Everi Holdings Inc (EVRI) 2004 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to your Cash Systems' second quarter 2004 earnings conference call.

At this time, all participants have been placed on a listen-only mode, and the floor will be open for questions following today's presentation. It is now my pleasure to turn the floor over to your host, Jason Baan. Sir, the floor is yours.

Thank you, operator. With me on today's call is Craig Potts, our CEO, and Chris Larsen, our CFO.

Before we start today's call, we need to make you aware that certain statements in this conference call that do not describe historical facts, including, without limitations, statements concerning future financial and operating performance, the impact of partnerships and alliances, future strategies, and plans or general market expectations constitute forward-looking statements.

Such statements are based on current beliefs and are subject to a number of risks and uncertainties that may cause our actual results to differ materially from those made in such statements.

Any forward-looking statements should be considered in light of the risk factors that appear in today's press release as well as our 2004 second-quarter Form 10-Q and other documents filed with the Securities & Exchange Commission. We undertake no obligation to update any forward-looking statements that we make, today.

With that, I would like to turn the call over to Chris Larsen, the Company's Chief Financial Officer.

Thank you, Jason. Good afternoon everyone. Welcome to Cash Systems' second quarter 2004 earnings conference call. I would like to take you through our second quarter financial results.

Then, Craig will discuss our expectations for the rest of the year, before we go to a question-and-answer session. For three months ended June 30th 2004, revenues increased 50% to 11.8 million from 7.9 million a year ago.

The increase in revenue is due to the continued expansion of products and services, new gaming clients, including new markets and geographical areas.

We currently operate more than nine casinos; and, during the quarter, we announced several new contracts to provide credit card cash advance, ATM services, including the Casino Queen. We also retained clients, such as the Hotel Casino; America TAB, which operates winticket.com; Frontier and Deadwood Stage Casinos in South Dakota; Greyhound Park & Casino in Dubuque, Iowa; and Northfield Park in Cleveland, Ohio. These new and existing clients successfully offset the loss of the Hollywood Aurora Casino.

Income from operations for the second quarter of 2004 was approximately $1 million, up 78%, from 562,000, last year. I will walk you through our operating expense categories. Operating expenses for the second quarter were 10.8 million, or 91% of revenues, compared to 7.3 million, or 93% of sales, last year.

Operating expenses reflect costs associated with greater transaction volume, such as commissions paid, credit card processing costs, expansion of our check cashing operations, depreciation, and the expensing of non-employee stock options.

As you can see from our income statements in today's press release, commissions were roughly 5.7 million, or 48% of revenue, down from 52% last year. Our processing costs were 2.1 million, or 18% of revenue compared to 19% last year.

Our check cashing costs were higher at 5.5% of revenue compared to 2.4% in last year's second quarter and 3.6% for all of 2003. The increase reflects our vendor agreements, which are priced geographically and reflect higher check cashing costs associated with new contracts that are often new geographic territories. We are looking at various ways to improve these costs.

In the quarter, payroll and related service expenses were approximately 1.2 million, or 10.2% of revenue compared to 7.8% of revenue last year and 8.5% of revenue for all of fiscal 2003.

The increase primarily reflects our new call center, which opened in the first quarter, and continued expansion of our full-service check cashing fees operations, such as the Florida Seminole Casinos.

At this time, we feel that Cash Systems is one of the largest providers of full-service, check-cashing operations. We are pleased with our investment in the call center, and our recently announced client wins are partly due to increased customer support -- meaning larger potential clients want higher levels of customer service; and we believe that the investment is already proving to be worthwhile.

We are also realizing tangible cost synergies, as we manage our software (inaudible); and we are doing this for many of our clients. The other costs category was 8% of revenue, flat with the second quarter of 2003 and down from 10.3% for all of 2003, before we accounted for the costs resulted due to Florida Seminole contract in the first quarter; and we expect our other costs category to improve over the long term, as we continue to grow and gain economies of sale.

Interest expense was $47,000, down from 180,000 last year. The decrease is due in part to proceeds from the private placement, which we used to repay certain loans payable and to revolve cash in our ATMs. It's worth noting that we paid $395,000 of taxes, during the second quarter.

We are now taxed at a rate of 40% this year, compared to paying no taxes in 2003. Net income in the second quarter was 591,000 or 4 cents per diluted share that includes 16.5 million diluted shares, and compares to net income of 415,000 last year or 3 cents per diluted share, given a diluted share count of approximately 13 million.

From our balance sheet perspective, we finished the quarter with $13 million in cash. This reflects ten straight quarters of positive cash flow from operations, as well as the 9.2 million from the private placement we completed in April. We have no long-term debt.

Although, the company has no material commitment for capital expenditures, it anticipates continued capital expenditures of approximately 1 to $2 million for the year ending December 31st 2004. This is consistent with our anticipated growth in operations infrastructure and personnel. We've got $435, 000 on capital projects in the second quarter.

For the six-month ended June 30th, 2004, revenues were 22.8 million versus 14.9 million in the first six months of 2003, representing a 53% increase. Operating income was 1.7 million, up from 1.2 million in the same period last year, and this reflects an operating margin of 7.3% versus 8% last year. Net income was $896,000 or 6 cents per share, versus 897,000 or 7 cents per share in the first half of 2003.

I would like to turn the call over to Craig to discuss our outlook before going to the question and answer session. Craig?

Thanks Chris. We are very pleased with our second quarter results. Our leading products, commitment to customer service and our intense focus on increasing claim profitability drew up our superior results.

Our call center investment has enabled us to compete even more effectively to bring on larger and higher profile casino clients, as many of these accounts require call center capabilities. Our cash from the private placement support the continued effort to invest in the business and focus on the newest in-depth technology in our sector. We are committed to making the right strategic investment to ensure continued growth in the future.

Regarding our expectations for the full year, we prefer to be conservative because the timing of startup of new contracts are too difficult to predict, therefore we assume minimal net new contract wins, although, we are confident that we can increase business and execute business effectively going forward.

Therefore, we are increasing our revenue expectation from 47 million to 48 million, up from the previous guidance of 46 million to 47 million. This is based on our existing revenue rate of approximately $4 million per month.

Giving our backlog of contracts and revenue run rate, we are increasing our EBITDA expectation from 4 million to 4.5 million, up from the previous EBITDA guidance of 3.5 million to 4 million. That concludes our remarks for today. Operator, could you please open the lines for questions.

Thank you. The floor is now open for questions. If you have a question, please press "star" then "one" on your touch-tone phone at this time. If at any point your question has been answered, you may remove yourself from the queue by pressing the "pound" key.

We do ask that while you pose your questions that you pickup your handset to provide optimum sound quality. Once again, to ask a question, please press "star" then "one" on your touch-tone phone at this time.

Our first question is coming from Tracy Mangani (ph) of ThinkEquity Partner. Please go ahead. Excuse me, Tracy, your line is live.

I am sorry, can you hear me?

Yes.

OK. Thank you. I'm sorry about that. I've got a question on the revenue guidance number for '04, so looks like you're basically just increasing it by roughly 1 million, is it fair to say that even that is conservative given that would only be implying about 1 million for Bicycle and Casino Queen?

Yes, that is conservative and really what is reflecting is --contracts that we have signed that are already in place and not been operating.

OK.

It doesn't reflect contracts that we have signed and aren't installed yet.

OK.

We are still pretty conservative on our guidance.

Can you give us a sense of like how many contracts, a rough range of how many contracts were signed in that amount?

You know we can't do that.

OK. All right. Can you go ahead and breakdown the revenue numbers for the quarter for us?

Tracy unfortunately I did not do that for this call. But I can ...

OK. Well, then we can talk about later. And then I just -- one more question, I'll get off the line. Craig, you mentioned strategic investments does that include acquisitions that we hear about periodically and if it does what type of parameters do you look at economically as far as making acquisitions?

Well, we definitely in communication like when we differently looking at do some acquisitions right now. Jason, if you want to chime in and you virtually thinking here to about -- we leave Jason (ph).

This is actually correct. One of the major things that we are doing right now is we're focusing in on areas where we can cut costs some of that is in the ETM switching technology that's out there the credit card processing switching technology out there. Technology that you think we could acquire rather than duplicating or reinventing the wheel.

So aggressively out there searching for companies that can affect those parameters for us. But as you said right now, we probably we go there looking we don't have anything in particular done yet. So, anything that can help cut costs or drive revenues that's really what we're focused in on.

OK. Great. Thank you.

Thank you. Our next question is coming from David Bain of Merriman Curhan. Please go ahead.

Yes, nice quarter guys. And can you give us a sense of the number of RFPs you are bidding on versus potential contract expirations for renewal?

Yes, we don't have really have any significant contracts that are coming up for renewal for the rest of 2004 and right now we're typically seeing that 7 to 10 RFPs in a given months and our Aspen (ph) rates been very favorable for us.

So, that being said we think there is quite a few deals for us to get for the rest of the field last six months of the year and we don't really have any major contracts that are coming out for our renewals. So, we're sitting in a pretty good position.

OK. Great. And then how many RFPs will you be bidding on-- in '04 and '05 that could kind of totally changed the landscape with just one contract when meaning 5 million plus and in revenues to your firm and what is that do from a customer perception standpoint, does that almost cost a domino effect or has it cause others to look as you as a major player?

I think right now, we are getting included some RFPs that we wouldn't have been included in the two, three years ago, and I would say over the next 12 to 24 months there is probably two to three major contracts that come up where it would be a larger chain.

So, obviously that's one of our goals for the year is to land our first chain afford to someone (ph) being maybe one of the larger Indian gaming chains where in order five casino deal, but we're definitely concentrating on landing our first chain and there is probably from two to three major chains that come up in the next 12 months.

OK. Great. And then how many Casinos are you currently in with Stay-N-Play?

While we just introduced into a new -- one of our largest casino this week, this is our second-generation product. We're also installing it at another major casino for us at the end of this month. So right now I believe it's going from four to eight casinos.

OK. And of the casinos that you have existing contracts with, that can utilize Stay-N-Play. What percentage of those, do you think will have the product by the end of year?

And by now, one of the things that we looked at this is an opportunity to take a product that none of our competitors have. And its an opportunity for us to leverage and do like new contract extensions, any increasing by-rates out there.

So as our sales force and as we get it out in the fields, we have a good base of recommendations. You know, we're opening two of our largest casinos this month. If all goes well, which we think it will, there'll be great referrals for us to start leveraging this product into too many other casinos. So it's a tool for our sales group.

Would that have an impact on margins for '05?

It can have a margin -- often times, when we see new technology been introduced in the market place, in the cash excess services, there is a higher margin given to these new types of products, because they are so unique.

And often times these products provide putting more money to the floor. So the casinos are willing to give up a little larger percentage of the commissions, knowing that these new products and this new technology is putting more money to the floor.

So we think, as some of our products like our wireless product are one product, we get out in the field a little bit in larger scale and we might see some increase in buyer margins.

OK. Great. And just last question from me. Craig, to the extent you want to be sensitive, if there are competitors maybe on the call, can you give us a sense of product pipeline and if their any new technologies that you may release in the next six months, that could rival like Stay-N-Play?

Like a rival Stay-N-Play...

Well, I mean just in sense, do you have any new technologies that would be incremental and helping you produce more casino wins going forward.

Yes, absolutely. We have just completed major strategic -- working on it, completing a major strategic alliance, shouldn't get into the details of that right now. But anyways, yes, we're going to be rolling out a new product line, that is, we think is going to be very effective in the marketplace.

OK. Great. Thanks guys.

Once again, to ask a question, please press "star" than "one" on your touchtone phone at this time. Our next question is coming from David Lasav (ph) of Core Funds. Please go ahead.

How are you doing guys? Just a quick question, looks like sequentially cash was down 3.5 million and I was wondering what your cash flow from operations look like for the quarter?

Sure, our cash flow from operations is positive. One of the reasons, was we had some lines of credit that we had out there in our accounts payable last quarter. Completely eliminate in that announced by $5 million.

Got you. And what was cash flow from operations?

I don't have that in front of me. When we file our Q, we only put out our balance sheet and income statement...

Right.

When our Q comes out, it will be.

OK. Great. Thanks.

Thank you. Our next question I coming from Brian Cawolchick (ph) of Westpark Capital. Please go ahead.

Good afternoon, guys. Great quarter.

Hey, Brian.

Want to make sure, I read this press release right, you beat the number and raised guidance.

Absolutely.

It's been so long, did that have a portfolio, company do that just enough I'd record, I knew when I saw it. Just a quick question for you guys, from the way you answer I believe Tracy's question about the number of contracts that were in your guidance or what was in guidance. From the answer, Chris, I assume that contracts that have been announced and are not yet implemented, are not in the number?

Correct.

Additionally, I think you are focusing contracts that have not yet been announced?

Correct.

So we can assume that the guidance going forward, again, does not include contracts that you have already announced but you haven't implemented. You have also got some contracts that you have not even announced yet?

Correct. I mean the guidance that we gave is basically what we done for the first six months and a run rate coming out of the quarter and reflect casinos that we have signed, that we haven't implemented the products with and doesn't -- in fact any casinos that we've signed that we have not announced yet.

Very good. Appreciate the clarification.

Thanks Brian.

As a final reminder, to ask a question, please press "star" then "one" on your touchtone phone at this time. Our next question is coming Allen Moracalous (ph) of Forestmen (ph). Please go ahead.

Hi. Just a few questions. Where do things stand in terms of getting Stay-N-Play approved by the Gaming Commission in Nevada? From what I understand the commission doesn't allow right now people to withdraw cash without leaving the tables or the machines.

Sure. This is Jason Baan. Indications we received from State of Nevada Gaming Commission is that, our wireless product is legal in that jurisdiction. So we shouldn't have any roadblocks with respect to implementing that product there.

OK. When did that occur?

That's based on conversation with that office. It's actually not been a official response but...

OK.

...but indication we received from.

Do you any announced contracts with the major -- any of the major casinos in Vegas?

Yes. We don't any of the major change in Las Vegas.

Not a change. OK. Have there been any key hires recently or over the course of the quarter in terms of building up sales force or building up the infrastructure to manage some of these -- potentially these strategic alliances?

Craig, you want to talk about that?

Actually in one of our last quarter, we really didn't hire anybody to take -- we really been -- we have our own real internal business development group that has been very successful in handling this strategic alliances and different alliances and focusing on, I guess, is maximizing that usage.

OK. And can you talk a little bit then at least on the comparative fund, what's happening given that, I guess, Sirji (ph) purchased global cash or -- excuse me -- game financial, just kind of you -- has there been any disruption in sales cycles or anything like that for that you may be Sirji being a larger company or with may be little more clout?

Well, I guess I don't know how to quite say, but we haven't lost nothing to them at this point.

OK.

And in fact our relationship with Sirji is pretty good and we feel pretty confident in relationship that we have to work through any potential issues like that. But, obviously, it's a competitive marketplace out there but we think our product differentiation is definitely letting us -- we are winning some of these contracts that we've seen pretty good.

OK. Great. Thank you very much.

Thank you. Our next question is coming from Justin Smiley (ph) of Thomson Davis. Please go ahead.

Hi guys. How are you?

Good.

One quick question. From the time you guys sign a new contract, how long does it usually take to implement it and start receiving revenues from it?

Typically we have 100-day -- 180-day RFP process, so start to finish, that's usually in the life cycle. Obviously sometime Indian gaming takes a little bit longer; non-Indian gaming takes a little bit shorter periods of time for us, but really depends -- right now, about 120 to 180 days -- time for RFP to implementation.

Got you. And are you guys going to give any, maybe, EPS guidance associated with your EBITDA and revenue guidance for the year?

That's something we are going to do on a go-forward basis.

OK.

This is really only our second quarter of giving guidance. So each -- we'll expand on it going forward.

All right. Thanks a lot guys.

Thanks.

At this time there are no further questions in the queue. I like to turn the call to the presenter for any closing remarks.

Craig, do you have anything?

No. We definitely appreciate it...

Yes.

...and thanks for listening Jason, and -- definitely appreciate it.

Yes. I just want to say thanks to you. You know all the different funds that are invested with us, we're pretty excited, and I think second half of the year should be outstanding for us. Thank you very much.

Thank you very much both.

Thank you. That does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day.