Everi Holdings Inc (EVRI) 2006 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Cash Systems CKNN 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'd like to remind everyone this conference is being recorded and would like to turn the conference over now to Mike Rumbolz, Chief Executive Officer. Please go ahead.

Thank you, Kevin, and good afternoon everyone. With me today on today's call is Andrew Cashin, our CFO. Andrew joined us from Alliance Gaming - now Bally Technologies - at the end of the first quarter. He has a proven background in the gaming industry on both the supplier and the operator side. And he also brings to us hands-on integration experience which make him a great fit for our Company. I'm sure many of you are going to have the opportunity to meet Andrew over the coming months.

I'm now going to turn the call over to him to discuss first quarter 2006 results and then I will come back to discuss our business outlook. Andrew.

(inaudible) our forward-leading statements.

Sorry; we are trying to figure out where our forward-looking statement is and we don't seem to have it in front of us.

Well, everyone bear with us, sorry we had that technical difficulty but we've been told the start we have that April difficulty but we been told by our counsel as well as our auditors that it is important that we read this before we begin today.

My apologies for not having it at hand. And now let me turn it over to Andrew with our forward-looking statements.

I apologize, folks. Somehow it got deleted from the last version.

Before we start today's call we need to make sure to make you aware of certain statements in this conference call that do not describe historical facts, including without limitations statements concerning future financial and operating performance. The impact of partnerships and alliances, future strategies and (indiscernible) 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 risks 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 may make today.

Okay. With those legalities out of the way, we will give you the results of our quarter and then I will come back in and discuss our business outlook and we will have a return to Andrew to talk a little bit about our guidance. But go ahead Andrew.

Thanks, Mike. For the first quarter ended March, 2006, revenues increased 50% or 6.8 million to 20.4 million over the first quarter of 2005. The increase in revenues is due to new locations, organic growth with the expansion of products and services at existing locations and one month's benefit from the IGS acquisition which contributed 1.5 million of revenues to our first quarter.

Quarter-over-quarter total operating expenses increased 8.7 million or 66.2% to 21.9 million from 13.2 million in prior year. Total operating expenses include all expenses excluding interest expense. The increase in cost of sales reflects our increased revenues including commissions, processing costs, check cashing costs, and armored car services. These expenses increased 5.9 million to 16.2 million from 10.3 million in the prior year quarter. A 57% increase.

Using these costs this resulted in a gross margin increase of 940,000 to 4.3 million versus 3.4 million last year. This represents an increase of 28% over prior year's quarter. Quarter-over-quarter, our gross margin declined 3.7 points to 1 -- 21% excluding one-time write-offs for approximately 300,000 related to receivables from processors, our margins would have been 22.5% for the quarter.

Table and related expenses increased 914,000 to 2.5 million from 1.6 million or a 58% increase. This is a result of the infrastructure buildout, the expansion of the check cashing business and the IGS acquisition this year.

Professional fees increased 742,000 to 984,000 from 242 in the prior year quarter. As discussed on the previous call this was the result of continued Sarbanes-Oxley cost, which represents 700,000 of this quarterly increase.

These outside consulting fees associated with Sarbanes will be reduced significantly, going forward.

We also incurred 126,000 of compensation expense related to the expensing of options and restricted stock. Almost all of this was related to a previously announced executive departure.

The increase in depreciation and amortization is due to the IGS acquisition and an increase in depreciable base from capital additions. Interest expense increased as a result of the increased borrowings outstanding with the IGS acquisition as well as interest on our ball cash agreement. Of the 529,000 of interest expense approximately 325,000 was related to the ball cash agreement and 206,000 was related to the line of credit.

We are currently evaluating alternative ball cash arrangements which would decrease our cost of cash.

Income before tax was a loss of 2 million. After-tax losses were 1.2 million or $0.07 per diluted share based on 17.1 million diluted shares outstanding. So from a balance sheet perspective we finished the quarter with over 24 million in cash and cash equivalents and 12.8 million outstanding on our line of credit. Capital expenditures for the quarter were 285,000.

With that said, I will turn it over to Mike.

Thanks Andrew and thanks, everyone, for bearing with us on getting the forward-looking statement here at the beginning.

I don't want to repeat everything that we discussed on our March call but I do want to spend a moment discussing our cost structure and our product development priorities. First, our work on our Sarbanes Oxley compliance does continue and we're going to complete this task as soon as possible.

Additionally, product development remains our focus for the remainder of the year and we still expect to increase development spending into the second half of the year. You will see these costs increase as early as the second quarter.

However having said that, there are other costs that we are reducing over the next three quarters. We have implemented or will be implementing new technology and methodologies on the processing side. Part of this is due to the IGS acquisition and we expect this to immediately begin reducing our processing costs.

Also as we integrate the IGS acquisition, we are going to have overlapping technologies; and we will obtain future benefits by eliminating any necessary redundancies.

This is part of our overall scrutiny of our cost structure and includes keeping a constant eye on our fixed costs versus our revenue. Clearly we have been gearing up for continued topline growth; and this includes hiring enough talent and creating enough capacity for higher volume, continued quality customer service, and ongoing product innovation.

At the same time, however, we want our fixed cost to remain in line no matter how large or small we are and we're confident we have the flexibility to adjust our cost space in a variety of situations. As our new products and new customers build out, we will be sure to adjust our cost structure accordingly.

Thus far in 2006, we're very pleased with our infrastructure investments and our product innovations. We plan to continually differentiate ourselves from the competition by rolling out groundbreaking new products like cashclub which goes into beta testing in a few weeks.

Cashclub enables existing players' club cards to be used right at the ATM machine for credit card cash advance, POS debit and check cashing, with the patron receiving their cash directly from the ATM. This means that players will get back to the casino floor immediately instead of waiting in lines at the cage. Cashclub provides the casino with the additional benefit of removing pressure from their cage operations and reducing their cage currency requirements.

In the first quarter we began development of another stage of product innovation in our joint venture with Bally Technologies and Scotch Twist. This suite of products will bring new functionality to existing casino players clubs and account wagering programs. The product being developed in this joint venture have the potential to dramatically change the competitive landscape in the cash access industry.

Cashclub is our first step in the roll out of these new products. We will take the cashclub functionality and add it to joint venture products to provide patrons with the ability to use their existing player club cards to fund their casino player accounts with their debit card, credit card or checking accounts right on the casino floor. This will eliminate the many additional steps that are currently required for a patron to first access cash from an ATM or the cage and then add it to their players club account.

This is incredibly powerful technology that enables truly cashless gaming and we are very excited about the level of service and convenience that we will bring to gaming patrons as well as the value and benefits that will be realized by casino operators.

From the front lines, we continue to see a lot of demand for products that enable truly cashless gaming and cashclub alone has already received special attention for its innovation and flexibility.

Now we also recently announced a new contract with Crystal Park Casino & Hotel, as well as contract renewals with Dover Downs Entertainment and, as you can see today, with the Delaware Park property. Delaware Park is a great example of our consistent efforts to build on our existing relationships as our product suite evolves as we will be enhancing our current relationship with Delaware Park by adding the All-In-1 ATM product to this contract under the multiyear renewal.

Now with all of that I will turn it back over the Andrew to address guidance before we go to Q&A.

For 2006 at this time we are not changing our previous revenue guidance of 82 million. We are not prepared to give specific earnings guidance at this time. However, we do expect to reduce our operating expenses related to Sarbanes and other professional fees on a go-forward basis as Welt as other SG&A cost initiatives which will not impact our product development efforts.

We are rolling out a new switch in Q2, which will improve our margins slightly in the second quarter or more so in Q3 and beyond.

We have other processing changes which will be rolled out in Q3 which we anticipate will have a positive impact on margins. We have many initiatives underway to address both the cost side as well as the revenue sight of our business. With that said we expect to reach profitability in the fourth quarter of 2006.

And of course as you all know, I must note that events and circumstances may change which may impact this guidance and we expressly disclaim the obligation to update investors on our guidance or the factors that contribute to it.

Operator, we would like to now open it up for questions.

(OPERATOR INSTRUCTIONS) David Bain. Merriman Curhan.

With regard to the agreement with Bally and Scotch Twist to develop the cashless products can you guys give us a little bit of a timeline with maybe some milestone steps we should watch for, going forward?

Yes. Without getting into too much of the detail round the agreement itself, we have agreed to expeditiously complete our developments both at Cash Systems and at Bally Technologies and we have built in to the agreement certain milestones that are within the first months of the agreement.

And as we indicated when we first made the announcement we anticipate that we will have the product actually available for beta testing in a nine- to twelve-month timeframe. As you can imagine since we will be beta testing cashclub - and that is a good portion of our part of the functionality set for these new products - we don't anticipate any issues on our side in getting that done and certainly have not heard of any issues that Bally may have.

Given that this announcement had to reverberate somewhere amongst casinos have you been contacted maybe by some of the larger players out there that may not currently be under contract by you guys? Maybe there was a competitor and if so is there a strategy there to get those types of product in over time?

I think it's premature to speak to strategy but we certainly have had conversations with three or four of the largest six players in the gaming industry, all of them were very interested to know more detail around how these products would be introduced. The markets that we would introduce them into first and then what our strategies were around approvals and what approvals would be necessary in various jurisdictions do so does have been ongoing and they actually began the day the announcement was first made.

Great. And just if we can speak to kind of understand -- I mean, I understand the first generation of products. There's probably some contemplation of the second generation of products. What is the ultimate vision here? And is there any sort of thought on revenue generation? How that will actually flow through your top line at this point?

Well, you will see how we start pricing and the impact of our pricing of cashclub on the top line over the course of the second and third quarter as we rolled the product out which will give you at least a starting point on that, David. As we move to Scotch Twist and actually start implementing on the casino floors that pricing has to be determined by the three partners and while we've had some discussions around that it's probably premature for us or anyone to presume a particular price structure at this point.

But, clearly, we anticipate that this will have a beneficial impact on our gross and operating margins. Having said that, the concept of this joint venture is to develop a suite of products and a suite of products that have additional functionalities that can be added at different price points. So part of what we intend in the first release is to have the ability to first bring outside cash sources into the casino through the gaming device to fund the players' accounts. And then to have the gaming devices put any moneys left on the machines or any jackpots paid on the machine back into that player's account and the player to be able to either cash out or leave those moneys on the account.

In that functionality, whether it's in the first or the second generation we will include the ability to use the players' clubcard and that account system in the retail outlet and in the restaurants and other parts of the casino hotel complex. Clearly, we have also designs and have both within the Scotch Twist patents but also in patent applications that we have filed and that Bally as been involved with previously, looked at other functionalities that would be added in second, third, and fourth generations of these products.

[Eric Skurgold] with Gruber and McBain.

Good afternoon. Maybe you can have Andrew do some wind sprints on the basketball court or something. I've got two questions for you. One financial question on the 3% drop in gross margins. Could you go into a little bit more detail on what the components of that were and how quickly you think you can reverse that with some of these changes to your processing platform?

We had $300,000 push through on some write-offs through the gross margin line which would gain us back another 1.5 points, say, for the quarter would get us to 22.5% in there. We again have all these other initiatives that we're out there working through of which will hit and we're projecting they will hit, we get them all accomplished out here the slight benefit into Q2. But really starting in the Q3 and rolling through Q4.

And the 300,000. Is that just a onetime unavoidable expense or was there a glitch? Or what did that arise from?

We had some receivables due from these processors out there that basically it was time to clean up some of the balance sheet things when, one, I came on board and it was hanging out there. We made the decision instead of chasing after this, let's get it off the balance sheet.

Okay. Then secondly with respect to the strategic for like there was an article a New York Times a couple weeks ago on a move towards wireless gambling where people will be sitting outside by the pool gambling. Could use data how these new products you are developing with Bally would fit into a wireless environment whether it be a bingo game that somebody takes off the play by the pool or some other wireless device and how you might interact for those devices?

Right. And as you can imagine we've been looking very carefully at the wireless devices that are proposed for testing in Nevada. The ability of us to incorporate the player account wagering through a player's clubcard at the handheld device away from the casino floor is not very difficult for us to implement. We have implemented the wireless already in the Stay 'N Play product and it's a matter of making sure that it can feed into the casino account wagering system. And, then, just making some determinations as to messaging formats back and forth and how we would control that process to satisfy the regulators.

So there's the opportunity there. But to be quite frank with you at this point I don't think anyone knows how how deep the market for wireless gaming devices is going to be and how quickly it's going to be adopted throughout the industry. So we -- behind the scenes, we have been working on an initiative to make sure we are prepared if these really take off but it's not on the top of our agenda right now.

Chris Krueger with Miller Johnson Steichen and Kinnard.

Good afternoon. Just a couple quick questions. I noticed your processing cost line was probably as a percent of sales was the lowest it has been in about a year. Is there anything particular this quarter that really helped that?

The only thing is that's where we pushed through that 300,000 in that line item itself. On a write-off, so the margin itself actually comparable to prior years as a percentage of total revenue out there. And the other thing is, we did have some price increases out there from our processes. Again, these are areas that we are focused on making changes out there.

I guess what I was trying to ask is it looks improved over the last three quarters and really even though you had that 300,000 write off I was wondering if those there was that immediately have helped -- that did help in this quarter because it looks pretty good in my view.

Really, I think that's going to be more again quarter over quarter and mix of properties out there in volumes. We've had volume increases quarter over quarter.

Interest expense. I know you're doing some things to change your vault cash situation and all that. You have any visibility into the second quarter and third quarter, maybe, just have an idea where that line might be after 529,000 in the first quarter?

We projected that out. At this point we finished out the vault cash agreement. I'd rather not just try to project that for you. Other than the fact that we expect I think 1.5 points or 1.76 or -- somewhere in there -- benefit at the interest rate.

As far as the Sarbanes-Oxley ordeal do you feel pretty good that it's about to clear up or they have the visibility on expenses portion of it now compared to the last year?

Yes one of the first things I did when I came here was bring in a gentleman from the Bay Area who's helped implement Sarbanes at many of the dotcoms out there and he's come on board. Started about two weeks ago. And he's already done a hand off from the previous consultants out there. We've already had a couple of meetings. He's going to meet with our Board here soon to talk about planning out the Sarbanes.

So, basically, we are not going to have those consulting cost external out there going forward. We do have a little -- to get on with too much carryover. There was a hand-off this past week out there and we will do the testing internally and work with our auditors going forward on that.

I know we've seen some announcements of the accounts being retained, a couple of new ones. Have you -- have there been any customers that you lost year-to-date? That you previously had?

We lost Leach Lake in Q4.

In Q4.

In Q4. That's the only one that I'm aware of we've lost.

Roy [Grubb]. Private investor.

My question regards the Scotch Twist Bally alliance. I would like to just know exactly what the Scotch Twist does and what the significance is to us? Also, Michael, see you on the 21st.

Yes you will. I'm glad you said that because that's the date of our annual meeting and I will look forward to seeing you out here.

Scotch Twist is the owner of eight or nine patents that have issued and several applications that are pending around the use of cards in gaming devices that can bring money from outside of casinos into a casino for use in a gambling environment. Those patents have been out for quite a while in the industry and my personal view is that they are part of - if not a very significant part of - the reason that the industry turned to ticketing as a solution for getting rid of coin and has led to the current state of tickets throughout the casino industry.

These patents now being incorporated into the joint venture means that we will have both the sword and the shield. The IP protection to be used to stop others from developing similar products but also the shield of hopefully deterring others from even beginning down that path without looking to us to license them.

And while I'm on that topic, Roy, part of our agreement was that after we have had the ability to commercialize these products for a 12-month period of time, the joint venture will then offer licensing agreements to other vendors - both in our business and also in the business of providing accounting and slot systems to casinos to develop products that will incorporate these patents as well.

Do you need regulatory permission to use these in the casinos? (MULTIPLE SPEAKERS) Vegas versus the Indian casinos. They can go right in and use it. Can they not?

Well actually the regulatory environment is different with each and every jurisdiction, whether it be a sovereign tribe or whether it be a state. In the majority of jurisdictions the approval that will be required is an approval of the modification of the Bally slot accounting system, that this will reside within. And those approvals, those -- they're called system modification approvals. Those approvals in most cases are administrative approvals which means they don't go through a public hearing process.

But we anticipate having a full and open discussion with regulators whether they be tribal or states around these products before we put them on the floor. But you are correct in your assumption that in Native America it will be and should be an easier regulatory path to approval for the actual modifications of the system.

And are you going to be beta testing this particular -- these particular patents here in the near future?

The patents will be incorporated in the first products which are on that nine- to 12-month timeframe. Cashclub - which relies on our own proprietary - and patents that we've applied for, the technology we've applied for will in fact start beta testing in about two to three weeks.

(OPERATOR INSTRUCTIONS) David Bain with Merriman Curhan.

Just want to follow up on one thing the last caller actually brought something I found sort of interesting. Given the ramifications of this new product with your new partners, I mean one would think that this had to be sort of a competitive situation for the patents with Scotch Twist and wondering what you may believe are some other reasons why this partnership actually came down? Maybe systems market share with Bally are sort of the innovation you have shown with cashless wagering or cashless -- cash access. If that is the case?

Well I mean you understood some of the answer immediately. There were discussions amongst the patent holder with at least one additional company in our industry and with a couple of different companies in the gaming systems provider space. Those discussions were at the end of the day, were not fruitful. The patent holder was not satisfied that they wanted to work with those businesses as partners for whatever reason. And the attraction I believe to a cash system - certainly the attraction to Bally is the breadth of their footprint in the gaming management system space, with their ability to reach more machines in North America than any other system provider. But, also, for us I think it clearly was and, in our first discussions, it was clear that it was because of the kind of innovative products we were looking at and the kind of technology we had both applied for and had issued as patents, that that patent holder thought we would be good hands to put these patents into.

David Wolf with Sigma Capital.

Andrew, first question for you actually just in regards to some of the guidance. Not to go into too much detail but can you just briefly say what the Sarbanes costs were in the first quarter again? I just didn't write it down.

Total Sarbanes? Well, we had 700,000 of that.

Of consultants and (MULTIPLE SPEAKERS) charges in there. I think that doesn't, that 700 doesn't include the bodies that we had brought in, internally, prior to the showman that Andrew was talking about previously.

I guess, is there a way to give some sort of datapoint as to which part of that relates to the material weakness costs that could be -- that could subside when you are clear from that?

Well all of that testing was around that. I mean they were actually in the first quarter still -- the consultants were still in here working on the financial reporting portion, which became the material weakness due to its not being in place long enough for a full robust testing. So all that was around that -- the final piece being put in which was the area that ended up with the material weakness.

I mean I think Andrew has made it clear that we intend and believe those costs are going to come down significantly on a going forward basis. We've internalized functionality required around Sarbanes at this point and don't see those continuing at that level. There will be clearly some additional internal costs. It will -- that we will have in order to make that.

And the question that has not been decided yet is whether we come back in at the end of the second quarter or third quarter and retest that area of material weakness to have it lifted or whether we wait until the end of the year and have that as part of our '06 Sarbanes review.

Right. I guess that was kind of my question in terms of the guidance when you say that you'll return to profitability in Q4 although I guess I don't really care if it's Q3 or Q4 that you model in.

We modeled in the additional cost to go through the Sarbanes review that will be required for that, yes.

Right. Now we've got the boring questions out of the way. Can you Mike, one thing we forgot to ask you earlier was the patent -- what kind of relevance did it have in Internet? I mean, I know this is a second phase but what -- how would they hold up in international markets?

Many of the patents - although I can't stay to all of them - but many of them were filed multinationally. They were filed outside of the U.S. at the same time they were filed in the U.S. so we believe there is applicability in other markets. It depends on to some degree the methodologies that we employ; there are methodologies defined, different methodologies defined and different claims of the patents and how we exactly use the methodologies and the claims in developing the products will really dictate whether it also has shielded protection in other marketplaces outside the U.S.

My last question is, sort of goes along with what David was asking just a second ago. Can you in your words describe -- because I think when you made the announcement obviously some competitors and in general people immediately pointed to Nevada and how "Oh this can't happen in Nevada."

And I am not sure, I mean I'm not a lawyer, I don't understand exactly what the terminology is. Again people focus too much on one state but can you -- it doesn't sound to me like lack this is necessarily a violation. It's not a credit card application specifically but I will leave that for you to describe.

Sure. Let me first maybe and it would, I think it would probably be good to simply describe the process that we currently envision in order to use the Scotch Twist products. That is, you would come to the player club booth or the cashclub booth. You would reapply for your cash access on your player's club car. You would identify the accounts that you wanted to use and you would decide whether or not you wanted to place limits on how much money you could take out of those accounts either over the course of a day or over the course of a longer period of time. If, in fact, you had any concerns about your gambling you could also exclude yourself from any accounts being used in the casino.

Once you've completed that application and we've taken all the information from you, you can then take the card to a gaming device and using the existing card reader and keypad, reach through the systems out to us to request funds into your players club account. We then will go through a normal process as we would today at an ATM or a kiosk or a cage and authorize or decline to authorize those funds.

If those funds are authorized they will then be placed into your account. You then may use your account to bring credits down directly to the gaming device and to send those credits back to your account at the end of your gambling activity.

Because we are of that methodology there is - and you're correct to point out - a question as to whether or not current Nevada law applies with respect to a statutory provision, which prohibits credit cards from being used in slot machines. But - and I believe that Lincoln was correct when he said the attorney that represents himself has a jackass for a client. I don't intend to lawyer this myself. We have others looking at the issue.

But whether or not that applies and even if it does apply, it does not stop us from using debit card accounts or check cashing accounts initially in the state of Nevada; and of course if the product is successful and proves to be as well accepted as we believe it to be by both casino operators and by patrons then there's always the possibility of changing the law in the state of Nevada with respect to the credit card part of that. But you're quite correct to point out that we are not allowing and don't intend to authorize people to just put a credit card in the slot machine and start playing.

And I guess one last question I mean, if I can, can't resist. Which GLI lab is going to test the Valley portion of the product? Is it going to happen over here in New Jersey or Colorado or is that yet to determined?

Yes or Las Vegas. They have a facility here now. Actually it is yet to be determined because as we look - that's a bit down the road to actually make the final selection of the beta site. We have several that we have discussed but we would want that to be closest to the beta site that we ultimately select.

I would anticipate it, that it will be either West Coast or East Coast and -- but that's just my guess.

Nicolas Saillez with ING.

Good afternoon. Dave actually took most of my questions but the only other one remaining was regarding the revenue guidance. I mean you did 20.5 million in the first quarter and you only had one month of IGS so is there anything that comes out going forward to get us to that 82 or is it just sort of somewhat conservative (MULTIPLE SPEAKERS).

Yes; you know us. I mean that's us being conservative and not wanting to overpromise.

Okay. Did the one contract that you did lose, was that significant?

It was not. It was a medium sized casino and it was one casino location.

That's all I had. Thanks.

(OPERATOR INSTRUCTIONS) At this time there are no further questions. I would like to turn the conference back over to your host for any additional and or concluding comments to make at this time.

Thank you, Kevin. Thank you, everybody, for joining us today and again our apologies for not having that forward-looking statement but we will make sure that Andrew gets on the treadmill and is able to run that back to us quicker on the next call. Thanks everybody.

Ladies and gentlemen, this does conclude today's conference call. At this time we would like to thank you for your participation.