Total revenue increased by 25%, amounting to $72.1 million in Q4 2018

AGS announces fourth quarter and full year 2018 results

"With new product and content launches, further penetration of both new and early-entry markets, and international expansion, AGS is positioned for another high-growth year in 2019." said Chief  Executive Officer David Lopez.
2019-03-08
Reading time 5:19 min
PlayAGS reported this week operating results for its fourth quarter and full year ended December 31, 2018. The company reported a record annual revenue of $285.3 million, which grew 35% year-over-year.

"We ended our first year as a public company with a solid fourth quarter and 35% growth in annual revenue," said Chief  Executive Officer David Lopez. "Our continued top line growth, increased operating cash, and free cash flow generation reflects the industry-leading performance of our products and AGS' unique position given how underrepresented we are in the market.  These two factors contributed to our phenomenal growth in electronic gaming machines ("EGMs"), ending the year with more than 4,300 sold units, a 71% increase from fiscal 2017. We kicked off 2019 with the close of our acquisition of Integrity Gaming Corp., which bolsters our recurring revenue footprint and provides long-term optimization opportunities.  With new product and content launches, further penetration of both new and early-entry markets, and international expansion, AGS is positioned for another high-growth year in 2019."

REPORT

Fourth Quarter 2018 Financial Highlights

  • Total revenue increased 25% to $72.1 million, driven by continued growth in our EGM segment in the Class III marketplace, primarily in early-entry markets such as OntarioMississippi and Nevada as well as continued penetration into ramping markets such as California and Florida.
  • EGM equipment sales increased 86% to $23.2 million, due to the sale of 1,159 units, of which nearly 60% were sold into early-entry markets.
  • Gaming operations revenue, or recurring revenue, grew to $48.9 million, or 8% year-over-year, driven by EGMs purchased from Rocket Gaming, increased domestic revenue per day ("RPD") of $26.41, growth and performance of our international installed base, and an increase in Table Products revenue.
  • Net loss of $10.3 million increased year-over-year from a net loss of $8.5 million. Fourth quarter 2018 net loss includes a non-cash, pre-tax impairment of goodwill of $4.8 million related to our social gaming business within our Interactive Social reporting unit.
  • This goodwill related to our acquisition of RocketPlay in 2015. The impairment charge was recorded within write downs and other charges in our consolidated statements of operations and comprehensive loss.
  • Total Adjusted EBITDA (non-GAAP)(2) increased to $31.5 million, or 19%, driven by the significant increase in revenue, partially offset by increased operating expenses primarily due to headcount related costs in SG&A and R&D. Included in that amount was approximately $1.0 million of operating costs from our real-money gaming ("RMG") content-aggregator Gameiom.
  • Total Adjusted EBITDA margin (non-GAAP)(2) decreased to 44% in the fourth quarter of 2018 compared to 46% in the prior year driven by several factors, including increased headcount related costs in SG&A and R&D, operating costs from Gameiom, as well as the increased proportion of equipment sales as part of total revenues.
  • SG&A expenses increased $2.0 million in the fourth quarter of 2018 primarily due to increased non-cash stock-based compensation expense of $1.2 million$0.9 million in professional fees driven by acquisitions, $0.6 million in sales commissions, $0.3 million in headcount related costs and offset by decreased interactive user acquisition costs.
  • R&D expenses increased $0.6 million in the fourth quarter of 2018 driven by non-cash stock-based compensation expense. As a percentage of total revenue, R&D expense was 12% for the period ended December 31, 2018compared to 14% for the prior year period.

Fourth Quarter Business Highlights

  • EGM units sold increased 66% to 1,159 compared to 697 in the prior year led by sales of the Orion Portrait and Orion Slant cabinets in early-entry markets as well as to corporate customers, the latter which accounted for approximately 43% of sold units in the period.
  • Domestic EGM installed base grew by over 200 units year-over-year despite the voluntary removal of approximately 500 machines in Texas earlier in the year as well as an end of lease buyout by a customer who purchased 420 VLT units in Illinois. The VLT units were not counted in our sold unit count in the periord. Domestic EGM installed base grew by 228 units sequentially.
  • Domestic EGM RPD increased 2% to $26.41, driven by our new product offerings and the optimization of our installed base by installing our newer higher-performing EGMs.
  • Average selling price ("ASP") for EGMs increased by more than $1,000 year over year to $18,782 driven by sales of our premium-priced Orion Portrait cabinet and our core-plus cabinet, Orion Slant, which accounted for nearly 80% of sales in the period.
  • Our new Orion Slant footprint increased to over 1,500 units, up 161% sequentially, and accounted for nearly 30% of sales in the quarter.(3)
  • Our Orion Portrait footprint increased to over 5,000 units, up 19% sequentially and 202% year-over-year. (3)
  • Our ICON cabinet footprint increased to 7,325 units, up 8% sequentially and 58% year-over-year. (3)
  • International installed base increased 624 units year-over-year and 235 units sequentially to over 8,350 units, with more than 500 ICON units in Mexico as of December 31, 2018.
  • Table Products increased by 762 units, or 32%, to 3,162 units, driven by organic growth, most notably the Super 4 Progressive Blackjack and Buster Blackjack side bet.

Balance Sheet Review

Capital expenditures increased $7.4 million to $22.0 million in the fourth quarter, compared to $14.6 million in the prior year period due to increased recurring units.  As of December 31, 2018, we had $70.7 million in cash and cash equivalents compared to $19.2 million at December 31, 2017. Total net debt, which is the principal amount of debt outstanding less cash and cash equivalents as of December 31, 2018, was approximately $468.1 million compared to $648.7 million at December 31, 2017. This substantial reduction was driven by the IPO and related redemption of our HoldCo PIK notes during the first quarter.  In the fourth quarter, net debt decreased by over $8.8 million due to a higher balance of cash and cash equivalents and mandatory principal payments on our term loans.  As a result of the above transactions and our strong operational performance, our total net debt leverage ratio, decreased from 6.1 times at December 31, 2017, to 3.4 times at December 31, 2018. (4)

Recent Developments

Acquisition of Integrity Gaming Corp.

On February 8, 2019, we completed the acquisition of Integrity Gaming Corp. ("Integrity"), a regional slot route operator with approximately 2,600 recurring revenue gaming machines in operation across over 33 casinos in Oklahoma and Texas. Under the terms of the deal, AGS acquired all issued and outstanding common shares of Integrity for a cash payment of CAD$0.46 per share, reflecting a total transaction value of USD$49.0 million, which includes repaying USD$35.0 million of Integrity's outstanding debt. The acquisition was funded with cash on the balance sheet and funds from the new $30 million term loan facility closed on October 5, 2018.

Entry Into Philippines

We recently completed the necessary regulatory requirements in the Philippines and initial units of our Alora video bingo cabinet are now live. The Philippines video bingo market comprises approximately 70,000 machines currently, and we are confident that our content and innovative cabinet will be a competitive market addition.

2019 Outlook

We expect to generate total Adjusted EBITDA(4) of $160.0 - $164.0 million in 2019, representing growth of approximately 17% - 20% compared to 2018.

We further expect 2019 capital expenditures to be in the range of $65.0 - $69.0 million, compared to $66.2 million in 2018, reflecting an expectation for a continued increase in our installed base in both existing and new markets as well as our ongoing yield optimization initiative, which includes units recently purchased from Integrity.

We expect our total net debt leverage ratio, excluding any potential future M&A, to be at or below 3.0 times within the next 12 months.

We have not provided a reconciliation of forward-looking total Adjusted EBITDA and total net debt leverage ratio to the most directly comparable GAAP financial measure, net income (loss), due primarily to the variability and difficulty in making accurate forecasts and projections of the variable and individual adjustments for a reconciliation to net income (loss), as not all of the information necessary for a quantitative reconciliation is available to us without unreasonable effort.

We expect that the main components of net income (loss) for fiscal year 2019 will consist of operating expenses, interest expenses as well as other expenses (income) and income tax expenses, which are inherently difficult to forecast and quantify with reasonable accuracy without unreasonable efforts. The amounts associated with these items have historically and may continue to vary significantly from quarter to quarter and material changes to these items could have a significant effect on our future GAAP results.

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