Everi Holdings Inc (EVRI) 2005 Q1 法說會逐字稿

Welcome to the Cash Systems, Inc. first-quarter 2005 earnings conference call. Today's call is being recorded. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions.

I would now like to turn the conference over to Mr. Dave Clifford.

Thank you, operator, and good afternoon, everyone. Welcome to Cash Systems' first-quarter 2005 earnings conference call. With me on today's call is Mike Rumbolz, our CEO; Chris Larson, our COO; and Dev Kaplan (ph), our General Counsel.

Before we start today's call, we need to make you aware of 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 market conditions that may 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 materially from those 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 2005 Form 10-K and other documents filed with the Securities and Exchange Commission. We undertake no obligation to update any forward-looking statements that we may make today.

With that said, I will take you through our first-quarter financial results, 2005 guidance, and then Mike will discuss our growth strategy before we go to Q&A. Revenues for the quarter increased 24% to 13.7 million from 11 million in the first quarter of 2004. The increase reflects our continued expansion of products and services to additional and existing gaming customers. We successfully expanded and won new business relationships based upon our focus on technology and superior service. We are now installed in over 160 casinos.

Operating expenses for the first quarter were 13.1 million, compared to 10.4 million for 2004, or 96% of revenues as compared to 94% for last year. The 26% increase in total operating expenses reflects increased commissions, processing and payroll costs associated with the increase in revenues we achieved this quarter, as a direct result of the investments we are making in our infrastructure. Specifically, we paid higher commission rates this quarter in order to secure new business, retain existing customers and to continue expanding our market penetration. We are experiencing a significant increase in payroll and benefits, as we continue to build the key infrastructure needed to take this company forward. This includes announcements we have made previously and the addition of seasoned gaming veterans to our Board of Directors in Don Snyder and Patty Becker. We are continuing to make key additions to our management team, as well as growing our growing sales force.

As part of this effort to prepare for the growth we expect in the future, we are making vital improvements to our systems to comply with Sarbanes-Oxley regulations, which will ensure that we are on schedule to be an accelerated filer as of 12-31-05 of this year. As you may recall, on our last quarterly conference call, we did not yet know the first-quarter financial impact of these accounting efforts. Income before taxes was 471,000 this quarter versus 507,000 the first quarter of last year, a 7% reduction year over year. Using a fully-diluted share count of 17.1 million, net income was 238,000 or $0.01 per diluted share for the first quarter of fiscal 2005, compared to net income of 304,000 or $0.02 per diluted share on 16 million shares in 2004. As of March 31st, 2005 we had 11.4 million of cash, compared to 13 million at December 31st, 2004. Looking forward, we remain optimistic that the new business pipeline for 2005 will continue to increase.

On our last call, we reiterated guidance of approximately 64 to 66 million in revenues for 2005 and $0.24 to $0.26 per diluted share. We are again reiterating our topline guidance of 64 to 66 million today, and expect the costs associated with Sarbanes-Oxley compliance to negatively impact the Company by approximately $0.06 per share for 2005. That works out to approximately 800 to $1 million for the full year or 200 to 250,000 per quarter. Therefore, our updated guidance is $0.18 to $0.20 per share with no new contract wins this year. Yet we remain enthusiastic about our new contract opportunities for the balance of the year. We are optimistic that we can make up the gap between prior guidance and the cost of Sarbanes-Oxley compliance. We will, of course, update you throughout the year as we gain visibility.

I would now like to turn the call over to Mike before we go to questions and answers.

Thanks, Dave, and thanks, everyone, for joining with us today on the call. We announced some very important new contracts during the first quarter. Our contract with the Chickasaw Nation, which operates 14 casinos in Oklahoma, clearly addresses our ability to meet the cash service needs of large, multi-casino operators. Additionally, during the quarter, we expanded our presence in California with new contract wins at Golden West and Lake Elsinore casinos. We also solidified our relationship with Deadwood casinos in South Dakota and won the Grand Traverse contract in Michigan, and we entered into a new contract in Ohio with the addition of Beulah Park.

We made great headway in the quarter, and we continue to build on this momentum. I'm sure many of you saw last week that we had re-signed one of our largest clients, the Ho-Chunk Nation. This provides solid evidence of our commitment to long-term customer relationships. So overall, we're very pleased with the first-quarter results, and we feel very good about the sales pipeline right now. We will certainly continue to leverage our team's experience in the gaming sector as much as possible throughout the rest of this year, and in particular our newest addition that I will address in a moment.

At the same time, the first quarter was and 2005 will continue to be a period of evaluation and investment for us. Our costs increased substantially in the quarter, as we reinvested in the business in anticipation of future growth. These are investments we felt we had to make to effectively execute our plans. It includes increased labor costs to account for new operations and new senior management. And we announced today, after the market closed, another addition to our management team in John Glaser as our Executive Vice President of Sales. You will see that with his 20-plus years of experience, 12 of it with two of the largest vendors to the gaming industry, he is a wonderful and welcome addition to our team.

We also have increased costs related to our accounting programs to ensure that we are compliant with 404, and that our systems remain as robust and efficient as possible. We feel that these increased expenditures are necessary to grow this business, especially as we strive to increase market share going forward.

Today, Cash Systems is a dynamic and innovative company with leading products, a commitment to customer service and an intense focus on increasing our clients' profitability. However, in the future we intend to become an even more integral part of a casino's operations. We are currently exploring new opportunities and developing relationships and partnerships that are concentrated on capitalizing on the future of cash access technology. We are focused on how our new product offerings will impact casino operations. We intend to be woven into the fabric of the casino environment and to provide integrated products that enhance the casino patrons' overall experience.

We will be sharing more details of our plans and vision with you in the coming quarters. Now, as we execute our business strategies, we're confident that we can continue to gain market share, improve our financial performance and drive increased shareholder value.

That concludes our prepared remarks today. Operator, could you please open up the lines for questions?

(OPERATOR INSTRUCTIONS). David Bain, Merriman Curhan Ford.

On the commission expense as a percentage of revenue, can you give us an idea of where you see that trending, as you do retain contracts and continue to grow?

Sure, Dave. We don't see a reduction in our margins. That is a little bit skewed for the first quarter because of the new contract wins that we brought on in the first quarter of this year, but we continue -- I feel confident that they will remain in the levels that they had been for the prior year.

And then, I know, Mike, you kind of touched on this, but can you give us a sense as to the casino operators' current awareness as to why cash access in casinos is so important, and kind of relay that versus where it was, say, their awareness six months ago, a year ago, and speak to any other avenues of potential growth out there? Stuff that may be broad enough so you don't have to create competitive conflicts would be great.

Right. And I appreciate you giving me that room, David. Before joining the Company, I had the opportunity to talk with a lot of my friends and peers out in the casino industry. And once you move outside of the finance departments of most operations, there was not a high level of understanding of what our business was providing to the casino operators -- or, in many cases, even who was providing those services to the casino -- from the people on the operations and marketing side. And I think that is changing rather rapidly. I know, certainly, as a result of my conversations, I’m making it clear to the rest of the casino executives, that perhaps have not been involved in these contracts and their negotiations in the past, what it is we're providing to the casino, how we can provide additional cash onto the casino floor and how that ultimately impacts their same-store sales on a year-over-year basis.

And I'm getting a great reception with that, so I think the visibility is increasing. I don't have a sense of whether that's significant, or whether it's increasing simply beyond our efforts. But I've got to believe that with some of our competitors out on an initial public offering and some of the sales efforts around that, that they are increasing it, as well. And so I think that creates more opportunity for us.

In addition, bringing John in, who is coming from the machine sales side of the business and has worked for the two largest companies in that space, he is addressing, has addressed in the last few weeks and when he comes on full-time, will be involved in addressing the other executives as well in the casino environment, and increasing their knowledge and understanding of what we do.

So I'm satisfied that we're increasing it. I just can't give you on a scale of 1 to 10, where we are at on that scale.

And on sort of a no-name basis, can you give us a sense as to RFPs in the future, how the pipeline is shaping up there, in terms of potential revenues over the next year, two years, whatever you wish?

Yes. We're continuing to look at anywhere from four to eight RFPs per month. We're excited about the pipeline, the big ones out there that you are fully aware of, Dave, as well as the ones that are more traditional in our space. We are very confident about our abilities to transition our technology and service into those contracts, and hopefully we will win some of them.

And, Dave, can you walk us through any line items on the balance sheet that may have changed?

Yes. The biggest change, as you'll notice, was cash and then settlements due from credit card processors. Cash went down and other assets went up, because we removed nontraditional deposits and transit from cash to deposits and transit due from processors so they could be more visible and more transparent to the reader. It was also exactly what one of our largest competitors did in their public documents. So trying to be more comparative, give you a little bit clearer picture of the balance sheet.

Traci Mangini, ThinkEquity Partners.

Can you gentlemen break out for us the revenue by segment, so we can get a sense of how the growth was distributed on the top line?

(multiple speakers) first quarter?

Yes.

Roughly, of the 13.6, 4.7 was ATM; 5.8, credit card cash advance; roughly almost $1 million in credit card cash advance All-IN-1; and check cashing fees of almost $2 million.

And did the interchange fee -- was that changed for you? I know one of your competitors mentioned that it was being raised on them, and I wondered if that affects you.

You know, Traci, I just heard that last week, and we have not seen that change.

Just two kind of last housekeeping -- I was curious where things stand with Mexico. We haven't heard any mention of that contract in a while. And also, a change of listing over to the NASDAQ -- any update on those?

Let me take the latter first, and that is that we have not really focused on the move to the NASDAQ, although we will continue to review that. It sort of got pushed behind some other, more pressing matters. But we will continue to look at that in the quarters coming up.

The Mexican agreement -- right now, we're continuing to do the kind of back-of-house things we need to do in order to operate a business in Mexico, and so you're probably not going to hear much about that for the next several months, until we are in a position that we could actually comply with all the various governmental and other requirements down south of the border.

Chris Krueger, Miller Johnson Steichen Kinnard.

I think the first caller asked a question about commissions and where that may trend after kind of jumping up here versus fourth quarter. A similar question on the processing cost -- that looks like it went up by 1.5% as a percent of sales from the fourth quarter to the first quarter?

Right.

Any explanation there, and any comment on the trend?

It's the check piece of that. I don't expect ATM processing costs to go up; I really more expect that to go down, as well as our credit card processing costs. I don't expect that to go up, as well. Check, as you know, is a little bit different because of our arrangement; it goes property by property.

Sarbanes-Oxley -- I know you guys said about 800,000 to 1 million for the year. What was it for the first quarter, the expense for that?

For Sarbanes and Sarbanes-related costs it was almost 200,000.

Similar to lower than what it will run the rest of the year, then?

Yes. When we had our consultants come in, we ramped it up to get compliant as soon as possible. It will go up more in the second, third and fourth quarter, but we got them in as quick as we could, and as well as the people that are helping to give me bench strength on my staff, till I get the staff the way I want it.

Any thoughts on new products to come, or any comments or timeline or anything like that?

No. I need to leave it open the way I expressed it in our prepared remarks. I guess what I want to confirm to everyone is that we are, in fact, working and we're working diligently on that, but there's nothing that we can speak to you today.

Mike Thorson (ph), Berthel Fisher.

I guess I've got really two quick questions, first being you hear a lot of mention right now regarding the Chickasaw contract. How big of an impact would that have in second quarter and how big of an impact ongoing?

Well, we don't know the second quarter yet. That contract got delayed until the 1st of April, and it's still too early to tell really what the impact it's going to have, until the end of the second quarter.

The second question is now, with you guys planning the move out to Vegas with the headquarters; now the addition of John Glaser; obviously, Mike, your background in Las Vegas from both sides of the fence. Is that going to be a major target in '05?

Yes. Our target is to move by the end of September.

Well, you mean as clients for us?

Right, exactly.

Yes, absolutely. One of the things that the Company has been poised to do is to break into the multi-casino operator market. There are more multi-casino operators that are headquartered in Nevada than elsewhere. Obviously, Chickasaw is our proving ground to show that we can do that. There are other regional multi-casino operators that we are addressing currently that we think we are a perfect fit for and can do a wonderful job for. And then beyond that, you will find the rest of them are probably located here in Nevada. And so, that is part of the thought behind the move.

David Wolf (ph), Sigma Capital.

Just one housecleaning, just share count guidance for the balance of this year?

It should stay right at around 17,137 is where we are at right now.

And just one question -- I mean, you answered on the Chickasaw. I'm just curious; since you have come in, it's been kind of a sprint, and it seems like a lot of it has been to kind of catch up with some infrastructure, obviously, that needed to be repaired or enhanced. And I am just curious how much of your time, as best you see, that you were kind of managing to catch up, and at what point in time this year you can put all your resources with your full team really going 100% forward?

It's a great question, David. I would say that, certainly, the majority of my time has been spent with, as you put it, sprinting to kind of keep up with the issues that were here on arrival. But I believe that that is -- that we are of getting stabilized in all of those areas. By the end of the third quarter, I'm pretty certain that we're going to be operating on virtually all cylinders, which will allow me, then, to devote the bulk of my time to our new opportunities and the kind of new directions that I think we're going to be able to take here.

And just a last question -- just with the Chickasaws, how much expense did you incur in the first quarter, if any, or did you capitalize any expenses with that? And same with Carnival.

Well, Carnival, Chickasaw and Grand Traverse were all those. We did capitalize some, but we had a substantial amount of payroll and pre-opening costs that hit the income statement, as well.

(OPERATOR INSTRUCTIONS). Eric Swergold, Gruber McBaine.

Congratulations on your progress here in getting things straightened out. It looks like you've got about $0.005 or so in Sarb-Ox costs through the rest of the year, which seems pretty in line with what we are seeing from a lot of small companies, actually quite modest compared to some other companies -- so not too bad there; hopefully you can get it behind us pretty quickly here.

My question is with regards to insider buying. When we participated in the private financing back late last year, there was some discussion that you guys would be participating in that transaction from the buy side, and then the seller pulled away and was unwilling to sell enough stock, that you were not able to participate in that transaction. Are we now in a period where your lawyers would allow you to buy stock?

As of Thursday.

This coming Thursday.

This coming Thursday, yes. 48 hours after this call, we will be in a position to purchase.

And along the lines of that, should we expect to see some insider purchases or some buying by the Company, since you have a buyback in place between now and the end of the quarter?

Well, now, it if I were to say anything here, what would that do to the price that I would get if I were, in fact, trying to purchase?

Probably wouldn't help you. But in regards to the buyback, did you buy back any shares during the quarter?

We did not.

Have you bought back any shares since the buyback?

We have not, since we authorized that, no.

That does conclude our question-and-answer session. At this time, I'd like to turn the call back to our speakers for any additional or closing remarks.

Thank you, operator. Thank you, everyone, for joining us. And let me just reiterate that we really appreciate your support, and we look forward to speaking to all of you again at our next quarterly conference call. Thanks.

That does conclude today's conference call. Thank you for your participation. You may now disconnect.