Gaming equipment provider AGS went right back to work following the announcement of the company’s first quarterly earnings disaster since going public 20 months ago.
There was no sense in dwelling over a 52% stock price decline that began soon after the Las Vegas-based AGS told the investment community that its second quarter cash flow fell 2 percent and it would be cutting its 2019 earnings guidance from a 17%-to-20% growth rate down to 6%-to-10% growth rate.
AGS CEO David Lopez at the company’s 2018 GameOn conference
“I don’t think any of us on this call expected to see (an) EBITDA decline,” Stifel gaming analyst Brad Boyer told AGS CEO David Lopez.
Lopez, 44, AGS’s chief executive since 2014, said the company addressed the issues it came across during the quarter – problems with product rollout in Oklahoma, higher research and development costs, lower electronic game machine revenues, and challenges in the interactive gaming market.
Macquarie Securities gaming analyst Chad Beynon told investors the quarter was AGS’s first serious stumble.
“On the call, we felt management was forthright about the issues facing the business, and we were encouraged to hear (that) remedies have already been identified,” Beynon said. “But while the team appears to have a plan in place to course-correct, our concern is that solutions will take time to implement, effectively pushing out much of the growth that we had anticipated for 2019 earnings.”
SunTrust Bank gaming analyst Barry Jonas said the investment community has AGS “in the penalty box” because of the earnings slip. But he believes the company could regain shareholder confidence during October’s Global Gaming Expo in Las Vegas.
“We believe most of the Street was surprised by the miss. Our discussions with slot managers suggested the AGS story was stable, and even industry surveys did not pick up on this sort of deceleration,” Jonas told investors. “After the second quarter we think AGS has moved to a show-me story, and we will look to be more diligent in our regular discussion with slot managers.”
The earnings miscue was a surprise, especially following the upbeat attitude AGS executives displayed during June’s GameOn conference at the Chickasaw Nation’s WinStar World resort in Oklahoma. Lopez told the 133 in attendance at the conference that he wasn’t happy the company’s stock price had declined 28 percent over the previous three months.
On the Aug. 7 earnings call, Lopez said “our content of fundamentals have not changed for the business or for the road to $250 million (in annual cash flow by 2023).”
He blamed the Oklahoma situation not on the market, which he described as “healthy,” but on the company’s “going too hard and fast” with certain products.
“We also went too deep into our portfolio of titles, where we should have focused on our most successful game themes,” Lopez said.
AGS worked to rebuild investor confidence immediately. On Aug. 14, the company announced a $50 million share repurchase plan through August 2023, which Lopez said demonstrates “confidence” in AGS’s long-term growth prospects.
In the year following its January 2018 initial public offering at $16 per share, AGS’s stock price more than doubled as the company expanded beyond Indian gaming markets and into commercial casino jurisdictions both in the U.S. and internationally into Canada, Mexico and the Philippines.
During the earnings call, Lopez said AGS saw significant sales in the second quarter into Florida, Alabama, California, Nevada, Mexico, Canada, Michigan and Pennsylvania.
“What’s important to note is that it’s not about the specific performance of a single game title in any given quarter, it’s about AGS and our ability to consistently perform and be recognized in every slot survey over the past three years,” Lopez said.
However, on Aug. 8, AGS shares hit a 52-week low of $6.05 before rebounding slightly. Over the next four days, more than 14.6 million shares of the company’s stock was traded. A normal trading session for AGS to this point is approximately 160,000 shares.
On Tuesday, the company closed on the New York Stock Exchange at $10.53, up 7 cents or 0.67%.
“We believe that the company’s shares are significantly undervalued,” Lopez said.
On Monday, AGS said it acquired New Jersey-based table game provider In Bet Gaming for an undisclosed price and will add its titles into the company’s portfolio., Lopez said on the conference call that AGS wasn’t going to shy away from continued acquisitions.
Beynon said the company will have to overcome questions about market share gains and 2020 growth projections.
“With new product launches and new casino openings in (the second half of 2020), we believe AGS has good visibility into their success and should achieve guidance if executed properly, without risk,” Beynon said.
Howard Stutz is the executive editor of CDC Gaming Reports. He can be reached at hstutz@cdcgamingreports.com. Follow @howardstutz on Twitter.
