Everi Holdings Inc (EVRI) 2005 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Cash Systems Inc. second quarter 2005 earnings conference call. Today's call is being recorded. (OPERATOR INSTRUCTIONS). Now I would like to turn things over to the Chief Financial Officer, Mr. Dave Clifford. Please go ahead, sir.

Good afternoon everyone. Welcome to Cash Systems' second quarter 2005 conference call. With me on today's call is Mike Rumbolz, our CEO, and Chris Larson, our COO. 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 believes 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 2004 Form 10-KSB and other documents filed with the Securities and Exchange Commission. We undertake no obligation to update any of the forward-looking statements we may make today.

With that said, I will take you through our second quarter financial results, 2005 guidance, and then hand the call over to Chris who will discuss some of the business changes we have made in the last six months to develop a sustainable platform for growth. And then Mike will discuss our strategy going forward before we go to Q&A.

Revenues for the quarter increased 4.2 million, or 35.4%, to 16 million from 11.8 in the second quarter of 2004. The increase reflects our continued expansion of products and services to existing gaming customers. While we did not announce any major new relationships during the quarter, we continued rolling out the remaining Chickasaw and Grand Travelers locations.

Operating expenses for the second quarter were 18.7 million compared to 10.8 million for 2004. The total increase in operating expense was 7.9 million, or 73% higher than 2004. The increase in total operating expenses reflects accounting adjustments, which I will address separately. Excluding those adjustments, operating expenses rose due to increased casino commissions, processing expense, and payroll costs directly related to the investments we continued to make in order to build out our infrastructure, as well as Sarbanes-Oxley compliance costs.

The Company spent nearly $800,000 in professional consulting fees related to our Sarbanes-Oxley 404 compliance efforts, the expansion of contract information technology management and the build out of accounting and finance infrastructure. The use of outside consultants has resulted in the development of a stronger internal control environment, and has enabled and afforded the Company the ability to develop more comprehensive accounting procedures and financial reporting. This was significantly more than initially expected, but we made a conscious decision in the quarter to accelerate these remediation efforts.

Previously we estimated Sarbanes related compliance costs at approximately 800 to $1 million pretax, or $0.06 a share after-tax for the whole fiscal year. Because of the efforts we have taken in the quarter, we are revising our estimates based on the actual cost for the first half of 2005, and now estimate Sarbanes related compliance will cost approximately 1.6 million pretax, or $0.09 a share after-tax.

Due to these Sarbanes related compliance and remediation efforts, we examined all the Company's accounting estimates, allowances and reserves. And based on this exhaustive detailed review, we have made the following accounting adjustments. First, we established a very conservative allowance for potentially uncollectible settlements due from processors in the amount of approximately 1.6 million. This is reflected on our balance sheet as an offset to the balance due from processors. This is also reflected as an expense in processing costs on our income statement. Please note that this is .1 of 1% of approximately $2 billion that will be processed by the Company in 2005. Due to this large volume of transactions processed on an annual basis, we believe that establishing this allowance for collectibility is a sound, conservative business decision. And we want to be clear that this is an accounting estimate which is a non-cash charge. This is not related to our confidence in our ability to collect receivables. We believe this is more consistent with our industry peers.

In addition, the Company experienced a current period charge relating to self guaranteed check cashing operations that resulted in the recognition of approximately 300,000 pretax bad debt expense, reflected in check cashing costs for the quarter on approximately 117 million in check volume. On an after-tax basis these costs resulted in a $0.01 per share impact during the quarter. We consider all these items to be non-recurring in nature, and feel it was most appropriate to record these costs in accounting allowances as soon as we felt they were justified.

Using a fully diluted share count of 17.1 million, net loss was 1.7 million, or $0.10 per share, for the second quarter of fiscal 2005 as compared to net income of 592,000, or $0.04 per share, on 16.4 million shares last year. The net loss per share includes the impact of approximately $0.07 per share related to the allowance for potentially uncollected settlements due from processors, and the charge for bad debt expense as I previously explained.

Moving on to our guidance. Previous guidance was estimated at 64 to 66 million in revenues for 2005. We now expect revenues of approximately 60 to 62 million. The reduction is primarily due to slower than expected roll out at certain customer locations, and unfortunately, this will drag into the second half of 2005. From an EPS perspective, we now expect a diluted loss per share of approximately $0.10 for the fiscal year 2005, which compares to our prior EPS guidance of $0.19 to $0.22.

Just to summarize, the major factors contributing to the revised expectations are as follows. The allowance associated with monies due from processors was 1.6 million pretax, or approximately $0.06 per share after-tax. The reserve of 300,000 related to our check cashing business relates to $0.01 per share. The increase in Sarbanes-Oxley and remediation costs from 800,000 to 1 million to 1.6 million pretax impacted our prior guidance by approximately $0.03 per share after-tax. The remainder of the difference reflects the reduction in our revenue forecast, the resulting impact it has on our revenue mix, as well as higher ongoing general and administrative costs, as we complete building out our infrastructure.

With guidance now covered, I would like to turn the call over to Chris Larson, our COO.

During the quarter we experienced a significant increase in payroll and benefits of nearly $800,000, as we continue to add key personnel and infrastructure needed to take this Company to the next level. In that regard we added several experienced professionals to our management team. Today we announced a new Controller and a new Chief Information Officer.

We're now a very different Company from six months ago, with a very different business philosophy. We looked at our business plan, the opportunities we had in front of us, and identified key areas we needed to address in order to successfully execute against those opportunities. Our people, operations, systems and infrastructure have all been significantly enhanced. We have lasered our focus on new products that we have in development, and we now have a professional sales organization that is developing a meaningful pipeline of opportunities.

We remain very confident that the investments in people, systems, operations, and infrastructure made this year will translate into a sustainable, long-term revenue and profit growth. With that I turn the call over to Mike.

Thanks everyone for joining with us today on this call. I know this is a lot of news to digest. First, let me say that we're disappointed in the reduction in guidance. We made a conscious decision to invest in our business based on a revenue forecast that was built on contracts in operation and contracts awarded. Unfortunately, we cannot control how new customers roll out our services to their facilities. As we pursue larger deals with multiple casino sites, the timing of these roll outs will certainly influence when we achieve the financial benefits that are associated with these contracts. In this case, when you compound lost revenues with our more aggressive spending on the operating side, it has a pronounced impact on EPS.

Secondly, our team has worked very diligently since my arrival to solidify and enhance our operations, our personnel and our systems Infrastructure, and this is very nearly complete. We know these investments were necessary to build an organization that can sustain scalable, long-term growth.

Third, while we didn't announce any material new contract wins this quarter, we did continue to make progress on building our pipeline of opportunities, and we remain very encouraged. We were successful in re-signing one of our largest clients, the Ho-Chunk Nation, and this provides solid evidence of our commitment to long-term customer relationships.

As we pursue contracts with larger multi-casino operators, we're finding that their contract processes take more time than smaller, one casino operations. However, we continue to be very enthusiastic about the opportunities that we're seeing. In order to capitalize on these opportunities we will continue to leverage our team's experience and contracts in the gaming sector. Having said that, we have not abandoned smaller opportunities. We also continue to pursue the single casino sites that got Cash Systems to where we are today.

Lastly, we're diligently pursuing several new and enhanced products, some of which will be introduced at G2E, so we're confident we will further build on our product offerings and provide greater benefits to Cash Systems' customers.

Today Cash Systems is a dynamic and innovative Company with leading products and a commitment to customer service. We are intensely focused on increasing our finance profitability, and continue to explore new opportunities and relationships that will place us at the forefront of cash access technology. We also continue to work on new product offerings that will further integrate us into the casino environment, while enhancing our casino patrons' overall experience.

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

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

Can you -- kind of looking at your guidance, doing the math, are you basically telling us that in Q3 and Q4 we're looking at two breakeven quarters to get to that loss of $0.10?

With the increased expenses and the adjustments we have taken, that is exactly what it would be. Revenues, if we sign nothing else, should be around 16.5 million, same thing as the second quarter.

Are there any particular issues that you could address on the timing of installations -- that you can address today?

The only thing I can say is that we stand prepared and are ready to implement and put our systems into the locations as they are made available to us. We simply cannot control when a particular customer will give us the facility and allow us to make the implementation.

Can you give us a more detailed review of what we'll see at G2E on the technology front?

I hate to start detailing new products before we introduce them to the public for a couple of reasons, not the least of which is allowing our competitors time to come out with something of their own for this show. I can tell you that these are enhancements of existing products together with brand-new products that we believe are going to provide additional benefits to our core product offering.

One of the products I can discuss is our wireless -- it has been previously introduced, but has not been rolled out. We have now engaged one of the big four accounting firms to prepare all of the necessary internal control documentation in order for these devices to be used in any jurisdiction in the United States. We will have those packages available, as well as demonstrations for customers at G2E to show them how we can integrate this seamlessly into their casino kit operations. But beyond discussing that, I would really prefer to let everyone see what we introduce at the show.

Just to hop back to guidance then, on the revenue side when do we begin to see that ramp that we're sort of expecting with the Chickasaw and everything that you have signed to date, and including a percentage of that installed base that could be converted to All-IN-1 for better margins. I am hoping to get an idea of when we begin to see leverage in the model? What is a realistic time frame for both the revenue and the margins to really move north?

I wish I could give you the time frame. We are aggressively up-selling into our existing customer base with new products. But the guidance that we're providing you today is extremely conservative, and it is based only on what we currently have in the field that is currently operating -- locations that we have already addressed. And everything else -- anything else that we would offer you today would be potential, but it is not in the bank, so to speak. And so this guidance is very conservative guidance. My expectation is that we will be moving the sales and the up-sell of new products over the next two quarters. But since I can't guarantee that, we're being very conservative today.

Traci Mangini with Think Equity Partners.

I just have a question, kind of tagging off of Dave's question. On the new products -- I know you can't talk about exactly what they are, but can you give us a sense of the economics of them? Are the kind of thing where they are adding incremental value so it is a way not to have to let go of any pricing, or is it something that will be charged incrementally for?

Your right on with the first -- the former. What we have seen in the marketplace is we have seen that our core products treated in a vanilla fashion. And the pricing pressure that we're starting to experience is really around our core product offerings. So going forward in order to maintain and grow our margins we need to offer additional benefits and features that enhance value to the casino operation. So they would be add-on -- it would be add-on pricing that would improve margins.

And then just lastly, I was noticing in the Q that you just put out it looks like you might be pursuing some acquisitions. Is there anything you can comment on there?

We continue to look very carefully at potential acquisitions, but it is not something that we can speak to today.

Eric Swergold with Gruber McBaine.

I have got a series of questions here for you. I certainly understand coming in and cleaning things up, and like having a cleaner Company going forward. But my questions relate to how many of these costs are ongoing. I can see the SARBOX costs are continuing into the second half, because at the same time you've hired additional accounting personnel as announced today -- a new Controller, and a new It person. At some point I would think that Controller and IT person would allow you to move away from the SARBOX costs.

That is exactly correct. And part of what we have been doing -- I mean SARBOX is a large part of this. We've had teams of consultants in here in lieu of employees in both the IT and the finance and accounting areas. And as they come on board and take over we're moving the consultants off.

Basically, my whole team has been outsourced, and now it is full. And to answer your prior question, the vast majority of these charges we have taken to clean the balance sheet up are onetime charges. As we have mentioned before, we didn't come here for 2005. We really came here for 2006 and 7. Get the Company into shape. Put the infrastructure in shape to take this Company to the next level, and really explore some of the exciting opportunities that brought us here.

We feel like when it is all said and done we're going to put on a static level 12 to 12.5 million in operating expense to run this business, which is extremely scalable and leverageable, as you see the top line grow. As we grow to 100 million, you won't see that 12.5 jump to 22. It might jump to a 14, which is tied to our booth expense. But not -- that is the true operating leverage that we have been talking about.

We should not expect to see the same type of check cashing or processing costs in the second half?

That is up in the gross margin. One issue that we're dealing with is our check cashing margins. Processing costs have gone up a little bit due to an increase interchange, but we're working diligently to address all of our gross margin issues. The gross margin, without these adjustments, would have been about 25%. We believe this is a 28 to 30% gross margin business. There are things we're doing to rectify that. It is going to take some time to work through it. I think you'll really see that play out out in the first of next year.

If my math is correct on the rough numbers, it looks like you are taking about 3.5 million out of pretax in the -- actually about 2.2 million out of pretax in the second half. How much of that is directly identifiable to the increased costs of the major officers that you've announced, the CIO and Controller, and a head of sales? So out of the 2.2 million of incremental costs that I see coming on from the G&A here, how much of that is from those three new main hires?

Not much. Those people have just come online. The vast majority of that is consulting fees and the $800,000 that you saw. We had 1.6 million, which was the onetime allowance I took for our processing costs, and then roughly a $300,000 write-off or receivable due to our check business.

This is -- I'm looking forward. I'm looking at the second half. For the second half, I'm looking at about 2.2 million of pretax coming out as well from where the guidance was to where it is now. I'm wondering how much of that is for these three big hires?

Probably 200 to 2.25.

For each or combined?

Combined. For all three.

I'm sorry. I misunderstood where you were going.

That's all right. And then were there any other major hires that I miss3ed besides CIO, Controller and head of sales?

Major hirer, no. There are other personnel that is below that level.

Alan Marglese (ph) with Porchman Left Asset Management (ph).

I am just trying to reconcile the reduction in the revenue guidance. Is that a function of these installations that aren't happening, or have you lost some contracts?

It is a function of the installations that haven't occurred. They were anticipated when that guidance was prepared.

Today we have the exact opposite. We have actually signed pretty much all of our top 10 accounts for the next 12 to 24 months. So we have very good vision on our current customers. But like Mike said, as they make them available, we instantly install them.

When you compound that lost revenue with more aggressive spending, it has a pronounced impact on the RTS.

Sure. Also, as you roll out these new products, when do you expect they can start to contribute to revenues? And how sure or how positive are you that there won't be a continuing increase in operating expenses to support these new products? The fact that -- especially the wireless products and its ability to integrate into all your new systems and infrastructure, I just want to make sure -- I am just trying to get a sense of how much control you really have over that?

The products that we will be introducing at the show, including the wireless, don't require us to start adding additional people at the operating level. That is part of the scalability of what we have built so far is that all of that folds on top. The question of how well the products will be accepted by the marketplace really will dictate how quickly we can get additional revenues from them. We will be prepared after the show to begin installs with customers. If there's acceptance of this then you should see the revenue generation immediately.

I'm sorry. One last question regarding the installations. Was it one large customer that had slowed things down, or was it a handful or is there any way to dimensionalize what the slow down is?

Actually, the Chickasaw installs went slower than we had anticipated, and Carnival has continued to be exceedingly slow.

Any particular reasons?

Well we are only allowed to install Carnival when the boats are made available to us. And they have been going through their own Sarbanes issues. But when they will make those boats available to us, I can't tell you.

And Chickasaw, New Castle and WinStar was our primary focus, the biggest two to get installed and get everything operating the way they would like, and now we're going to the other 12.

(OPERATOR INSTRUCTIONS). Eric Swergold with Gruber McBaine.

One question I did forget to ask is in the list of cash uses in our press release you did not mention share repurchase at this time. I know you do have a buy back in place which you haven't used yet. Is this something you're now reconsidering?

You know we -- our cash buy back is part of our internal asset allocation strategy, and clearly it is one investment that is available to us. And we will continue to look at investments across the board, including investments in our own stock. But I don't feel like revealing necessarily any plans that we may have in that regard publicly.

Fair enough.

We will certainly announce anything if we do it.

Mike Thorson with Berthel (ph).

A couple of different questions. First of all the reduction in guidance, is that strictly due to Chickasaw, Carnival and internal costs, or other contracts that you already haven't implemented?

It is Carnival and Chickasaw.

Basically the guidance now is still based on no additional new contracts whatsoever, correct?

That's correct.

And the increased spending we put in our infrastructure.

And I guess the other question that I have now would be obviously this G2E coming up in September, is anything related to you guys going before the Nevada Gaming Control Board again?

I have had discussions with the Gaming Control Board, but we're not currently scheduled to go back on an agenda with them.

Is there anything about these new products that has to be done?

The wireless product needs to go back in front of the Nevada regulators for use in the state of Nevada. It would go through in tribal jurisdictions whatever tribal regulations there would be, and in the other nontribal it would go through those state regulatory jurisdictions. But currently the only state that we would be required to take it back in front of a Border Commission, would be the state of Nevada.

Well, I guess with Nevada obviously being the mecca of gambling, isn't that like the Good Housekeeping seal of approval, so to speak?

Yes, it is to a large extent. But I say that without wanting to insult New Jersey or Mississippi or Illinois or Iowa or Minnesota for that matter. But having said that, one of the things, and I mentioned it previously that we are are required to do in order for it to be accepted in a Nevada casino operation is to have the model internal control system signed off by the Nevada regulators, and available for use by the casino operators. And that is being done as we speak.

I guess the last question I have is obviously Sarbanes-Oxley has been, to say the least, a pain to all of us. First of all, why the difficulty, and why the expansion? Do you feel you have it handled now?

I think we have a really good handle on it. I think everybody is starting to become aware that Sarbanes is not just documentation. It is also remediation. And we decided to aggressively pursue remediation, and it has required more consultants. And more consultants cost more money. But we decided to do that aggressively in the second quarter, and it was to the shareholders' benefit to do that.

Is that strictly consultants? Was there hardware involved, software involved?

It was basically -- the biggest part of what we spent the second quarter on was the redesign of our front end revenue recognition software system. So some hardware, but the vast majority of it was hired brain help.

Jonas Christel (ph) with Jonas Capital Partners (ph).

Just taking a quick look at the 8-K and the loans receivable, I was wondering when you did your financial review, how thoroughly did you look into the loans receivables, because I see a lot of these were made before present management, a lot of the payment schedules have been extended? I see one is in default. Can you just give us an idea what is going on there?

Yes, you are exactly right, and we did look at those in great detail. And pursuing one of them, we should be paid off next week, is roughly $1 million. We did accelerate the loan. It was extended and then we sent them an acceleration letter. And in talking to their CEO last week he assured me that we would be paid back. The other one was a loan we made to a potential strategic partner. And that loan is due at the end of September. And they have assured us that it will too be paid off. And we feel like that we're sufficiently securitized if it is not.

Rick Peterson with True Capital Management.

A quick question. On the capital expenditures and things that have been out there, why aren't they being amortized over time, or why are they just being all taken in the quarter?

They are being amortized over time. Part of the Sarbanes remediation that we did is we examined every balance sheet account that we had out there, as well as some of these capital expenditure costs. If we deemed there is any possibility of a write-off we did it immediately. So you are probably seeing a little bit more aggressive approach to that. But part of the first six months of this year is our acceleration and our focus on our new products. We constantly look at that and make sure that we get anything that has a potential write-off written off immediately.

I have got to be honest, sitting on the outside here as a major shareholder I am not happy with the performance at all. You had brought on a lot of high-priced people, and we have really seen nothing out of it.

I understand the disappointment, and I share with you. I will tell you this that the changes and the additions we have made both to management as well to your systems, and the enhancements we've made with our operation are all designed to allow us to continue the kind of growth pattern this Company has had in the past. When I got here six months ago and started working with this team and we started putting our plan in place, it was fairly clear that without these fundamental investments we were not going to be able to sustain that kind of growth going forward. And so this had to be done.

As well as to become compliant with 404 by the end of year.

And I really do think we're doing this for a purpose. We're doing it because of the pipeline that we see. The pipeline of opportunity that we have is very exciting, but we needed to take these steps so we could execute on those opportunities.

I see the opportunity for you guys down the line, not for the people today. That's all I have. Thank you.

Christian Grub, private investor.

I actually have two questions. One is the plan was to move the operations to Las Vegas. Number one, it is that still in the pipeline? Number two, the costs involved? And number three, are those costs also figured -- if is going to happen this year is it figured in the -- here in the projections for this year?

Yes, they are. We have moved -- the majority of the team is now located in Las Vegas. Our new office space won't be ready until the middle of September. Basically all that is left in Minnesota is my team, with half of them commuting from Las Vegas. The majority of people I hired are Las Vegas -- or Nevada residents, so they are doing the reverse commute. And we hope to be ready by the middle of September or the end of October to move all of the accounting and finance down there, as well as specific IT functions. And then moving into less expensive space in Minnesota our call center, as well as a tech support group. And yes, all of that has been reflected in our numbers going forward.

The other question is in the past there has been a time element with -- like (indiscernible) casino transactions when it happened it seems to me that it was -- I think you had to actually wait up to what -- three weeks before you could account for that? Have you -- has that time been -- the time frame been eliminated with the new equipment?

Yes, we addressed those issues during the quarter. We're also initiated seven new systems. We put them in place, i.e. Great Plains Software. Our revenue recognition model has also changed, so it is a much quicker model and much quicker transaction for accounting purposes, as well as a lot of the IT infrastructure that we put in place in the last three months.

Through our Sarbanes efforts we were first -- before we got here we were recognizing revenue on a 28 to 35 day cycle. As of July, we can now recognize revenue on all of our credit, debt, and All-IN-1 products on a daily basis now. So it has been a huge achievement.

Then secondly, as Mike mentioned too earlier, contracts have their own life. We get the availability when the casino gives us availability to get in there. That really hampers us a little bit, but our install teams are raring and ready to go as soon as we get an opportunity.

I am glad to see that the time element has been decreased to a day. Thank you. Good job.

Alan Marglese with Porchman Left Asset Management.

You mentioned the point of the new products is because it seems like there's going to be -- there is pricing pressure in your legacy or your core products. And at the same time you haven't announced at least any new contract signings this quarter, at least in the second quarter. Can you talk about what is happening on the competitive front? And maybe talk about what is happening on -- and talk in a little bit more detail about the pipeline of new deals, and when we might hear about some new contracts?

Let me address the last first. The presentations that we make at the request of operators was running at a rate of about eight a month at the early part of this year. We're seeing that slow a bit during the middle part of the year. We are probably doing four presentations a month at this point in time. And we expect that will ramp back up and become -- probably back up to the eight a month towards the end of year because that seems to be when most contracts expire.

The whole process around bidding on these contracts is -- unfortunately it is outside of our control. What generally occurs is as a contract expires it also rolls to a month-to-month, which means it is really up to the operator and their timing as to when they want to go back to the market and request bids from companies like ours. But there is no immediate pressure on them to do that unless one of two events is occurring. They are either having problems with their existing operator, or there are new benefits and features or new enhancements to the existing core products that are being offered by competitors.

So clearly with the kinds of products that we are working on and are bringing to the show, and we will be offering both to our existing and to new customers, our focus has been on adding enhanced value and additional benefits around those core products to try and push operators who may be on month-to-month to open up the bidding process and give consideration to a different operator.

Beyond that, the kinds of products -- the pricing pressure is there on the core products. As you know, one of our major competitors is still considering going into the public markets. And so you have seen their margins erode a bit, and that is -- I think that is a symptom of their plans on a longer term. But to do that they end up -- because of their market position they end up affecting everybody in the marketplace. So our plan going forward to both stabilize, but also to grow our margins, is to bring these new features both to existing customers, but more importantly to a new customer base.

Is there -- in terms of not having announced new contracts during the second quarter, it is possible that -- one explanation is that you had -- a lot of your contracts just went month-to-month.

Well, yes --.

And it didn't go up for bid.

That may be it, but also what I would suggest to you from viewing the press releases from our competitors is that they have all been, or the vast majority are resigning, much as we did our existing customer base. Of the presentations that I have been involved with, we have yet to see one of the contracts decided. Even though we have made the presentations, the customer has not chosen at this point to make any announcement one way or the other on the results of the presentations that they saw.

There appear to be no further questions at this time. I would like to turn things back to Mr. Rumbolz for any additional or closing comments.

Thank you. I appreciate it. Thank you everybody for joining us today. I know this has been very difficult for you. Trust me, it has been very difficult for us. But we look forward to reporting our progress to you honor next conference call. Thank you all.

And again that does conclude today's conference call. Thank you for your participation. You may disconnect at this time.