâve not only come back from those numbers, but weâre trending and our run rate is going to exceed that very soon now, and actually, our current run rate would exceed that. But throughout the rest of the year, weâll prove out unit based growth, RPD consistency, et cetera, will put us on a great trajectory for our recurring revenue base and I think that will start to really sort of resonate with folks and we believe investors as well. But your sensitivity and how we looked at it, yeah, we have, I just donât have to have it in front of us.
David Katz: Noted. And if I could just follow-up, with respect to the premium games that youâre placing versus legacy, whatâs your experience or expectation around the duration of those games in terms of their sustainability or churn rate relative to what you already have their new versus old?
David Lopez: So theyâre sort of like historical when you look at other companies. This is a new territory for us, David. And so because itâs a new territory for us, we have very limited experience, because Big Red was the only product that we had as far as, quote-unquote, premium, but it was very niche. It was a small piece of the business. What we know is this, is that thereâs some Class III stats out there for other companies, and I think that weâre exceeding those and we will be exceeding those with our performance, because in Class III, our premium product has been very sticky, in particular, our core premium -- our Curve Premium product has been extremely sticky. On top of that, going back to sort of hand what weâre good at as well, sort of whatâs in our wheelhouse is Class II. Class II premium, I canât emphasize not extremely sticky. So those installs will be a multiple of what we see in Class III. But coming back to sort of the overarching topic, we are confident, we continue to launch and test new premium content and we have a good pipeline going forward of sort of like additional gains and weâll eventually have additional cabinets, additional options. Weâll have many swim lanes to jump into there. So weâre confident about our R&D abilities, but weâre also on track to exceed sort of the industry averages, and then, I said, just to reiterate Class II super sticky.
David Katz: Thank you very much. appreciate it.
David Lopez: Thanks, David.
Operator: At this time, there are no further questions. There are no further questions. So thank you for your participation. You may now disconnect your lines.
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.