Everi Holdings Inc (EVRI) 2004 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Cash Systems third quarter 2004 earnings conference call.

[OPERATOR INSTRUCTIONS].

It is now my pleasure to hand the floor over to Mr. Chris Larsen. Sir, the floor is yours.

Thank you. With me on today's call is Craig Potts, our CEO.

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 limitation, 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 actual results to differ 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 third quarter Form 10-Q and other documents filed with the Securities and Exchange Commission. We undertake no obligation to update any forward-looking statements that we make today.

I will take you through our third quarter financial results, then Craig and I will go to a question and answer session.

For the three months ended September 30th, 2004 revenues increased 41% to 12.8 million from 9.1 million a year ago. The increase in revenue is due to the continued expansion of products and services to new gaming clients, including new markets and geographical areas, as well as some intended (ph) growth from current customers. We currently operate in over 100 casinos and during the quarter we announced 14 new contracts to provide credit card cash advance and ATM services, including Saratoga Springs, Ocean Jewel and the Bicycle Club. We had no new casino client losses to report for the third quarter.

Recent new opportunities include; we have entered into a new contract with the Mesquakie Casino to provide check cashing and credit cash advance services. Mesquakie Casino is located in Tama, Iowa, and is the only full-service 24-hour casino in the state. The 64,000 square foot casino includes 34 table games, 1,350 slot machines and a 206-room hotel. Cash Access Mexico entered into a multiyear agreement to provide credit card cash advance services to the Caliente Group, the leading provider of racing and sporting gaming locations throughout Mexico and Latin America.

The Caliente Group owns and operates 119 racing and sporting gaming locations throughout Mexico, including the Caliente Raceway in Tijuana, Mexico. The company also owns and operates an additional 35 locations throughout Latin America. In conjunction with Cash Access Mexico, the agreement with Caliente, Cash Systems has partnered with a sponsorship financial institution in Mexico. This relationship provides Cash Access Mexico the necessary platform to expand current and future products into Central and South America. Combine this with our Canadian subsidiary, we can now process transactions through North, Central and South America.

Income from operations for the third quarter of 2004 was just shy of $1 million, up 73% from 565,000 last year. Operating expenses for the third quarter were $11.8 million, or 92% of revenue, compared with 8.5 million, or 94% of revenue, 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. As you can see from the income statement in today's press release, commissions were roughly 6.4 million, or 50% of revenue, flat on a percentage basis of revenue last year.

Our processing costs were 2.1 million, or 17% of revenue, compared to 19% last year. Our check cashing costs were flat year over year at 5% of revenue. In the quarter, payroll and related service expenses were approximately 1.2 million, or 9% of revenue, flat with last year. We added a new call center in the first quarter of 2004, as well increased -- as well as increased our overall headcount by nearly 50 employees for the year. The cost -- the other cost category was 7% of revenue versus 8% of revenue last year. We believe our other cost category is beginning to improve due to the growth and economies of scale, as well as cost cutting measures.

Interest expense was $11,000, down from $101,000 last year. The decrease is due in part to proceeds from the private placement, which we used to pay certain notes payable, and for vault cash in our ATMs. It is worth noting, that we paid $389,000 of taxes during the third quarter. We are now taxed at a rate of 40% this year compared to paying no taxes in 2003. We have fully used our net operating loss carry forwards last year.

Net income in the third quarter was 583,000 or $0.04 per diluted share. That includes 16.5 million diluted shares and compares to net income of $427,000 last year, or $0.03 per diluted share, using a diluted share count of approximately 13.6 million. From a balance sheet perspective, we finished the quarter with nearly $13 million in cash. This reflects nine 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 commitments for capital expenditures, it anticipates continued capital expenditures of approximately 1 to $2 million for the year ending December 31st, 2004, consistent with our anticipated growth in operations and personnel. We spent approximately $500,000 on capital projects in the third quarter.

Regarding our expectations for 2004 and 2005, we expect the following; for 2004 we are increasing our guidance. Revenue will be in excess of 49 million. That will translate into diluted earnings of 14 to $0.16 per diluted share. That would represent a 50% growth in revenue and nearly a 60% growth in income from operations. For 2005, we base our guidance on contracts that we have signed and expect to sign by year-end.

Therefore, we expect revenue of 64 to 66 million, or growth in excess of 30% over 2004. This should translate into diluted earnings per share of 25 to $0.26, or growth in earnings of nearly 70% per share, a strong improvement over 2004. While we do not want to get into too many details, we are planning on continuing to make investments in our organization to create a platform of growth. We are very pleased with our third quarter results, our leading products, our commitment to customer service, and our intense focus on increasing (audio break) client profitability drove our superior results.

Our investment in the call center has started to pay off. We have signed contracts with several high profile casino clients, during the quarter, and our ability to offer dedicated customer support played a role in this success. We are committed to making the right strategic investments to ensure continued growth in the future. That concludes our prepared remarks for today. Operator, could you please open the lines for questions.

Thank you.

[OPERATOR INSTRUCTIONS].

Our first question is coming from David Bain with Merriman Curhan Ford.

Thanks. Hey, guys. Early this month there was an article on the "Las Vegas Review Journal" on the wireless product and it mentioned that MGM could be interested in this product. Can you give us a sense of timing for Nevada -- or potential Nevada approval and what kind of impact an MGM install would have financially?

Hey, David. This is Craig here.

Hey, Craig.

How you doing? Yes, we're trying to get approval from the Nevada Gaming Control Board there and we're seeking approval and we're hoping to have some kind of formal answer on this Wednesday. We definitely have several large clients very interested in this service, and very excited to roll it out. It's been a great success so far, and I think it'll definitely be a very good success in that market, too.

Great. And so we can assume, though, that this is not in your guidance whatsoever?

David, this is Chris.

Hey, Chris.

Our guidance is pretty conservative. It's really based on contracts we have signed or we will sign by year-end. We have not included the MGM Mirage only because a. we have to get the Nevada Gaming approval first, which we think we can do. But that would be upside there in our numbers for next year.

And then at G2E this year, I went around to a lot of casinos and saw one in particular that had your -- had your system installed and I didn't see an announcement on the tape. Can we assume there are contracts, a. that you've signed up and not announced and, b. what's the reason for not announcing them at this time?

Well, in some instances we have to wait for gaming licenses to get approved, which are completely out of our control. But yes, there are some contracts that we have announced -- or that we have signed that we have not announced, more of a courtesy to our customer. We oftentimes wait for their approval before we announce new contract wins. I think the one in particular you're talking about, we're just waiting on the gaming license right now before we can announce that.

OK. OK, great. And you mentioned that guidance is fairly conservative. Can we assume that those do not include possibly any more Carnival boats or any substantial signing, like a larger contract?

It does definitely not include any signings of larger contracts. Really what we're doing is we're just basically taking our run rate out of the current quarter, plus deals that we have signed that we have not announced or deals that we have announced that we have not implemented, and kind of run that out and that's really getting us to our 2005 guidance. So I would look for, as we sign more contracts, bigger contracts, we'd move guidance accordingly.

Right. OK, thanks, guys.

Thanks, Dave.

Thank you. Our next question is coming from Traci Mangini with Think Equity Partners.

Thanks. Two question actually. First one, if you could try and quantify for me just what the percentage of recurring revenue is in your growth expectations for next year. And secondly, can you speak to the pricing environment, what you're seeing out there? Is it fairly stable? And then if you can comment, you know, where are you coming in compared to competitors in RSGs right now.

OK, I'll take that first part. In our guidance, basically if you look, we came out of the third quarter at a run rate of about 4.5 million, so that's what we're using as our reoccurring number. Obviously as we start layering on contracts that haven't either been implemented or we haven't announced yet, that gets us to the proper run rate to get us to that 64 to 66 million.

OK.

Traci, to answer your second question there, yes, we're seeing the marketplace -- we're not seeing a whole lot of room in the market. Everything's pretty much staying the same right now, there's not a whole lot of fluctuation on the pricing side. So it's fairly consistent out there, and I think it's going to stay the same.

OK. So you're not seeing any come in and saying, "Hey, we'll eat the whole ATM part and just take the interchange just to get the contract", you're not seeing any of that?

No, not really.

OK.

I mean, there's different variations in different deals, but we haven't seen a whole lot of that, no.

Great. Thank you.

You bet, Traci.

Thank you. Our next question is coming from David Baker (ph) with Core Fund Management.

Good afternoon, gentlemen. Nice results.

Thank you.

Chris or Craig, maybe Chris will want to take this, I don't know. It seems to me that in taking into account the business that's already been announced and other business, it sounds like it's been one but hasn't been announced, and prospective contracts from people like MGM, that there's a strong likelihood, without trying to paint you guys into the corner, that you're going to have to guide up again. Could you speak to that, and are you willing to quantify or qualitatively describe what MGM, and other large entities might do from a revenue standpoint when and if you get gaming approval for your device in Nevada?

I think the big thing with our guidance that we give is we've always been conservative in what we've done and we've based it on contracts and run rates coming off quarters. So looking forward, we just kept that same mentality. Obviously, a large casino like MGM could have just dramatic effects, could double or triple the size of our company. But more realistically, there's a lot of business out there that we can get on a monthly basis that are good wins for us.

We don't necessarily need an MGM Mirage or a Harrah's Corporation to award us a contract to be very successful next year and for the next several years. Oftentimes when you get into some of those larger contracts, margins tend to deteriorate and we focus in on not only are we trying to land our first major chain and obviously trying to land some of the major chains out there, but we're focusing on small casinos as well, small, medium to large casinos.

Those have been our bread and butter; those are what keep our numbers moving up and up and up. So not only are we trying to hit the giant down, but we're also staying focused in our core business of meeting all those regional casinos. If we were to land a major Vegas property like that, you could literally see the size of our company double overnight.

That's helpful, Chris. And with respect to Caliente Group, for example, and Carnival, has your guidance assumed what seems to me to be sort of minimal penetration of those new clients?

Our guidance has conservative penetration for the Caliente Group, and it has the first 19 boats of the Carnival Cruises.

How big is that fleet?

Craig, if...

Yes, it's like 62.

OK. And Caliente Group, how many facilities, if you will, and how many total?

There's about 119 in Mexico, 35 in Latin America. With the Caliente Group, built into our projections is a progression of adding these customers on, identifying, let's say the top 10 to 15 accounts, focusing on those, getting those up and operating properly, and then just keep going down the ladder until we've fully leveraged the whole Caliente Group.

So they're amenable to a full rollout of all their facilities?

Absolutely.

Excellent. Thank you.

Thank you. Our next question is coming from Brian Collicuk (ph) with West Park Capital.

Good afternoon, gentlemen.

Good afternoon, Brian.

Good quarter. I wanted to ask you a quick question, kind of try to follow up on the guidance that you gave me. It's subtle, but I think it's important. You said that the guidance that you give is based on your run rate plus signed and announced contracts and signed and unannounced contracts. Is that correct?

That's correct.

So effectively, you have -- the numbers that you've given guidance to, you have 100% visibility into, plus or minus some fluctuation on casino draw and player activity. But with the number that you've got or the number that you've given are based on basically 100% visibility on contracts you haven't had and signed.

And timing issues obviously.

Sure, and when they roll out in terms of implementation.

Correct, because this is reoccurring revenue bases, the earlier we get it implemented, obviously the better it is for our revenue base. But timing is critical on a lot of these deals.

So just putting that all the way, there's not really anything in your guidance for next year from any unsigned contracts.

Correct.

Have you given any thought to -- or give us an idea what the impact of any expirations might be going into next year? Are there any big contracts that are coming due?

We have one contract that we consider a larger contract that comes due next year.

OK.

Other than that, we've been very successful in just recently resigning several casinos to a longer-term deal. You can maybe look for those announcements in the very near future as well.

OK. I commend you guys on results this quarter and again, continue to be, I don't know, pleasantly surprised by the degree of conservatism in your guidance. Thanks for the numbers this quarter.

Thank you.

Thanks, Brian.

Our next question is coming from Melvin Verley (ph), a private investor.

Gentlemen, I have a question on prepaid commissions and how they're computed and how they result.

OK, I can help you with that. Basically a prepaid commission is a major competitor of ours was going out and prepaying commissions and they're using the strength of our balance sheet against us for a period of time. Since we've been able to do our private placement, we matched some of their prepaid commission offers and we've pretty much seen that practice disintegrate now. It's just really nonexistent over the last few months. It had happened a couple of more times, but it's not a practice that we're seeing in the normal course of business. It was...

So this was prepaid commissions to the casinos?

Correct.

So you anticipate this will decrease?

Correct.

OK, thank you.

Our next question is coming from Mike Cooney with Merriman Curhan Ford.

Hi. Chris, maybe you could talk about what some of what you think are potential other international opportunities with the Latin American opportunity really being your first international. What do you see in Europe or possibly Asia as well?

I think the big things that we're seeing is we're just building our footprint. There's a huge possibility for us in Canada with our partnership with Mikohn. I think Craig can even probably talk a little bit more about this, but we think we'll be able to leverage that relationship and work very, very closely with them to start landing some European customers and maybe even make some major advancements towards the cashless gaming application outside of the U.S., which is very exciting to us. Craig, what's your feel for Mikohn?

For Mikohn? Well, yes, as far as international. Let's back up, go to international question. Yes, we're definitely -- we're focused in that area right now, as you can see, the Caliente, the Canada side and we're definitely moving over to the Europe side right now. So we're excited about that. And as far as Mikohn, we're definitely talking to a lot of casinos right now together, so it's going great.

We're kind of getting in the ground floor, what we like to think the ground floor in Europe. We went up against obviously Global Cash Access in the Caribbean. We've been pretty successful with them in that area. We'll probably be going to Canada and combating them up there as well, but we think Europe has some really unique opportunities for us.

Sir, does that answer your question?

Yes, thank you.

Thank you. Our next question is coming from Arie Cole (ph) with E-Invent (ph).

Good afternoon, gentlemen. I had a quick question about your All-IN1 product line. Can you just clarify for me when it was actually introduced on a more or less nationwide basis and just kind of clarify exactly what you're offering with this product line? I just want to make sure I'm not mixing it up with some of the other more limited products you have to offer.

Craig, you want to go ahead with that one?

Yes, it just offers cash advance and debit transactions at the ATM machine. It's a pre approval process and allows customers options as far as if a customer runs out of cash, he has the ability to move over to your credit card cash advance and do a debit card cash advance. So it's a - and we're also moving some more functionality towards the ATM machine right now, like check cashing functionality and continue to move more - moving more and more functions over towards the ATM.

OK. And again, I apologize for the slight confusion on my part, but All-IN1 represents what portion of your revenue today relative to some of the other services you've been testing in individual locations?

Right now it's still 60 to 70% of our business is driven from our credit card cash advance product. I would say another 10, 15% comes from our ATM product and another 10, 15% comes from our check cashing operations. Really what that All-IN1 does is it's really a special feature of software that captures customers that have hit their daily limit and what we see by that is we're capturing more transactions that we would have turned away customers using a traditional ATM.

So it's a relatively new product. I would say it's been in business for close to a year now. It's probably in about 25% of our casinos. Oftentimes the customers that we have originally signed up with us for us to provide the credit card cash advance aspect of the business, so as the ATM contracts come up, it's a leverage point for us to get in there. We obviously use our check cashing guarantee product that we have with Certegy as a leverage point for us to renew, extend and get new contracts and we use ATMs as well.

So we're one of a handful of companies out there that can offer a full range and the big thing is we're continuing to try to find new products, introduce new ways for customers to get their money. Because at the end of the day, most people have a $500 a day limit on their ATM card, so for them to take any more money out at a casino, they will be probably touching our credit, our debit application, our check cashing services, as well as marker to play.

But again, with the All-IN1, it doesn't matter if you're using your credit card or your ATM bankcard, either one is - can be used with the All-IN1 obviously to retrieve additional cash.

Exactly.

And with a credit card cash advance, is most of that business done for you on an automatic basis through an ATM type device or is at a window with a person?

It's done with a window at a person out of a kiosk.

OK, so today really maybe only 10% of your revenue comes from sort of automated revenue where there's no human interaction on the casino floor?

It's a requirement right now, correct. It's a regulatory requirement for us to have that human intervention right now.

Thank you. Gentlemen, there appear to be no further questions at this time. I would now like to hand the floor back to management for any closing comments.

Well, I'd just like to thank everyone for taking their time to be with us today and we're very excited about our third quarter and excited about 2005. Craig?

Yes, I just want to say pretty much the same and we're very excited about the future. We think we're in the best position we've ever been in and very excited to have you guys on board. Thank you for your time.

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