Everi Holdings Inc (EVRI) 2006 Q2 法說會逐字稿

Good afternoon. Welcome to the Cash Systems Inc. second quarter 2006 earnings conference call. Today's call is being recorded. (OPERATOR INSTRUCTIONS). I would like to remind everyone that this conference is being recorded, and would now like to turn the conference over to Mr. Andrew Cashin, Chief Financial Officer. Please go ahead, sir.

Good afternoon everyone. 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 marketing 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 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 may make today.

With that said, for the second quarter of 2006 revenues increased 51% to 24.1 million over the second quarter of 2005. The increase in revenues is due to the IGS acquisition, which contributed 4.5 million of revenue, for the quarter (technical difficulty) new locations and organic growth with the expansion of products and services at existing locations. The volume of transactions processed in the second quarter increased 46.9% to 728 million compared to 495 million last year. During the quarter we installed our products and services into six new locations.

Total operating expenses increased 5.9 million, or 31%, to 24.6 million from 18.7 million last year. Total operating expenses include all expenses, excluding interest expense. The increase in cost of sales reflects our increased revenues, including commissions, processing cost, check cashing cost and armored car services, all of which are directly related to the growth of our business to additional locations. These expenses increased 4.7 million to 18.9 million from 14.3 million in the prior year quarter, a 33% increase.

Using these costs, this resulted in a gross margin increase of 3.5 million to 5.2 million versus 1.7 million last year. This represents an increase of 198% over prior year's quarter. Quarter over quarter our gross margin improved to 21.5% from approximately 11% last year. Last year's numbers did include a number of unusual items.

Payroll and related expenses increased 1.1 million to 3 million from 1.9 million, or a 57% increase. Included in that number is non-cash stock option and restricted stock grants totaling 369,000. Without that expense in the quarter, the increase would have been 728,000, or a 38% increase. This is a result of the infrastructure buildout, expansion of the check cashing business, and the IGS acquisition this year.

Professional fees decreased 409,000 to 385,000 from 794,000 in the prior year quarter. This is the result of us doing a better job of controlling SOX costs and other professional fees.

The increase in depreciation and amortization is due to the IGS acquisition, and an increased appreciable base from capital additions. Interest expense increased as a result of the increased borrowing outstanding with the IGS acquisition, as well as interest on our vault cash agreement. Of the 880,000 of interest expense, approximately 674,000 was related to the vault cash agreement and 206,000 was related to the line of credit.

Operating losses for the second quarter were 438,000. After-tax losses were 804,000, or $0.05 per diluted share based on 17.6 million diluted shares outstanding. From a balance sheet perspective we finished the quarter with 20.7 million in cash and 9.8 million outstanding on our line of credit. Capital expenditures for the quarter were 1 million.

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

Thank you everyone for joining us today on the call. Product development and implementation remains our focus for the remainder of the year. We still expect to increase development spending into the second half of the year. You'll see these costs increase throughout 2006. Our spending is a direct reflection of the opportunities that we see at hand in the marketplace.

In that regard, cashclub will roll out at one of our beta sits in about a week, with a second site to follow two to three weeks later. We are not announcing the sites yet, so please don't ask us. But we will be providing a press release announcing these locations in the near future.

As many of you know, cashclub enables existing players' club cards to be used directly 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.

The cashclub beta testing has been slightly delayed at the casino's request to avoid any conflicts with other property level promotions. Most importantly, we have been extremely pleased by the very high customer interest level regarding our cashclub product. We will be having increased interaction with customers regarding additional cashclub rollouts once the beta testing is completed.

Our other big initiative is the products we refer to as Players' Cash, our joint venture products with Bally Technologies and Scotch Twist.

This product suite will bring new functionality to existing casino players clubs and account wagering programs. We will be taking our cashclub functionality and adding it to the joint venture product in order to provide credit and debit card cash advance and check cashing services through the existing players’ club cards directly into the customer's player account.

For the first time in the gaming industry, we will provide the ability for casino patrons to fund their players club account while they are seated at a gaming devices or a table game. Customers can then use these accounts to upload and download credits for the gaming device or to purchase chips at a table game without the need for tickets or currency. This is incredibly powerful technology that enables truly cashless gaming.

We are extremely excited about the level of service and convenience that we will be bringing to gaming patrons, as well as the value and the benefits that will be realized by casino operators. We remain confident that the products being developed in this joint venture have the potential to dramatically change the competitive landscape in the cash access industry.

We are continuing to actively work with Bally Technologies to showcase these products at the G2E show this November. We are currently targeting a beta site introduction for the first quarter of 2007.

While it would be premature for us to talk about customer interest at this point, we have reason to believe that the casino industry is taking notice and paying close attention to the changes that are occurring in cash access technology. I think it is important to remind everyone that the gaming industry has a history of rapidly rolling out products that generate attractive ROIs and/or other customer efficiencies. You only need to think back to the introduction of currency acceptors, participation games and ticket-in/ticket-out.

Despite our strong focus on product development, we are also spending time on areas where we can generate further efficiency in our current business. We are focusing on processing efficiencies and other areas where we believe we can generate further cost savings. This is part of our continuing scrutiny of our cost structure and includes keeping a constant eye on our fixed cost 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, while at the same time maintaining superior customer service and innovation. However, we want our fixed cost to remain in line no matter how large we become, and we are confident that we now have the flexibility to adjust our cost basis in a variety of situations.

During the quarter we announced a new contract with Chickasaw's newest casino, the Riverwind Casino. We also announced contracts with the Golden Bear Casino in northern California, and the Lodge at Belmont in Belmont, New Hampshire. Additionally we announced contract renewals with Cannery Casino & Hotel, Rampart Casino, San Manuel Casino and the Cocopah Casino. I believe that these new contracts and our contract renewals speak directly to the service and product innovation that Cash Systems brings to casino companies to enrich their customers' overall gaming experience.

I would now like to turn it back over to Andrew to address guidance.

For 2006 at this time we are updating our previous revenue guidance of 82 million to approximately 90 million for 2006. We're not prepared to give specific earnings guidance at this time. However, we do expect to reduce our operating expenses related to SOX and other professional fees on a go forward basis, as well as other SG&A costs initiatives. However, these savings will not impact our product development efforts.

Our new processing switch is now operational, and we expect this to drive cost savings at the gross margin line in the second half and beyond. We continue to expect to reach profitability in the fourth quarter of 2006. And of course, as you all know, I must note that the 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're ready for questions.

(OPERATOR INSTRUCTIONS). Joe Hudak with Wachovia.

A nice quarter guys. Just a few little pieces in here. Can you give us a target range on gross margins that you're shooting for that you feel comfortable with for the remainder of the year?

I would rather not project or go out on to that, other than the fact that our gross margins have improved in there, and we hope to continue that improvement going forward.

Do you feel comfortable with 21.5 or between 11 and 21.5?

I feel comfortable with 21.5%, and hope to get better than that.

Great. Thank you. That is what I was looking for. Also, you mentioned that you will be seeing SOX costs go down the rest of the year. For modeling purposes, should we be looking in the 7 to 800,000 range, or should we be looking at the lower end of 7?

I would be lower than that. I would be in the $0.5 million range or less.

Beautiful. Good job. Also we were about 3.7 million light. Do we see that burn rate going forward?

You're talking about the cash?

Yes.

The cash change was a buydown from the credit line. And there were a couple of other small pieces in there. But I wouldn't anticipate that to be the -- necessarily be the burn rate going forward, no.

Other than the fact that we spent $1 million on capital.

That is acceptable and good. Going forward, barring an acquisition or something unforeseen to the positive, we feel comfortable with keeping it around 20 million?

Yes.

On the cash side? Yes.

Good job guys.

Traci Mangini with Think Equity Partners.

I just had a question on the interest expense. It was quite a bit higher than I was looking for, but I have a feeling that is just principally the bulk cash. And I know you were doing something to try and reduce that. Have you made any progress in that regard?

Yes. We've negotiated for reducing that. We haven't executed that yet. Hopefully, we will get that done soon here. And again, yes, it is related to the vault cash.

How meaningful of an impact do you think this renegotiation could have?

A 30% reduction under our vault cash portion.

I am assuming are you still not in compliance with your B of A credit facility on the EBITDA covenant?

That's correct.

That is okay with the bank, everything is fine and [not right then]?

Yes, but again I will refer you to the financial statements. We did go out and sign an amendment.

Then just with respect to -- I know we have talked about this on the calls in the past -- but with respect to wireless and what you see as maybe some opportunities for you out there, it seems like a lot of the different platform providers, or hopeful platform providers, in Nevada are out talking to one another, are trying to get licensing partnerships or what have you. Has anyone approached you guys trying to maybe integrate your technology, or is that something you're even interested in, or are we at this point?

You're right. We have spoken about this in the past. We have internally determined what it would take for us to be able to interact with the wireless gaming devices. Our biggest issue, and we have not initiated any kind of in-depth conversations with the companies that are looking to provide these devices, principally because we're not sure who is was going to get approved by the Nevada gaming regulators. We don't want to spend a lot of development time getting prepared to interface with a particular platform until that platform gets approved.

That's fair. Just lastly, given the delays with the beta testing, does this impact in any way your timeline for commercialization of some of these products, do you think?

Not really, no. As I indicated, the delay was principally at the request of the casino sites. They are running their own promotions, and frankly it was in both of our best interest not to try and compete with those promotions that were ongoing, but to come out at a quiet promotional time for the casino.

And it doesn't impact Bally's development on their side on the systems. This was our development, our own launch under this product. And from the Bally side, they continue down the pipeline and deliver their side.

We expect a small contribution from cashclub this year, but it shouldn't be significantly affected by the delay.

Chris Krueger with Miller Johnson.

You mentioned at the end of your comments that your new processing switch is now operational. Is that from the acquisition?

No, we have two switches now. We have the switch that we acquired that IGS operates on. And we had, as you know, gone quite a ways down the path to developing our own switch, the TNS switch. We have now taken that through beta, and we have begun the rollout to our locations with the TNS.

For the one from IGS is that being -- I guess I don't understand exactly what these things do, but is that being rolled out to more locations of yours as well, or is that a separate thing?

No, it currently is touching all of the IGS locations. And we are looking internally as to what is the best methodology for us with respect to processing, and which switch makes the most sense. But at this point in time we're going to run with both of them for a period.

As far as the acquisition, now you're four or five months into it, are there any other details or synergies or anything that you can talk about a bit that you think you've made progress on or will make progress on there?

The synergies truly are coming from the product side today. It is not like they had a heck of a lot of headcount over there. I think there is about 20 people in total. Again, down the line is there potential consolidation of duties? Down the line, but not in the near future right now in this.

Synergies with respect to headcounts are not what you should be looking for from this. But you will continue to see synergies as we incorporate their products into our mix, and we modify some of their products and some of our products to take the best of breed from both companies.

Probably the best example of that is the check cashing product that they had introduced, which had gone very successfully through a beta and that we are now looking at bringing to properties where we're currently using a third-party vendor for check cashing.

How about the people behind the scenes that are developing these products? I think when you acquired the company you were pretty impressed with that group.

Still very impressed with that group. They do a great job.

I didn't know if there some way of bringing that into the overall Company, I guess, or blending them with some of your other people.

That is what we're doing on a daily basis.

Next question, can you talk a little bit about the opportunities out there right now, whether it is RFPs, maybe how many are you betting on, or some kind of metric that you had given in the past, or how many -- the size of the total that is still out there for bidding in the next few years, or whatever kind of number you willing to talk about?

Sure. The one thing I can tell you is that the largest of the casino operators are now done with their bidding process, so they are under contract for anywhere from the next two to four years. But amongst -- for the remainder of this year there are a number, and I can't give you an exact count, but there is a number of casinos that are coming up for bidding where we have been requested to present under an RFP scenario.

We continue to provide presentations to casinos on a monthly basis under the RFP. And of course, we are now also approaching casinos about cashclub, which is a product the does not require an RFP, as it will be the only product out there that has the capabilities that we have developed for it.

To go back to the selling into our existing installed base.

Last question, your competition, anything new happening there that you're seeing, whether be other bidding for contracts or products they are developing and what you think of that?

We continue to see competitors give away their gross margin line in order to capture new business.

Anything interesting on the competitors' product development front? Do you think you might be the company that has things happening there?

Some of our competitors are producing new products that they intend to introduce that are going to bring cash access services closer to the customers on the casino floor. We think they're taking the right approach, very obviously. But none of the products that we have seen are going to be able to address the customer in the space that the customer most wants to be in, which is at a gaming device or at a table game. So while we see them coming into the casino floor, just as we are, we think that we've got the advantage of being exactly where the player wants to be and not forcing them to get up and go to another device somewhere else.

[Rick Ruth] with (technical difficulty).

In reference to your comment previously about the gross margin with the other company, I live over here in the Ohio, PA area, and I have been to Northfield. And I lived in Minnesota at Treasure Island, which has your units. I was at Foxwoods in Mountainair which has GCA. What will the -- you know, Cash Systems to get these kind of contracts at Mountainair and Foxwoods?

And also, I understand that -- and I know that Mountainair has gotten either cash upfront or kick-back to get GCA's services. It is something that is commonplace with the competitors or is commonplace in this industry? How does that work?

A couple of things. One, let me just say that I don't believe any of our competitors are providing kick-backs. There is, in fact, in some RFPs we've had competitors that have responded by making upfront bonus payments to the operator. It is clearly spelled out in their RFP response. And many times that is simply an advance against commissions for the life of the contract. But we're not aware of anybody paying kick-backs or any hidden payments to various casinos.

With respect to the larger casinos and how we intend to penetrate the larger casino markets, I would point out that we have several large casinos today, and operators of multiple casinos, such as the Seminoles in Florida, where we have provided service that is superior, and the kind of service that those customers expect.

We're very satisfied that we can provide the service and the quality that those customers are looking for. We believe that going forward the competitive advantage for our Company is the products that we are introducing. These products will be one-of-a-kind products that are protected by intellectual property that will stop others from being able to replicate them in the marketplace. And we believe that these products are providing such an overwhelming benefit to both the casino operator, but also to the customer, that that is going to provide us an edge going forward.

Going after these bigger contracts, and like you said, the big companies are hooked up here for two to four years. These are the things that should make the difference in the salesforce to go out and get these?

Absolutely, and that is our strategy.

But when a company is giving, like you said, money upfront how will that play into Cash Systems' equation with these companies?

That really should not affect it one way or the other. It comes down to an economic analysis of the value of the contract, the value of providing an upfront payment to a casino in order to secure a contract, and we can compete on those contracts as well.

Nicholas Danna with Sterne, Agee.

Two quick questions. One, sort of detailed and one more macro. On the stock option expense, I wasn't clear if that was unusually large in this quarter or whether that was a runrate going forward?

No, that was a onetime event. That is an annual grant to our Directors.

So when I am looking at the 3 million on payroll that would be slightly lower on a go forward?

Correct. Yes, 369,000 was what we took for the quarter, and 339,000 of it was definitely a onetime annual grant to the Board.

He stated that correctly. I shouldn't have said onetime, but it is an annual.

The second question is, as you roll out cashclub and then you rollout the products in conjunction with Bally, can you just talk about how you think about the pricing on that, and how it may or may not be different than the way your products are priced today?

It is going to be a pricing change for the way we have done business in the past. In that we will the looking to price these products very similar to the way systems companies, such as Bally's price their system products. That is with a software licensing fee, annual maintenance agreements that we provide upgrades during the course of each year that the product is being used. And then an additional fee, depending on the product, around the value of the transaction. It would be an increase in the existing transaction fees. Does that answer it?

You'll continue to charge the customer whatever percentage, depending on the type of transaction, plus there will be an additional fee, I guess, to the casino for licensing the technology and ongoing maintenance? Is that the way to think about it?

And an annual maintenance. Right. It is really -- you can think of it as three distinct revenue lines, software and licensing revenue line, a maintenance revenue line, which is an annual, and then the transaction fee changing, which would be a premium price for the products, meaning that we would receive a greater portion of the transaction fee than we do today.

The actual revenue would be the same, but you theoretically get a higher percentage?

Correct. Correct. Once we get to the gaming device itself with the joint venture products, there will be an additional fee per transaction somewhere in the $0.75 to $1.50 range at this point. That will be a convenience fee charged to the customer that will be split by the joint venture partners.

Ladies and gentlemen, at this time we have no further questions.

Everyone, thank you for joining us today. We really appreciate you getting on the call with us, and we look forward to speaking to you next quarter. Thank you.

Thank you.

Ladies and gentlemen, that will conclude our conference call for today. We thank you for your participation, and you may disconnect at this time.