Everi Holdings Inc (EVRI) 2005 Q4 法說會逐字稿

At this time I would like to welcome everyone to the Cash Systems, Inc. fourth quarter and year end 2005 earnings conference call. (OPERATOR INSTRUCTIONS). I would now like to turn the call over to Mr. Chris Larson, acting Chief Financial Officer.

Thank you, operator, and good afternoon, everyone. Welcome to today's call. With me on today's call is Mike Rumbolz, our CEO. Before we start today's call, we need to make you aware of certain statements in the 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 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 Securities and Exchange Commission filings. We undertake no obligation to update any forward-looking statements that we make today.

First I will discuss the fourth quarter and fiscal 2005 results; then Mike will discuss all our business outlook.

For the fourth quarter, revenues increased 28% to 16.4 million. The increase in revenues is due to continued expansion of products and services to new gaming clients. Operating expenses reflect costs associated with greater transaction volume, such as commissions paid, credit card processing costs, expansion of our check cashing business, and higher depreciation. In the fourth quarter, our results reflected certain expenses which we identified on our call in February that were greater than expected and unanticipated, including Sarbanes-Oxley compliance costs. We had approximately $1.5 million in costs in the fourth quarter related to these efforts, including payroll, overtime, temporary labor, consultants and audit work.

The stock option expense was approximately $300,000, resulting from the Board's approval to accelerate the vesting of options. This will eliminate approximately $3 million in stock option expense in the next three years. We have also expensed approximately $400,000 in ATM upgrades related to Triple DES encryption enhancements.

Operating losses in the fourth quarter were 3.4 million, pre-tax losses were 3.9 million, and after-tax losses were 2.5 million, or $0.15 per diluted share. That's based on 16.6 million diluted shares outstanding.

From the balance sheet perspective, we finished the year with over $12 million in free cash. We have spent approximately $3.1 million in capital expenditures during fiscal year 2005. For 2006 we now expect revenue of approximately $82 million. The main difference between the revenue number and our prior guidance of 88 to $92 million is due to two factors. First, the delay in closing of the IGS transaction, which caused about $3 million worth of this reduction. The balance of the revenue difference is due to more conservative assumptions among our existing contract base. We are not going to offer any earnings guidance at this time, due to the difficulty in estimating Sarbanes-Oxley compliance costs and certain new product development expenses.

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

Thanks, Chris, and thanks, everyone, for joining with us today on the call. While I don't want to repeat everything that we discussed on February's call, I would like to point out a few things.

First, I am disappointed that we were not able to completely pass our Sarb-Ox compliance review on our first attempt. Sarb-Ox has been and remains a daunting task, due to the complexity of our business, the volume of cash we handle, and the large number of customer relationships that we have. While we have made excellent progress, we realize we're going to have to spend what it takes to complete this task. Unfortunately, as we have learned, these costs cannot be forecast easily, and will continue to impact us at a higher-than-normal level into the first half of 2006.

Second, we expect higher G&A expenses into 2006 to cause deleveraging. This will show up in the first quarter from the general and administrative expenses we incurred in anticipation of a quick IGS closing, which obviously did not occur. We also expect to spend more than we originally anticipated on business development, and we believe this will begin to show up probably in the second quarter and certainly in the second half of 2006.

On our February call, I told you that we were diligently planning a more aggressive product strategy in 2006. While I had hoped to announce more about that strategy today, we unfortunately have not gotten all of our agreements in place just yet. However, we do expect the announcement of the details of this initiative to be imminent. What I can tell you today is that this initiative represents the culmination of months of work and collaboration with a major industry supplier, together with strategic intellectual property. This project has the potential to clearly demonstrate product leadership in the cash access industry, and we are confident that it will change the competitive landscape and provide the next evolution in casino operations.

With that said, development costs money. And because this initiative holds tremendous long-term potential, we're going to have to invest the necessary capital to bring this technology to market as quickly and as efficiently as we can. I would like all of you to understand, we watch our expenses carefully. We are not going to make these investments without proper consideration of both expected future returns on our invested capital, and the returns our shareholders expect.

The last time we spoke, I mentioned that we're installing our products at Boomtown Reno this year. This contract marks our initial entrance into the traditional multi-casino operator market. Pinnacle is, we hope, the first of many of these operators that we will work with, and we believe our mix of leading products and customer service will drive similar relationships for us going forward. That roll-out is currently scheduled to take place in the second quarter of this year.

And finally, we anticipate announcing a new CFO by the time we announce our first-quarter results.

That completes our prepared remarks. Operator, let's open up the phones for questions.

(OPERATOR INSTRUCTIONS). Traci Mangini.

Can you guys give us a sense of -- a while ago, you told us how big you thought the RFP market would be over, say, the next two years. And since then we've seen a number of big contracts be assigned. So, I was just wondering if you have any number like that that you'd looking at as far as available RFPs over the next two years.

I don't have a number for you. What we have seen is that several of the announcements that have come out recently from our competitors were not through the RFP process. We think this reflects a very aggressive re-signing or renewal cycle from some of our competitors. What we have at least been told is that the renewals that are going on are going on at substantially lower rates. And as a result, the companies didn't feel obligated to take out an RFP. So as a result, we've seen the RFPs coming out on a quarterly basis slowing down. With that said, there still is approximately a third of the industry that should come due during 2006 and into early 2007. How many of those are going to go to RFP, I can't tell you right now.

The question was withdrawn. Your next question comes from Chris Krueger.

In the fourth quarter, it seems like there was a pretty dramatic fall-off in gross margin, looking at the first three expense lines comparing it to both last year or the third quarter. Is there more detail you can give us there?

We did have a slight increase in our credit card processing costs. Another increase, obviously, was in the payroll area around the Sarbanes-Ox related costs. Is there anything else I can provide for you?

Does that fall under those lines, or is that below those lines?

It falls in those lines.

Is it within those lines? I didn't hear you there.

Yes, correct. Processing costs and commissions.

Okay. What was that dollar amount again?

For the fourth quarter?

Just the fourth quarter, yes.

$8.8 million in the fourth quarter for commissions and 3.7 in processing costs.

No, I mean, what was the Sarbanes portion of those?

We had approximately 1.3 to $1.5 million of Sarbanes-Oxley costs.

And that's within those two -- those lines. Okay. And looking ahead to first quarter, would you expect Sarbanes to [affect it in a] similar amount?

We do think that the Sarbanes-Oxley costs related to the fourth quarter will continue in the first quarter at a similar amount.

Okay. My other question has been answered. Just over -- I know you're not giving any specific earnings guidance, but if you looked at the whole year, just with what you kind of think and what you can see, do you think it might bring things down to more of a breakeven or even a loss, or is it just too hard to tell right now?

It's just too hard to tell right now. We're -- we ramped -- in 2005 we did several things. We ramped up our personnel in order to be prepared to bring our new technology changes such as our TNS switch online in 2005. And beginning in first quarter of '06, to develop and then introduce the Cash Club and the Stay ’N Play products, and also to develop and introduce the new product suite that we have been trying to get to a point where we can announce this to you. All of that was then impacted by the additional costs that came on as a result of Sarb-Ox, and it also slowed down each of those. We expected the bulk of those to be occurring in the first quarter of this year at the latest, and thus being able to give you better prediction on the expense side with the offsetting revenues. That's now been put off. I wouldn't anticipate that we're going to get better visibility into this until the second quarter, when we can actually see these products and these initiatives coming into some budgeting cycle that we can understand completely.

[Michael Thoroson].

Just, I guess, just to kind of cover that IGS acquisition, besides the obvious getting the new contracts and whatever assets were there, what kind of synergy is there with your technology and their technology, and what kind of advantage do you think that's going to give you in the marketplace?

Their technology is a significant addition to us -- in particular, their check cashing technical products. In fact, they were poised as we finished the acquisition to complete that check cashing -- the next version of that check cashing product and introduce it into the marketplace starting with a beta site. We think that is going to be a significant advantage for us. As you know, in the past we've had to rely on third-party vendors for most of our check cashing solutions.

In addition, they bring the mosaic switch, which is a fully operational and top-of-the-line switch for use in the ATM and the cash advance markets. That gives us a redundancy with our own TNS switch which should come up at the end of the first quarter, beginning of second quarter, to allow us to adjust our costs of these transactions pretty significantly.

(OPERATOR INSTRUCTIONS). Traci Mangini.

Sorry; I think I got cut off the last time. I had a question on the new product suite. I know you can't go into any detail on it, but is it related to the new products that you were demonstrating at G2E, or is this something completely separate?

Some of this product suite will be completely separate, and a portion of it is going to integrate perfectly with the products that we introduced at the show.

And again, the new products will be things that will be more value-added and not charged for incrementally, is that correct?

They should provide incremental revenues to us. Part of what has taken us so long as we have worked with our strategic partners on this is to look at the pricing model around the products, and make sure that we're in agreement as to how we're going to bring them to market. But they will provide new revenue streams for us.

Chris, maybe could you just go through on the balance sheet, from an accounting perspective on that settlement due to credit card processors -- the numbers seem to jump up, and then the year-over-year number changed as well. So, could you just explain that as well?

Absolutely. We had a change in our accounting policy that we discussed with the auditors, and we did agree with them. What we have done now is settlements due from credit card processor reflects what we used to call normal deposits in transit. So, we removed that from cash, put that down as a settlement due from processor. Then you'll see under the current liabilities section, there's a line item called checks issued in excess of cash and bank. You would take that, subtract that from the 90 million -- or the 30 million, and then add back the settlements due from processor to get you to our true cash position, which is approximately $12 million.

[Eric Bergold].

In terms of your revenue guidance for next year, I certainly understand the acquisition closing later, taking (technical difficulty) out. In terms of the other 3 million that's coming out, could you go through that in a little more detail? Because I was under the impression that guidance was always based on you not winning any new contracts.

And guidance has been based on that. When we went back through guidance and took apart each of the component segments, we felt that there was too much aggressiveness in the increases in existing customer volumes than we were prepared to tell you that we were comfortable were going to in fact occur. Now, that does not mean they won't occur. But I did not want to set the bar that high; I don't think Chris wanted to set the bar that high, because we felt they were very aggressive.

Okay. And --

Operator, I think you may have dropped Eric. Operator?

In terms of Sarb-Ox expenses, we've seen this with some companies, but could you detail for us what exactly is unique to your business that's caused this to be an ongoing issue for roughly a year now? Is there something specific about the business that you're in that creates these difficulties versus other businesses?

Yes, because, I think, we have so many different business segments. So, we have a booth segment with handling of cash, the movement of cash. We have a processing segment that actually has to document and account for the dollars that are processing through our system. So, when you combine that with a growing company and all the issues that we face, our costs just ramped up considerably. We were a pretty relatively young company with not a lot of meat to its infrastructure, until we got to this year.

I think the principal -- Chris, I think, is giving you one of the principal drivers, and that was the fact that the infrastructure necessary for a company that is perhaps similar in size to us with similar volumes of transactions and customer relationships, if it were a mature company with completed infrastructure, would probably have slightly lower Sarb-Ox costs. But we had to both add the infrastructure and the personnel to make sure that all of these internal control systems were in place and operating effectively, and a lot of that was new hires. You see that in the payroll increases.

[Lori Bersting].

If you're able to announce a new product suite in the near-term, say the next couple of weeks or whenever it might be, how long before we would be able to see revenue coming from those (multiple speakers)?

And actually, that is part of what's driving us regarding the earnings guidance, is that we are developing those plans right now. They will be impacted significantly by the amount of development signs that remains to complete the product and get it to market. And today we just don't have a product project schedule that is complete enough for us to be able to say, well, the revenue should start appearing in the third quarter or the fourth quarter. It clearly is our intention to bring those products to market as quickly as we can in the most efficient manner we can, (multiple speakers)

Could you see revenues this year, or are we talking about a year from now?

We believe we can see revenues this year, but there are some other things that will occur as a result of having these products described and detailed for The Street, not the least of which is we will be telling customers whose contracts are expiring that these are coming in to the marketplace, and we'll be giving them within probably a 60 or 90-day timeframe, when we expect those products to come to the marketplace, asking them then to either sign with us now to guarantee that they will get access to those products, or hold off re-signing with any competitor until such time as they can get assurance that the products are what they want to introduce in their casinos. (multiple speakers)

Can you talk about the confidence that you have about -- obviously, you can't talk about what they are, but can you talk about what your assessment is as to the new product suite, and the reaction that you expect from your customers, and particularly, the ones that are up for renewal as well as new customers?

We have just begun discussing this with our customers that are coming for renewal. Every customer so far where we have -- without -- again, without giving much detail, have explained to them where we are headed and what the concepts are that we are going forward with have become extremely excited. And some companies that we've had conversations with that are not our current customers have agreed with us that we're really focused on where the future of the casino operation has to go.

So, what are they going to do for you if they're not your customers? Do you see -- are they up for renewals at some point in the near future that might make a difference?

Absolutely. Every customer is up for renewals (indiscernible) within three years. But more importantly, we would ask customers who are prepared to renew with their existing access provider to exclude these kinds of products from that contract specifically, so they could contract with us for those products, even though they may not contract with us for the core product of ATMs, for example.

But these are totally separate to new business, really, new business model?

That's correct.

(OPERATOR INSTRUCTIONS). At this time, there are no questions.

Thank you, everybody. We appreciate you phoning in for this call and we look forward to speaking to you again soon. Thanks.

That concludes today's Cash Systems, Inc. fourth quarter and year end 2005 earnings conference call. You may now disconnect.