Everi Holdings Inc (EVRI) 2005 Q3 法說會逐字稿

Good day, ladies and gentleman. Welcome to the Cash Systems, Inc. third-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 your questions. I would now like to turn the conference over to Mr. David Clifford, CFO of Cash Systems, Inc.

Thank you, operator, and good afternoon, everyone. Welcome to Cash Systems' third-quarter 2005 earnings conference call. With me on today's call is Mike Rumbolz, our CEO. Chris Larson, our COO, will be traveling this week and join us from the road on today's call.

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 or 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 statement 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 statement that we may make today.

With that said, I'll take you through our third-quarter financial results, 2005 guidance, and then Mike will discuss some of the recent business activities we continue to develop as we finalize the implementation of our infrastructure and systems improvements, positioning ourselves for an exciting start to 2006, and then we'll open the floor for Q&A.

Now, let's review the third quarter financial performance. Revenues were 17.1 million, which was a record for us in any quarter and an increase of 34% from the 12.7 million posted in the third quarter of 2004. Revenue growth through the first three quarters averaged 17% with new revenues accounting for approximately 90% of that growth from Q1 to Q3 of this year, reflecting renewed contract extensions with major customers like the Ho-Chunk Tribe in Wisconsin, the continued expansion of products and services to existing gaming customers and contracts previously announced that continue to mature with time as a transition from Class II to Class III gaming. We did announce our second major relationship win in Oklahoma, the Creek Nation, which will be fully implemented in late December of this year, as well as the continued installation of the remaining smaller Chickasaw locations. I will also note that neither we nor any of our customers, fortunately, suffered any significant losses to operations due to the tragic events, Hurricanes Katrina and Rita.

Gross margins continue to hold the line at approximately 25% against significant pricing pressure from competitors in the marketplace on new contract opportunities and increased costs to process our transactions. Those of you who are familiar with our story know that our primary focus this year is in building the necessary infrastructure to position the Company for 2006 and beyond, which is almost complete. Operating expenses for the third quarter were 17.1 million compared to 11.8 million over the same period in 2004. I think it's important to point out that of the increase in total operating expenses of 5.3 million, 3.4 of that cost is the cost of goods needed to finance the increase in revenues. The remaining 1.9 million increase reflects our true infrastructure additions this year.

Excluding the nonrecurring accounting adjustments of 2.5 million we expensed of Q2, and the continued high cost of SOX compliance of approximately 900,000 year to date, operating expenses net of the cost of revenues would be consistent with our growth rate.

Using a fully diluted share count of 16.7 million, net income and diluted EPS was essentially breakeven for the third quarter of fiscal 2005 compared to net income of 583,000 or $0.04 per diluted share on 15.6 million shares in the third quarter of 2004.

Before I move onto guidance, we would like to announce a significant advance in our capital structure. On November 10th of last week, we closed the Company's first major debt financing with the pre-eminent lender in the gaming space, the Bank of America. The financing includes a $13 million revolving credit facility, sophisticated treasury management systems and a new vault cash facility to finance our continued growth and working capital needs. I think all of you will agree with our enthusiasm, the Bank of America relationship is an important element in the future maturity and growth of the Company.

Now turning to financial guidance for the balance of 2005. On last quarter's call, we downgraded prior guidance of 64 to 66 million in revenues for 2005 to 60 to 62 million. The reduction was primarily due to our changing guidance methodology of only including contract wins that had been signed and implemented, as well as the slower than expected rollout of certain new customers. We are now expecting top-line revenue of approximately 62 to 63 million, taking into consideration the third-quarter record run rate of 17 million. From an EPS perspective, we continue to expect the diluted loss per share of approximately $0.10 for this fiscal year 2005. We continue to remain highly confident that we will be able to leverage this infrastructure via the expansion of current products, new product offerings, technology innovations to a broader customer base, which will translate as sustainable, long-term revenue and earnings growth.

With that said, I'll now turn the call over to Mike.

Thanks, Dave, and thanks, everyone, for joining us today on the conference call. I'm going to be brief so that we can move quickly onto your questions.

While the third quarter wasn't a barn burner from a financial standpoint, we are starting to see the early benefits of all our hard work. The underlying business trends are very encouraging.

First, during the quarter, we continued to make progress on building our pipeline of opportunities and we remain very encouraged about the future. There are a lot of good opportunities out there and we believe we will continue to capture our fair share.

As I told you all before, as we pursue larger contracts, we continue to see that the process takes more time than smaller one-casino deals, but we continue to be very enthusiastic about the opportunities that we're seeing. We will certainly continue to leverage our team's experience in the gaming sector to capitalize on these opportunities.

In that regard, in September, we were awarded a contract for all eight of the Creek Nation Casino locations in Oklahoma. We are installing these now but do not expect them to have an impact on our financial results until 2006.

While we pursue these opportunities, we also continue to pursue and provide great service to all of the smaller casino sites that helped bring Cash Systems to where we are today. The recent Ocean's Eleven contract that we announced is a good example of that. Secondly, we are starting to ramp up our new product pipeline.

At G2E, we introduced several of our new products, including cashclub, totalcash and our third-generation Web reporting program. These products create value for our clients because they eliminate lions at the cage, they reduce labor costs and they ultimately help our clients derive more value from their club card programs.

In addition, in October, we were awarded a patent for technology that captures and transfers data from a driver's license to a customer database. This allows a casino to swipe the patron's license and complete a credit card cash advance transaction in under 60 seconds, while at the same time populating the casino's customer database. This significantly expedites the credit card cash advance process and in the casino environment, as you all know, time equals money.

We've also been working diligently on additional intellectual property that we strongly believe will further differentiate our technology offerings from that of our competitors. Today Cash Systems is a dynamic and innovative Company with leading products and a commitment to customer service as well as an intense focus on increasing our clients' profitability. We are doing this through new product offerings that further integrate us into the casino environment while enhancing the casino patron's overall experience, and additionally, we continue to explore new opportunities and relationships that will place us at the forefront of the cash access business. That concludes our prepared remarks for today. Richard, could you open up the lines for any questions, please?

(Operator Instructions). Traci Mangini, ThinkEquity Partners.

Is there anything that you can provide for us as far as guidance and how we should look at '06?

We're not providing guidance right now, Tracy. We're going to provide guidance sometime around the second week of December, once we're through with our formal budgeting process.

Okay. And then kind of more of a picky question, I want to understand the other line item a little bit. Dave, I know you've been separating things out of that, but right now, is that principally just installation costs?

On the income statement?

Yes, under operating expenses?

Right. No, it consists of a lot of different things. There's bank fees in there, there's some travel, tools and supplies, stuff like that. Just miscellaneous stuff.

Okay. So is this quarter, in the third quarter, is that a pretty good average run rate to look at going forward for other?

No, I think that's a little high because the bank charges with the old M&I deal were significant and now will be a lot less with the Bank of America in there. So I would say it's closer probably maybe to 800 -- 700 to 800,000.

Okay. And then just lastly, I know you mentioned the other two hurricanes and not really feeling an impact there, but anything that we should kind of be mindful of in our revenues for Seminole Nation and Hurricane Wilma?

Well, Wilma did impact their operations for a number of days. We haven't seen that roll through yet to a point where we would be in a position where we would want to warrant anything about that.

It really was de minimis, Traci. We looked at that specifically, but it was (multiple speakers).

David Bain, Merriman Curhan.

Kind of looking at Global Cash's margins, they seem to be trending around 31 to 33%-ish and you guys were around the mid-20s. Have you identified the primary variances in the margins and can you combat that?

Yes, we have, Dave. There are two primary differences. Global Cash processes their own ATM transactions and it would cost them around $.05 a transaction where we are around $0.13 to $0.14 a transaction, as well as their check deal with TeleCheck is a lot different than ours. They are paying about 17% of their revenues versus we are paying around 45. And those two primary differences are the big differences in the gross margin.

And those are the things that you guys are working to reduce?

Those are things we are addressing, we are addressing as we speak.

Okay. Great. And to get to a sort of 20%, call it, operating margin, is there a baseline revenue number you'd need to hit?

Well, like I mentioned to Traci, we are working on our '06 budget and guidance. I think you can see from Global's recent quarter, they are at a 20% margin. We said consistently, we think this business is mid to high teens. I'm not sure at this point to say whether it's 100 million for us, Dave, or 120 million, but I certainly believe in that range that's achievable for us, in the mid to high teens.

Okay. And just kind of looking at the industry, there seem to be a lot of synergies between the more sophisticated types of cash access and casino management systems. Can you speak to any of those synergies and what it can mean for the Company down the road? Or I guess maybe a better question is what's your current long-term vision for the Company?

Well, there's no question that there are synergies to be had with the systems that are currently operating in casino environments and the kinds of systems that we provide and others in our industry provide. The back-of-house customer databases that are currently being used by marketing departments throughout the casino industry currently lack some very specific information which would be very helpful to those departments and that's information about their cash access customers.

Part of our third-generation Web reporting is the first attempt to get that information over into the hands of marketing departments. Obviously, the next step would be to automate that integration so that it doesn't have to be coming from two different systems. And then in addition to that, clearly, if you want to address devices on the casino floor, the way you do that is through the systems. And we believe that the future of this business will be addressing casino patrons at the locations that they want to be in casinos in those jurisdictions that will allow it. And that will be a combination of our services combined with the casino customer systems that are in place currently.

Okay, that's helpful. Thank you. Just one last one. I know that for competitive reasons, you don't like to get into property specifics in terms of RFPs outstanding, but we've dug up three in particular that seem like they could be significant ones, a public company, and two are in Oklahoma. Can you speak to your confidence level on these and any sort of sense of timing on a decision?

The decision, let me take that portion of it first, David. As you are aware, the decision-making really is out of our hands once we've provided the casino or the operator with all of the information they've requested from us. We continue after we've done those presentations to supply any additional information requested, and we continue to stay in touch with the operators that have put the RFP out there to make sure that they know of our interest level in continuing a negotiation with them. Unfortunately though, the ultimate decision is in their hands and we can't really drive that decision-making any harder than we do currently.

With respect to what's out there and is available, I guess I have to point back to the statement that I made in the prepared remarks and that is that we are very encouraged by what we're seeing out in the marketplace in a variety of areas. But beyond that, I'm not going to get us into a position of predicting what percentage chance we have of winning any particular or any group of RFPs.

Okay, great. Great quarter, guys.

Chris Krueger, MJSK.

You talk about pricing pressure again. How are you dealing with that and where do you see gross margins I guess maybe in the next three to six months, if you can give an indication there?

Go ahead. I mean Dave's probably -- his crystal ball I hope is better than mine because that's a real hard prediction to make. I don't know that we're going to continue to see the pricing pressures we've seen most recently, but that's anybody's guess. I mean it's a question of all of the companies in the space looking to different reasons to drive their pricing on the core product offerings. We certainly don't intend to be driving that pricing down below levels that you've seen in the last month or two.

I think the key to that too, Chris, is as new product offerings going away from the same things they've been offering in the industry for years is really the key to maintaining and increasing your gross margins. I mean from our perspective, our gross margins have been at 25% or a little above for the first, second, now, and third quarter, like I said, amongst significant pricing pressure. And I think the reason we've been able to hold those gross margins is some of our new products that we're introducing out there and changing the business proposition around a little bit. And we will get some benefit to our gross margin with some of the verticals we are working on.

Do you think say that you notice more pressure really in the last couple of months, or has it really been in the last couple of quarters?

Well, it's the last few quarters.

Right, right.

Okay. As far as the new products, have any of these been installed in your existing base of clients yet?

No, we're working with a couple of different clients right now to get to a point that we can install. I mean we introduced these things at the show but then we have to take them back into real-time in the casinos and work out the integration on the interfaces. But we've had a very, I would say, very open and very welcoming reaction to our products from both our customers as well as customers of our competitors, and a lot of interest and excitement around them. The question now is getting a couple of them up and running so that we can then take the proof back to those customers that have expressed interest and show them how it works in the real world.

Okay. Carnival Cruise Lines, is that the same as it was three months ago, the progress?

No, Carnival, we've got the contract under review right now. We have a dispute with that client at this point, and so at this point, I'm not expecting that to go anywhere in the next several quarters.

Okay. Can you give the number of how many RFPs you're currently bidding on?

You know, I can't give you an exact number. I mean the run rate has picked up from the last quarter and I would say we're probably looking at between 7 and 10 on a monthly basis at this point.

Okay. And what was your CapEx for the quarter? Or year-to-date, whatever?

2.4 million.

That's for the quarter?

No, that's nine months to date.

And that will do it for me. Thanks a lot, nice quarter.

(Operator Instructions). Joe Hudak, Wachovia Securities.

Just a couple of quick questions. One in relation to what Traci had asked earlier on the expenditures. Do you feel comfortable with that 17 million going forward?

Well, you need to look at the expenditures like when I broke them out in the prepared remarks, of what those expenditures is attributable to revenues, that being commissions, processing costs and check expense, and then below that line, which isn't broken out in the Q, is our payroll and operating expenses. I think Mike and I have been pretty consistent all along this year of expecting operating expenses, net of the things that are in the gross margin, of around 14.5 million. And we think that's a good number with the infrastructure that we're putting in place. That being said, having to deal with Sarbanes, which we had budgeted about 250 a quarter -- we spent 309 in the third quarter -- as well as consulting fees to help us with the SOX., as well as some of the bench strength, which will not be in next year.

Okay. We had a good cash position. Do you see the same for Q4, approximately the same?

Again, that's a crystal ball thing. I think, yes, I don't see any big changes in our cash position right now.

Okay. And then lastly, headcount, current and expected for '06?

Two-hundred-and-forty, including our booth people and that just totally depends on our biggest increases in our payroll is when we sign a contract with a booth and we've got 18 booths right now. So it just depends. We, our management team, is 99% complete. As I mentioned, our infrastructure is almost done here that we've been working on this year. So, again, I think you need to look at that as what is the operating profits that we think this business can work under and leverage that operating expense? And again, I'll go back, I definitely think this is a mid to high teens business, as you can see from Global's numbers, once you reach that plateau of revenues.

Very good. Nice quarter, guys.

That does conclude our question-and-answer session for today. I'd like to turn it back to the speakers for any additional or closing remarks.

Great. Well I just want to thank all of you again for being on the conference call with us today and look forward to speaking to you again after the fourth quarter. Thanks, everyone.

This does conclude our conference call for today. We thank you for your participation and have a great day.