Accel Entertainment (ACEL) Q4 2022: Terminal Count Surges 70% as Century Integration Reshapes Portfolio

February 28, 2023 | By EarningsIQ Research

Accel Entertainment capped 2022 with record revenue and a 70% jump in active terminals, underscoring the impact of its Century acquisition and organic expansion in Illinois. Despite inflationary cost pressure and lower margins from new markets, management signaled continued discipline in capital allocation and a measured approach to growth in developing states. The absence of formal guidance highlights macro caution, but operational tailwinds point to further upside as integration and technology investments mature.

Summary

• Terminal Expansion: Century acquisition and organic growth drove a step-change in active locations and terminals.
• Margin Reset: Lower-margin new markets and inflation have set a new baseline, but operational leverage remains a focus.
• Capital Allocation Discipline: Buybacks and M&A remain balanced, with liquidity supporting ongoing investments and shareholder returns.

Business Overview

Accel Entertainment operates as a distributed gaming route operator, installing and managing video gaming terminals (VGTs, slot-like machines in non-casino locations) across bars, restaurants, and other venues. The company earns revenue from a share of gaming proceeds at each partner site. Illinois is the core market, but recent acquisitions and organic investments have diversified the portfolio to include Century’s operations in Nevada and Montana, with developing efforts in Georgia and Nebraska. Accel’s business model is asset-light, with a variable cost structure and a focus on local partnerships and scalable technology.

Performance Analysis

Accel delivered record revenue growth in Q4 and for the full year, propelled by the Century acquisition and steady same-store sales in Illinois. The company’s installed terminal base surged 70% year-over-year to 23,150, and the number of active locations grew 39% to nearly 3,600. Illinois same-store sales rose 6% in Q4, demonstrating resilience in the core market even as inflation and macro uncertainty persisted.

Margins, however, came under pressure as new markets integrated via Century operate on lower revenue splits and higher variable costs. Management confirmed that back-half 2022 margins (around 15.5%) now reflect the “new normal” including full labor cost resets and inflationary impacts. Still, cash generation remains robust, supporting both organic investments (notably in Georgia and Nebraska) and a $200 million buyback program, with $88 million repurchased since inception.

• Acquisition Impact: Century’s portfolio added scale but diluted consolidated margins, as expected with negotiated revenue splits and less mature markets.
• Organic Growth: Illinois expansion contributed 52 new locations and positive same-store comps, offsetting slower growth in new venue openings.
• Cost Structure Shift: Wage, parts, and fuel inflation are now fully embedded in results, with technology investment aimed at restoring margin trajectory.

CapEx rose to $47 million for the year, driven by upfront investments in developing markets. These outlays are expected to yield returns over a multi-year horizon, with current performance in Georgia and Nebraska still well below mature market benchmarks.

Executive Commentary

Strategic Positioning

1. Century Integration and Portfolio Diversification

The Century acquisition has reshaped Accel’s geographic and operational profile, adding scale in Nevada and Montana and introducing new technology capabilities to developing markets. While these regions offer attractive long-term growth, their lower initial margins and negotiated revenue splits require careful integration and operational tuning.

2. Organic Growth and Illinois Core

Illinois remains Accel’s anchor market, with organic expansion via new locations and positive same-store sales. However, management cautioned that the pipeline of new business openings has slowed, shifting focus to capturing a disproportionate share of venue transitions and maximizing yield from existing sites.

3. Technology and Operational Efficiency

Accel is investing in technology to streamline operations and offset inflationary cost pressures, including labor optimization and deployment of prepaid value card solutions in Georgia. These initiatives aim to protect margins and enhance partner value, supporting long-term scalability.

4. Capital Allocation and M&A Discipline

Share repurchases and tuck-in acquisitions remain central to Accel’s capital allocation strategy, enabled by strong free cash flow and liquidity. Management emphasized a balanced approach, with flexibility to pursue M&A while maintaining shareholder returns and prudent leverage.

5. Developing Markets and Legislative Optionality

Investments in Georgia and Nebraska are early-stage, with backlog-building and technology deployment underway. While legislative expansion in new states remains a potential upside, management stressed that the business model is not dependent on near-term regulatory wins, focusing instead on optimizing current markets.

Key Considerations

This quarter’s results highlight Accel’s ability to scale through acquisition while maintaining operational discipline, but also surface the challenge of margin dilution as the portfolio diversifies beyond Illinois.

Key Considerations:

• Margin Management: Century and developing markets reset consolidated margins, requiring ongoing efficiency gains to restore upward trajectory.
• Organic vs. Inorganic Growth: With new Illinois venue growth slowing, M&A and backlog conversion in emerging states become more important levers.
• Technology Adoption: Early results from prepaid value card deployment in Georgia show promise for volume and compliance enhancement.
• Capital Return Flexibility: Strong liquidity and cash flow support continued buybacks and investment, even amid macro uncertainty.

Risks

Margin compression from lower-yielding new markets, persistent inflation in labor and parts, and uncertain legislative outcomes in targeted states present ongoing risks. While Accel’s asset-light model offers flexibility, the company’s near-term performance is closely tied to integration success and the pace of organic growth in mature markets. Regulatory inertia could limit upside from new state expansions, and macroeconomic headwinds may dampen discretionary gaming spend.

Forward Outlook

For Q1 2023, Accel did not issue formal guidance, citing macroeconomic uncertainty. Management noted:

• Strong start to 2023 with positive Illinois licensing trends and continued integration of Century assets.
• Ongoing investment in developing markets expected to weigh on near-term margins but build future growth capacity.

For full-year 2023, management withheld guidance but indicated that tailwinds from late 2022 have carried into the new year. They committed to providing updates as visibility improves.

• Monitoring macro trends and expense run rates closely.
• Expecting gradual improvement in developing market performance as investments mature.

Takeaways

Accel’s Q4 results reflect the dual forces of scale-driven growth and margin reset as the business expands beyond its Illinois core.

• Portfolio Shift: Century acquisition and organic investments have diversified Accel’s footprint, but require operational focus to close the margin gap with legacy markets.
• Efficiency Imperative: Technology deployment and labor optimization are essential to offset embedded cost inflation and restore margin expansion potential.
• Watch Developing Markets: Georgia and Nebraska will be critical to long-term growth, but meaningful P&L impact is several years out; investors should track backlog conversion and regulatory developments.

Conclusion

Accel Entertainment enters 2023 with expanded scale and a more diversified market presence, but faces a recalibrated margin structure as it integrates new assets and navigates inflationary headwinds. Disciplined capital allocation and operational execution will be key to realizing the growth potential embedded in its broadened portfolio.

Industry Read-Through

The distributed gaming route sector is entering a phase where scale and geographic diversification are increasingly important, but not without cost. Accel’s experience highlights how acquisitions can drive headline growth but may dilute margins if new markets are less mature or operate under different revenue splits. Inflationary cost resets and the need for technology-driven efficiency are sector-wide challenges. For peers, balancing expansion with disciplined integration and margin management will define winners as the industry matures and legislative momentum remains uneven. The slow pace of regulatory change in new states underscores the importance of extracting maximum value from existing markets and leveraging operational agility.

ACEL Consumer Discretionary Gaming Route Operations M&A Margin Inflation Capital Allocation