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Full Speed Ahead

A successful IPO caps four years of meteoric growth for AGS

Full Speed Ahead

Gaming supplier AGS is in the midst of a renaissance. It’s not the first time.

Founded in 2005, the company—then called American Gaming Systems—spent its first years as a small Class II supplier with strong markets in Oklahoma and elsewhere. The company first made a play at Class III markets early this decade, after former Bally chief Bob Miodunski came out of retirement to guide the company to its first Class III licenses as CEO.

But the company’s first real renaissance would come with its late 2013 acquisition by private equity firm Apollo Global Management. Apollo’s first move was to place gaming supply veteran David Lopez at the helm as CEO, charged with transforming the company from a Class II supplier into a full-service gaming supplier. Lopez—who formerly was CEO of Global Cash Access and COO of Shuffle Master, where he spent 14 years—would spend the subsequent four years crafting that transformation.

In a whirlwind of acquisitions, key hirings and implementation of a development plan, Lopez and his newly assembled team grew AGS into a major supplier of Class II and Class III slots, created a table-game division from scratch that has fast-growing sales in side bets and proprietary games, and most recently, launched an interactive division that offers a white-label B2B social casino and a B2C social app.

This year, AGS is being reborn once again, as public company PlayAGS, Inc. On January 26, the AGS senior team rang the bell of the New York Stock Exchange to commence trading of shares under the ticker AGS. The company then completed a successful initial public offering of 10.25 million common shares with an opening price of $16 per share. The price went up quickly, reaching $18 early in trading. Shares were $19.55 at press time.

The company had announced that it hoped to raise $160 million with the IPO. After the initial success, that prediction was raised to $174 million.

According to Lopez, the proceeds will be used to deleverage the company, freeing up cash to continue its growth plan as a publicly traded company. Less than two weeks after the IPO was launched, the company announced the repricing of its existing term loans in a move that will save around $6.4 million in annual interest payments. “After executing our initial public offering, we immediately started work on repricing our term loans to reduce our annual interest expense and provide us with more cash to grow and operate the business,” says Lopez.

“We’re also sponsored by Apollo, which is a private equity firm. And right now, it’s a good market. At some point, they had to pick an entry point for liquidity. We issued enough stock to cover our PIK notes. It’s a good time in the market, and it’s a nice time to establish that liquidity platform.”

Lopez credits the leaders of Apollo not only for providing the financial muscle to reinvent AGS as a supplier, but for what will be the equity firm’s continuing support as the largest shareholder of the public company PlayAGS, Inc. (Apollo was expected to control 69 percent of AGS following the IPO.)

It was Apollo that afforded Lopez and the management team the ability to craft AGS into what it is today. “Before I was even hired, we talked about what AGS needed to become,” Lopez recalls of his initial contact with Apollo. “AGS was primarily a Class II distributor. We wanted to become more of a Class II and Class III diversified global gaming supplier. What would it take to get there?”

The answer was a combination of acquisitions and organic growth, with the financial backing to accomplish it. The first two acquisitions would set the tone for the company’s slot division. The acquisition of large-format slot supplier Colossal Gaming would give the company its first big hit in Class III markets, Colossal Diamonds on the Big Red cabinet.

Next, the AGS acquisition of Georgia-based supplier Cadillac Jack combined two very similar companies—both traditional Class II suppliers beginning to move into Class III. With little overlap in the markets of the legacy companies, the AGS Class II footprint essentially doubled, and the former Cadillac’s Atlanta-based technology team provided AGS the basis for what would become its core video slot platform, ICON—soon to be followed by Orion, the company’s first premium slot platform.

“We doubled everything—employees, revenue, EBITDA,” Lopez says of the Cadillac acquisition.

That acquisition has one thing in common with subsequent moves that have led to the emergence of AGS as a top competitor in slots, table games and interactive products—it brought in quality executives that strengthened a management team that is the envy of the industry.

 

People Power

Lopez also credits Apollo with helping him build his team. “From the perspective of Apollo—the sponsor—and myself, we determined success was going to require making some acquisitions and doing other things organically, but we would have to start with people,” he says. “We’d have to start with hiring and establishing a great management team to lead us forward.”

One of the most important additions came midway through Lopez’s first year at the helm, when he brought in former Shuffle Master colleague John Hemberger as senior vice president of table games, charged with creating the new table division. Hemberger, who had run the proprietary table game division for Shuffle Master, acquired products such as the Buster Blackjack side bet, Casino War, Criss Cross Poker and others, in addition to adding new proprietary games such as Chase the Flush. Within three years, the table-game division completed more than 2,350 installations worldwide.

The Cadillac Jack acquisition also would strengthen the management team, with Sigmund Lee filling the role of AGS chief technology officer, the position he had held with Cadillac for nine years. Lee also had been vice president of engineering for Bally Technologies.

It was Lee’s team that developed the former Cadillac operating system into ICON, getting the slot division moving in Class III in concert with Andrew Burke, the senior vice president of slot products who had been with AGS since 2008.

In 2015, Lopez brought in Julia Boguslawski, formerly a longtime investor relations and marketing executive for Shuffle Master, Scientific Games and Bally Technologies, as executive vice president of investor relations and chief marketing officer; and longtime Aristocrat sales executive Robert Perry as senior vice president of sales. The team would further be augmented with the addition of Matt Reback as executive vice president. Reback was a longtime marketing executive with Konami in addition to a history on the operations side with Station Casinos and Caesars Entertainment.

“We thought about it from the very start,” Lopez says. “This was how we were going to build the company and build the product lines. We kept some folks on board from the previous team, and our goal was to hire All Stars who understood the culture, who could adapt to the culture, in a very unique environment where people speak very openly in front of one another but there’s no hard feelings.”

The culture that the executive team created for AGS is one in which operations are efficient but relaxed, and everyone gets a say—at least in the board room (“or the Death Star, as we call it,” laughs Lopez). “This room is where all disagreements are handled, and when we’re done in here, it’s done, because we’re not going to win by being political,” Lopez says. “We’re going to win as a team of 550 employees, as the late (Shuffle Master CEO) Tim Parrott said, all pulling oars in the same direction.”

“The pace is great,” adds Boguslawski. “David has created a culture where we get issues out there on the table, and we move quickly on decisions. It’s even part of our mission statement, which essentially says, ‘The bigger that we get, the smaller we need to act.’”

Lopez says it is different than the traditional corporate environment in which there are layers of management to go through before actions are taken—the culture makes for a nimble company.

“That’s part of our culture, and also part of the Apollo culture—there is no tomorrow,” Lopez says. “Why not today? There’s no need to wait. We’ve had executives who join the company and say, ‘We’ll talk about a problem, we’ll talk through a solution,’ and then, ‘What do we need to do to get this done and move it forward?’ And I say, ‘Well, we just did it.’

“They’re surprised to see how quick and nimble we can be. We don’t have to send it up to Galactic Headquarters for an approval. We’re the approval, right here, sitting around the table.”

“It’s something that all employees know,” says Boguslawski. “We never lose sight of those things we do that got us to the position where we are, where we’re able to grow and grow quickly.”

It’s a culture Lopez says he built from his experience with executives who have been role models in the past—from Parrott to prior Shuffle Master legends including Mark Yoseloff and Joseph Lahti, to Apollo Managing Director David Sambur.

“You take a guy like me who grew up in Troy, New York, and didn’t get very good grades in high school or UNLV, and ask, ‘How the heck did I get anything accomplished in life?’ And the answer is Joe Lahti, Mark Yoseloff, Tim Parrott, David Sambur—folks like that,” Lopez says. “If you were willing to listen and willing to learn, each and every one of those guys brought something to the table.

“Clearly, Mark Yoseloff had the most years with me, and I think that there was a lot that he shared with me. Joe Lahti, in my early years, really taught me a lot about being a CEO, although I was just an analyst at the time. And Tim Parrott was a huge influence. I think we carry a torch of customer service and community service culture that Tim instilled in us. And then, of course, David Sambur is one of the smartest people I’ve ever worked for, and has been tremendous in tutoring me along the way as well.”

 

Business as Usual

The emergence of AGS as a publicly traded company will not change the company’s culture or product plan moving forward. “(The change) should be transparent to the customers and the players,” Lopez says. “We don’t want customers to feel any bumps in the road, or any changes.”

The transition is easy for AGS, whose operation has mirrored public companies, at least from a financial perspective. “Kimo (Akiona, CFO) has already been doing all the quarterly reporting, the Qs and Ks, as if we were a public company,” Lopez says. “However, it’s not like we’re going to sprint to the end of every quarter. We’ll probably settle on annual guidance, because we know what we’re going to do over the course of the year. Quarter to quarter, things may change. We don’t want to change the way we behave, transitioning from private to public.”

Boguslawski adds that the investors the company’s executives dealt with leading to the IPO include a lot of “long-only institutions” that AGS will continue to target. “That’s always been our priority—we want investors who are committed to the story for the long term, who believe in the team, believe in the fundamentals, and who are looking out two years, three years,” Boguslawski says.

For this reason, Lopez says he expects the product roadmap to continue to grow at the pace it has established during the company’s phenomenal recent past. In the second quarter, the company’s slot segment will release the Orion Slant. “We’re developing content for that,” he says, “and I don’t think you’ll see us veer stylistically from what we’re doing right now. We’re developing games for core gamblers.”

Other additions on the slot side will include another new cabinet, a new style of linked progressive, and game programs designed for the medium- to high-volatility space.

The Class II segment of the slot division is stronger than ever, thanks in part to the acquisition in December of the installed Class II base of Rocket Gaming Systems, a transaction that instantly added 1,600 recurring-revenue games to the company’s footprint. “That puts us over 23,000 units on recurring revenue,” Lopez comments. “We like the opportunity to take that footprint, tack it on to what we have, manage it, optimize it, and make the most of it.”

Lopez says around 83 percent of the company’s revenues come from recurring sources, not only in Class II but in Class III standouts such as Colossal Diamonds. “As we expand internationally, that could grow,” he says. “We will continue to grow that base—it gives us great stability. It will allow us to plan accordingly for the future, and look out two to three years and have a lot of confidence in what we’re doing.”

“Equally important,” adds Boguslawski, “we believe that there’s great opportunity to optimize some of the existing base”—not only with the Rocket units, but with about 4,700 units she says are “great candidates to upgrade with some of our new high-performing content. We have a whole team of analysts that work on that, and look all the time at what makes sense in different properties. That’s a a strategy we believe will grow the recurring revenue dollars moving forward.”

That recurring revenue base also contributes to the company’s ability to experiment with new product styles. “It allows us to take some chances that maybe you wouldn’t take if 93 percent or 95 percent of your revenue came from sales instead of recurring sources,” Lopez says. “It gives you the ability to plan, look forward, and understand what your needs are from a capital point of view.”

On the table side, the company will continue to expand the division with new products. “At G2E 2017, I looked over into the table games section of our booth, and I was able to sit there and say, ‘This is coming together beautifully.’ We have an absolutely phenomenal product portfolio,” Lopez says. “I think any customer that came to see us was impressed with the diversity of the portfolio.

“Going forward, we will continue to take a look at expanding that portfolio, but that said, we’ve been able to do it because we hired the right people. We got John and his team in here; he has experience, he understands the pieces and parts, and how to put together a portfolio like that.

“So, nothing’s done—either on the slot side, the table side, or on the interactive side. We’ll always be active trying to improve those divisions.”

Some of the biggest successes on the table side so far have been the Buster Blackjack side bet and the Bonus Spin wheel for table games. “Buster Blackjack is just a great testament to what we can do when we acquire a game that might have limited installs, but under our umbrella of sales channels and licenses, we’re able to then quadruple the install,” Boguslawski says.

“And Bonus Spin has been great. We are excited with that rollout. It’s in Caesars, Las Vegas Sands, MGM, Golden Nugget, Graton and Foxwoods. That’s been a tremendous product, as well as the launch of the shuffler, which will be this year. We’re very excited about that, based on operator feedback.”

And how does AGS compete in these areas with a well-entrenched competitor such as Shuffle Master (now part of Scientific Games)—a.k.a. the “800-pound gorilla” of the segment?

“We worked for the 800-pound gorilla,” answers Lopez. “Each and every one of us has worked for the 800-pound gorilla. I was there for 14 and a half years, and I understand the ins and outs of the business. John Hemberger was there for a number of years; he ran the table game division.

“There was once a time in the slot division where we all asked the same question, because somebody had 75 percent to 80 percent ship share. Things have changed quite dramatically there, and there’s no reason that the same thing can’t happen in the table game space.”

He expresses similar confidence in the prospects of the new interactive division, another area where there is entrenched competition. “We’ve been primarily a B2C supplier of social gaming, but we now provide a white-label B2B product,” says Lopez. “In 2017, in the second half, we won about six deals. This year, we’ve already won two more deals, in the first month. Each one of those deals exceeds the combined total of all the deals we did in 2017, so we’re starting to scale up a little bit. We didn’t want to jump out there too fast, so we started with smaller customers, and now we’re stepping up to larger customers and still winning deals, so that’s exciting.”

The AGS product lineup will be augmented with changes to the industry, from expansion of online gaming to the search for games that appeal to the emerging millennial generation. Lopez says the company already provides skill games and other games that permit the kind of socializing younger players seek—they’re called table games.

“A lot of companies are focused on skill games because this millennial generation spends a lot of time in the nightclub, and they spend a lot of time in experiential stuff,” Lopez says, “but just as with Generation X, it starts with the table games. They’ll migrate to those table games, and are already starting to migrate. Table games are social. You can sit down, you can have your drinks, you can hang out, talk to your friends. At the end of the day, that’s a social, skilled game that we believe millennials will play.”

 

Expanding Markets

With licenses secured across the U.S. Class III market, AGS plans to expand elsewhere in North America—the former Cadillac Jack already was one of the top suppliers in Mexico, and the company is now looking toward Canada as well.

“We think there’s a huge opportunity in Canada for us,” Lopez says. “Our early returns on installs tell us our games are performing very well. We’ve hired a salesperson for Canada. Mexico’s been growing two years in a row, after multiple years of contraction.”

AGS also is looking to new markets in South America and Asian markets, beginning with the Philippines. “We have our first installations in the Philippines in Q1, and of course, we’re prepared for Brazil, should the gaming law pass,” says Lopez.

“The great news with going into the Philippines,” says Boguslawski, “is that this will help us grow our recurring revenue base—that market is a participation market, same as Brazil. We’re very selective with the markets we go into, and those two markets make great sense for us.”

With the company’s balance sheet improving and the continued support of Apollo, there will be sufficient cash moving forward to fund additional growth opportunities.

“Since we have so much great white space ahead of us, especially in the Class III market, we want to be able to capitalize on those opportunities,” Boguslawski says, “to make sure that we can get all those units in the field, and definitely prioritize use of the cash to go to that, and also to R&D, which is our lifeblood.”

And to continue that culture—AGS was recently named one of the “Best and Brightest Companies to Work For” by the National Association for Business Resources.

“David is so focused on his people,” says Boguslawski. “Everyone really enjoys working with one another, and this is a culture where people are very empowered, able to speak their minds without repercussion, and there’s this tone of playfulness with all of it. So, no matter how busy we are and how fast we’re moving, we can’t forget to have fun.

“That all comes from David. People meet him, they say how accessible he is, that he’s kind of a no-BS guy. Investors certainly felt the same thing. Everything stems from the top, and it’s trickled down in the organization.”

That extends to the “GameON” conference, an intimate gathering of AGS team members and around 100 key customers, during which operators get to know the company, its products and its product roadmap going forward. The event will be held this year at California’s Pechanga casino. “We’re keeping GameON about the same size every year, based on demand, because it allows everyone to feel that over the course of three days, you can mingle with everyone and it still feels intimate,” Boguslawski says.

There may be more M&A activity for AGS in the future, but for now, the company will focus on maximizing the product pipeline for its growing base of customers. “We’ve done over 20 acquisitions since Apollo acquired the company,” Lopez says. “Clearly, we’ve raised the bar. We don’t need to be as risky as we once were. That said, we’re still out there; we’re always looking at M&A.”

And of course, any future acquisition will bring more strength to the team. “When you talk about our culture, each person has had to fill a role,” says Lopez. “I’m not a fan of the New England Patriots or (coach) Bill Belichick, but his slogan is that we need all of our people to understand what their job is, and then we need them to do their job.”

That’s Lopez’s mantra at AGS, with one additional football slogan: “We’ll do anything it takes to win.”

Frank Legato is editor of Global Gaming Business magazine. He has been writing on gaming topics since 1984, when he launched and served as editor of Casino Gaming magazine. Legato, a nationally recognized expert on slot machines, has served as editor and reporter for a variety of gaming publications, including Public Gaming, IGWB, Casino Journal, Casino Player, Strictly Slots and Atlantic City Insider. He has an B.A. in journalism and an M.A. in communications from Duquesne University in Pittsburgh, PA. He is the author of the books, How To Win Millions Playing Slot Machines... Or Lose Trying, and Atlantic City: In Living Color.  

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