Executive Summary / Key Takeaways

• PlayAGS, Inc. ($AGS) has transformed from a Class II EGM provider to a diversified gaming equipment and technology supplier across EGM, Table Products, and Interactive segments, driven by strategic investments in R&D and operational teams.
• Recent performance, including Q1 2025 results, demonstrates the impact of this strategy, with strong growth in Interactive and Table Products offsetting a slight dip in EGM gaming operations revenue, while equipment sales saw a temporary decline in units sold year-over-year.
• Key technological differentiators like the high-performing Spectra cabinets, the efficient PAX S shuffler, and a rapidly expanding Interactive content library are fueling market share gains and operational efficiencies.
• The company is prioritizing balance sheet strength, successfully repricing its term loan and making voluntary debt repayments, targeting net leverage in the 2.7x to 3x range by the end of 2024, a significant improvement from prior levels.
• While facing risks including ongoing legal proceedings, potential impacts from international trade policies, and the uncertainty surrounding a pending merger agreement, AGS's product momentum, recurring revenue base, and focus on deleveraging underpin its investment thesis.

Setting the Stage: A Transformed Gaming Supplier

PlayAGS, Inc., founded in 2005 with roots in the Native American gaming market, has undergone a significant evolution. What began primarily as a supplier of Class II Electronic Gaming Machines (EGMs) has strategically expanded its footprint since 2014 to become a more comprehensive provider across three distinct segments: EGMs, Table Products, and Interactive gaming. This diversification was not accidental; it was the result of calculated investments in research and development (R&D), sales, and operational teams aimed at building a deeper, more diverse product portfolio and enhancing go-to-market capabilities.

In the competitive landscape, AGS operates alongside larger, more diversified players such as Everi Holdings (EVRI), International Game Technology (IGT), Aristocrat Leisure (ALL), and Light & Wonder (SGMS). While these rivals often possess greater scale and broader product integration (like Everi's fintech solutions or IGT's lottery systems), AGS has carved out its position by focusing on product performance, operational efficiency, and targeted innovation within its chosen verticals. The company's strategic approach, often described internally through the "three Ps" – People, Product, and Process – aims to leverage the quality of its team, the strength of its offerings, and the efficiency of its execution to drive consistent operating momentum and gain market share, ultimately positioning itself for compelling multi-year growth.

Technological Edge: The Engine of Growth

Central to AGS's strategy and competitive standing is its investment in differentiated technology across its segments.

In the EGM space, the company's cabinet portfolio, particularly the Spectra family (Spectra 43, Spectra 49), represents a significant technological leap. These cabinets are designed not only to capture player attention but also to maximize operator profits through features like enhanced energy efficiency (cited as 15-20% better than some competitors) and improved processing speeds (up to 20% faster). The Spectra 43, for instance, has demonstrated exceptional performance, topping industry reports for consecutive months, supported by high-performing game titles like Long Bao Bao and Shamrock Fortunes, which have averaged over 1.75x house average in initial deployments. The company's R&D efforts, supported by 7 game development studios producing over 75 titles annually, are focused on continually refreshing content and expanding popular game themes like Rakin Bacon, leveraging their success across different cabinet types. Future R&D is targeting entry into new verticals like mechanical reel (with the Revel cabinet recently receiving GLI approval) and jumbo segments in the latter half of 2024, expanding the addressable market and offering operators a more comprehensive product suite.

In Table Products, the PAX S single-deck card shuffler stands out as a key technological differentiator. Despite competing in a market long dominated by a single player, the PAX S has seen surging adoption, with its footprint growing significantly quarter-over-quarter, surpassing 330 units by the end of 2023. Its competitive pricing, reliability, and the company's focus on seamless conversion are resonating with customers. The Bonus Spin Xtreme (BSX) progressive technology also continues to expand its footprint, offering enhanced features that appeal to operators. The company is also investing in the early-stage development of a new multi-deck shuffler, aiming to address the largest segment of the global shuffler market.

The Interactive segment's B2B game aggregation platform and remote gaming server are foundational technologies enabling the delivery of a diverse game library. Recent investments have accelerated the cadence of new game launches, including porting successful land-based titles and developing online-first games like Mega Diamond, which has significantly outperformed previous releases. This focus on content depth and diversity, coupled with tactical business development, has positioned AGS as a leading provider of online slot content in North America, ranking 6th with approximately 5% market share according to a February 2024 Eilers Survey, and achieving strong game performance metrics (4th best overall slot performance at 1.6x site average).

These technological advancements and the R&D investment behind them are critical to AGS's competitive moat. They enable the company to offer products with tangible benefits – higher performance, greater efficiency, and innovative features – that translate into value for operators, supporting higher average selling prices (ASPs) for equipment and driving recurring revenue growth in participation models. While larger competitors may have scale advantages in manufacturing or broader system integration, AGS's targeted innovation allows it to compete effectively on product merit and performance, aiming to capture market share in key segments.

Segment Performance and Financial Health

AGS's financial performance reflects the impact of its strategic initiatives and product momentum, albeit with some fluctuations in the most recent period.

For the three months ended March 31, 2025, total revenues were $94.825 million, a slight decrease from $95.973 million in the prior year period. This was primarily driven by a decrease in equipment sales, which fell to $29.886 million from $33.913 million, mainly due to a year-over-year decrease of 198 EGM units sold (1,243 units in Q1 2025 vs. 1,441 in Q1 2024). Despite the lower unit volume, the average sales price (ASP) for EGMs increased to $21,787 in Q1 2025 from $20,626 in Q1 2024, reflecting the premium pricing commanded by newer cabinets like the Spectra family and price integrity initiatives.

Gaming operations revenue, which represents the recurring portion of the business, increased to $64.939 million in Q1 2025 from $62.060 million in Q1 2024. This growth was largely fueled by a significant increase in the Interactive segment revenue, which surged 74.9% to $7.269 million from $4.156 million, driven by higher real money gaming (RMG) revenues from North American operators due to an expanded game library. The Table Products segment also contributed to this growth, with gaming operations revenue increasing to $4.242 million from $4.105 million, supported by an increase in the installed base (5,800 units at March 31, 2025, vs. 5,410 at March 31, 2024). The EGM gaming operations revenue saw a slight decrease to $53.428 million from $53.799 million, primarily due to a decrease in revenue per day (RPD) ($25.52 in Q1 2025 vs. $26.38 in Q1 2024), although the total EGM installed base increased (23,246 units vs. 22,657).

Profitability metrics showed mixed results in Q1 2025. Net income decreased to $3.211 million from $4.345 million. This was impacted by several factors, including an increase in research and development expenses ($13.244 million vs. $10.918 million) due to higher salaries and benefits supporting product development, and a significant increase in write-downs and other charges ($0.558 million vs. $0.024 million) related to asset disposals and intangible impairments. Interest expense decreased notably to $12.117 million from $13.980 million, benefiting from a lower interest rate following the February 2024 term loan repricing and a decrease in outstanding debt principal. The effective income tax rate also increased significantly to 30.7% in Q1 2025 from 13.2% in Q1 2024, primarily due to the lapse of statute for certain foreign tax attributes.

Adjusted EBITDA, a key profitability metric for the company, was $42.100 million in Q1 2025, down from $44.019 million in Q1 2024. This decrease was attributable to the slight decline in total revenue and a net increase in operating expenses, despite the strong growth in Interactive and Table Products Adjusted EBITDA. Interactive Adjusted EBITDA saw substantial growth (134.2%), while Table Products Adjusted EBITDA increased (9.8%). EGM Adjusted EBITDA decreased (12.0%).

From a liquidity perspective, AGS ended Q1 2025 with $39.477 million in cash and cash equivalents and $8.944 million in restricted cash. The company had $40.0 million available under its revolving credit facility. Net cash provided by operating activities was $26.553 million, comparable to $26.325 million in the prior year period. Net cash used in investing activities increased to $19.825 million from $15.272 million, driven by higher capital expenditures on property and equipment and software development. Net cash used in financing activities decreased significantly to $5.420 million from $21.666 million, primarily due to the absence of a voluntary $15.0 million debt principal repayment made in the prior year period. Management believes the company has sufficient liquidity for its operating requirements and obligations for at least the next twelve months.

A core focus for AGS has been strengthening its balance sheet through deleveraging. The company successfully repriced its term loan in February 2024, reducing the interest rate spread by 35 basis points and voluntarily repaying $15.0 million of debt. This action is expected to reduce annualized cash interest expense by approximately $3.0 million at current rates. The company has made significant progress on this front, targeting net leverage in the range of 3.25x to 3.75x exiting 2023 and setting a target range of 2.7x to 3x exiting 2024, with a medium-term goal of getting below 3x leverage. This deleveraging strategy, supported by consistent operating momentum and improving free cash flow generation, is seen as a key factor for unlocking shareholder value and potentially allowing the company to speak to a broader investor base.

Outlook and Strategic Trajectory

AGS's outlook is anchored in the continued execution of its product-centric growth strategy and its commitment to improving financial health. Management anticipates that the momentum built through investments in R&D and go-to-market capabilities will continue to drive performance.

For the full year 2024, the company expects to achieve Adjusted EBITDA margin in the range of 44.5% to 45.5%, representing a modest increase at the midpoint compared to 2023. Capital expenditures are projected to be in the range of $65 million to $70 million, inclusive of capitalized R&D. A key financial target is to grow full-year free cash flow by 25% or more in 2024, with consistent positive generation projected across all four quarters and an expectation for the free cash flow conversion rate to continue improving year-on-year.

In the EGM segment, while Q1 2025 saw a dip in unit sales and RPD, management believes the expanded cabinet and content roadmaps, including the Spectra 43 and Spectra 49, coupled with entry into mechanical reel and jumbo verticals in the back half of 2024, will allow the company to surpass consensus estimates for global EGM unit sales growth in 2024. They expect domestic gaming operations revenue to continue outperforming market-level GGR trends and international EGM RPD to see modest constant currency growth.

The Table Products segment is expected to maintain its compelling multi-year growth trajectory, driven by the strength of its core products (BSX, PAX, Arsenal), strategic expansion into new geographies and customer accounts, and the development of a new multi-deck shuffler.

The Interactive segment is anticipated to be the fastest-growing segment, with the highest level of year-over-year revenue growth in 2024. This growth will be fueled by the added depth and diversity of the content roadmap, planned new customer and jurisdictional launches, and increasingly effective business development efforts, leading to considerable Adjusted EBITDA margin expansion and growth within the segment.

Overall, the strategic trajectory is focused on leveraging product innovation to drive market share gains, expanding into new product categories and geographies, and translating operational success into improved financial metrics, particularly free cash flow generation and balance sheet deleveraging.

Risks and Challenges

Despite the positive momentum and strategic clarity, AGS faces several pertinent risks that could impact its investment thesis.

A significant near-term factor is the pending Merger Agreement with affiliates of Brightstar Capital Partners. While stockholder approval and HSR clearance have been obtained, the consummation of the merger is subject to customary closing conditions, most notably the receipt of certain gaming regulatory approvals and licenses. The Merger Agreement's initial termination date was extended to August 6, 2025, and the transaction is expected to close no later than the third calendar quarter of 2025, but there is no guarantee the remaining conditions will be satisfied in a timely manner or at all. The uncertainty surrounding the merger could impact the company's operations and stock price.

AGS is also involved in material legal proceedings. This includes securities class action and derivative shareholder lawsuits, which, despite favorable court rulings for the company to date (including the Ninth Circuit affirming dismissal of the class action on March 27, 2025), are subject to further appeals (e.g., petition for rehearing en banc). The outcome of these matters is uncertain, and the company is unable to estimate the potential liability.

Furthermore, the company is dealing with a regulatory challenge in Mexico related to a North American Free Trade Agreement (NAFTA) issue, where the Mexican tax authority has assessed approximately $8.2 million in omitted taxes, interest, fines, and surcharges. While AGS disputes the assessment and has filed nullity petitions, the outcome is uncertain, and the company has been required to place a cash deposit in a restricted account ($8.944 million as of March 31, 2025).

Potential impacts from international trade policies, including tariffs and trade barriers, represent a new risk factor. These could increase costs of materials, affect supply chains, impact customer demand, and lead to retaliatory measures or heightened regulatory scrutiny in foreign markets, potentially affecting the company's business, financial condition, and results of operations.

These risks, while varied, highlight potential headwinds that could disrupt the company's operational momentum, financial trajectory, or corporate structure.

Conclusion

PlayAGS, Inc. presents a compelling investment narrative centered on its successful transformation into a diversified gaming equipment and technology supplier. The company's strategic investments in R&D and operational execution have yielded a strong product portfolio, particularly within its Spectra EGM cabinets, PAX S shuffler, and rapidly growing Interactive content library. These technological differentiators are driving market share gains and operational efficiencies, positioning AGS to outperform broader market trends.

While the most recent quarterly results showed some fluctuations, notably in EGM equipment sales and net income, the underlying trends in recurring revenue segments like Interactive and Table Products remain robust. Management's clear focus on strengthening the balance sheet through aggressive deleveraging, targeting net leverage below 3x in the near term, provides a clear path to improved financial health and potential value creation.

Investors considering AGS should weigh the demonstrated product momentum and deleveraging progress against the inherent risks, including the uncertainty surrounding the pending merger, ongoing legal challenges, and potential impacts from international trade dynamics. The successful navigation of these risks, coupled with continued execution on its product roadmap and financial targets, will be critical factors determining the realization of AGS's investment potential.