Everi Holdings Inc (EVRI) 2006 Q3 法說會逐字稿

Good evening. My name is Felicia, and I will be your conference operator today. At this time, I would like to welcome everyone to the Cash Systems, Inc. third-quarter earnings conference call. (Operator Instructions). Thank you.

Mr. Cashin, you may begin your conference.

Before we start today's call, we need to make you aware of certain statements in this conference call that do not describe historical facts, including without limitation, statements concerning future, financial and operating performance; the impact of partnerships and alliances, future strategies and plans; or market conditions that may constitute forward-looking statements. Such statements are based on current 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 statement 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.

For the third quarter of 2006, revenues increased 52% to $26 million over the third quarter of 2005. The increase in revenues is due to the IGS acquisition, which contributed $5 million to this quarter's revenues; new casino customers; organic revenue growth at existing customers; and expansion of products and services at existing locations.

So the organic revenue growth was approximately 24%. The volume of transactions processed in the third quarter increased 48% to $788 million compared to $531 million last year.

As you can see from today's press release, our third-quarter results reflected certain expenses, which we categorized as significant and unusual expenses. While they were not all anticipated, they primarily reflect onetime legacy issues from previous commercial relationships of the Company, of which we have taken a conservative approach and recorded additional reserves for these items.

There was $1.4 million in items related to prior processor transactions and fees. There was $451,000 from legacy bank relationships. These include termination fees of $150,000 and $301,000 reserves for disputed charges. There was $335,000 to increase reserves from bad debt as we move away from our current check guarantor. There was $151,000 write-off of an old receivable from a previous customer and $150,000 for the write-off of software as a result of our new products and system direction. There was $171,000 for non-cash share-based compensation.

While we are hopeful some of these might be favorably resolved in the future, we felt like it was prudent to fully reserve these items as most of these represent commercial relationships we no longer maintain. These increased reserves and charges hit the financial statements in the following areas -- $793,000 to the processing line item, $127,000 to the check cashing line item, $1.6 million to other G&A and $171,000 to the payroll line item.

Total operating expenses increased $12.4 million or 73% to $29.6 million from $17.1 million last year. Total operating expenses include all expenses with the exception of interest expense. Excluding the $2.7 million items previously noted, total operating expenses increased $9.8 million or 57% from last year.

The increase in cost of sales reflects the increased commissions, processing costs, check cashing costs and armored car services, which are directly related to our revenue growth and our expansion into new locations. These expenses increased $9.2 million to $22.1 million from $12.9 million in the prior-year quarter, a 71% increase.

Excluding the $920,000 of items previously discussed, gross margin increased by $650,000 to $4.8 million versus $4.1 million last year. This represents an increase of 16% over prior year's quarter.

Although revenues increased from Q2 of this year by $1.8 million, we experienced a shift in revenue more towards the lower margin ATM transactions. This shift resulted in a $400,000 decline in gross margin in this quarter compared to last quarter.

In order to get our cashclub product deployed on the ATM, we had to take over the processing of ATM business at certain locations with little-to-no margin. This resulted in a gross margin percentage after excluded items of 18.4% for the quarter.

Payroll and related expenses increased $750,000 to $3 million from $2.3 million or a 33% increase from the prior year. This is a result of the infrastructure build-out, the expansion of the check cashing business and the IGS acquisition this year. If you pull out non-cash compensation from Q2 of this year and compare it to Q3, we are almost dead even despite the increased development efforts and deployment of our new systems.

Professional fees decreased $334,000 to $280,000 from $613,000 in the prior-year quarter. This is the result of controlling our Sarbanes costs this year compared to last year. Other G&A costs increased $2.3 million over the prior-year quarter to $3.3 million. Again if you pull out the $1.6 million previously identified, other G&A is up $688,000 over prior year and $190,000 from Q2 of this year.

The $546,000 increase in depreciation and amortization reflects an increase depreciable base from capital additions and the IGS acquisition. Higher interest expense is the result of the increased borrowing outstanding with the IGS acquisition as well as interest on our vault cash agreement. Of the $800,000 of interest expense, approximately $600,000 related to the vault cash agreement and $200,000 was related to the line of credit.

Operating losses for the quarter were $3.6 million. After-tax losses were $2.8 million or $0.16 per diluted share based on 17.7 million diluted shares outstanding. If we pull out the items discussed, the operating loss would've been $900,000 and the after-tax of $1.1 million.

From a balance sheet perspective, we finished the quarter with over $27 million in cash and cash equivalents and $13 million outstanding on our line of credit. Capital expenditures for the quarter were $627,000.

Now on to guidance. With our new processing switch operational, the deployment of our new check product and changes to banking relationships, we expect this to drive savings in the fourth quarter and beyond. We continue to expect to reach profitability in the fourth quarter of 2006. We are raising revenue guidance to $94 million.

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

Now, I will turn it over to Mike.

Thanks, Andrew. And thank you everyone for joining us on the call today. I would like to begin today's call talking about our strategy and outlook as we approach the end of 2006.

While we had several significant and unusual items in the third quarter, they represent the past and not the present or the future of Cash Systems. We're very confident in our technology path, and we are continuing to execute against the plan we laid out last year.

Essentially, our business plan included two key issues that we had to address. First, we had to develop an infrastructure to support sustainable growth. That included hiring key people, developing a better technology infrastructure to create business efficiencies as well as entering into commercial relationships that could scale with us and create further financial and business opportunities.

While we previously talked about several key hires that we've made, since the end of the third quarter, we've also made three significant announcements that we believe will drive material efficiencies and scale into our business. On October 11, we announced the launch of Smart Processing Solutions and the transformation of our acquiring platform. Through the integration of advanced transaction routing capabilities developed by a division of the TNS Group of Companies, we have now gained control over the processing of our ATM and All-in-1 transactions.

In addition to providing ongoing cost savings, our acquisition of this processing control technology was key to the introduction of our cashclub product. On October 18, we announced a processing services partnership with TSYS Acquiring Solutions for our credit card processing, which will eliminate another third-party call center.

These changes in our core technologies will create substantial savings, beginning in the fourth quarter and continuing into 2007 and beyond. They also have given us the ability to launch our next-generation product at a substantially lower cost, while giving us control of all of our transactions. This is crucial because ownership of these technologies will eliminate many of the challenges and inefficiencies we've had with our other processing partners that have led to some of the significant and unusual items that Andrew discussed.

The third major announcement was the note financing. We rely on financial liquidity to grow our business, and financing costs play a significant role in our cost of doing business due to the cash that we maintain in our ATMs, our booth operations and generally in our business as we continue to grow rapidly. Our prior bank relationships were inflexible and were extremely costly to maintain.

As Andrew indicated, in the third quarter alone, we were hit with penalties, error fees and other unusual bank fees of $451,000. The note offering will allow us to eliminate such fees and together with a new vault cash agreement will reduce our future interest costs and provide much greater financial flexibility.

The second major area we had to address was product development and innovation. While we have been aggressively spending to innovate, we have not yet seen the financial benefit of our efforts but it is on the way.

Let me tell you about what we're doing at G2E next week. First, we and Bally Technologies will debut powercash at G2E, which we believe will change the way casino players access their funds on the casino floor in the future. This is the first product from our joint venture with Bally and Scotch twist.

Once patrons have enrolled in the casino players' club program with our cashclub functionality, they will be able to access funds from their desired credit, debit or checking accounts while sitting at the gaming device. Players will be able to request funds from the designated account, transfer those funds into their players' club wagering account, and then transfer down to the gaming device credit meter the amount of money that they want to use.

This disruptive technology will be the first cash access product that allows a truly cashless casino floor. We're currently targeting beta sites for powercash introduction in the first quarter of 2007. We know the casino industry generally, and our existing customer base in particular are taking notice and paying close attention to this product and the other changes that we're developing in cash access technology.

We will also be displaying cashclub. As many of you know, cashclub enables existing players' club cards to be used at an 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 operator with the additional benefits of removing pressure from their cage operations and reducing their currency requirements.

In the last few months, we announced cashclub began beta testing its Delaware Park and Dover Downs in Delaware and at Boomtown in Reno. We have also recently announced that the Agua Caliente Casino and the Spa Resort Casino will be the first casino properties in Southern California to install the product. Our customer interest level regarding cashclub remains very high.

Now also at the show, we will be debuting e-cash systems and e-cash checking, which are products developed by Indian gaming services, the company we acquired this past February. E-cash system Web-based software facilitates the accessing of funds from credit and debit cards within the gaming environment through the casino cashier cages in one simple and easy-to-use application.

E-cash checking is our new check cashing product and check guarantee product. This product is already deployed in 14 locations, and 6 more locations are scheduled for installation over the next several weeks.

E-cash checking is the fastest check cashing available technology in the industry. After an initial application, casino players can cash checks in less than eight seconds. And this eliminates the need for depositing of checks, thereby reducing the casino cashier's workload.

We're working aggressively to implement this at all of our existing customers since we're currently using a more costly third-party application. Once fully implemented across our customer base, we believe we will realize significant cost savings in our check cashing business with this product as well.

Now, as we've told you previously, having the technology to process our own transactions was a necessary precursor to our ability to most effectively reintroduce the Stay 'N Play wireless handheld products for table game operation. Stay 'N Play allows a customer to begin and complete the purchase of chips at the table from their credit card, debit card or through their players' club card with cashclub functionality. Stay 'N Play begins a beta test in a Native American casino this month and once completed will become available throughout the casino industry.

We believe that these are all transformation products for our Company, and they represent the future of Cash Systems. Many of you know, the gaming industry has a history of rapidly rolling out products that generate attractive ROIs and other customer efficiencies. You need to only reflect back on the introduction of currency acceptors, participation games and ticket-in/ticket-out technology.

We're confident that our products will change the landscape in cash access technology. We would like to invite anyone who is attending the G2E show next week to stop by our booth and see our new cutting-edge products. Thank you.

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

(Operator Instructions). Chris Krueger, Miller Johnson.

I guess my first question is just kind of (technical difficulty) --

Hello?

We dropped Chris.

Joe Hudak, Wachovia Securities.

Hopefully, I don't get dropped. Just a couple of things -- any comment on the state legislatures that didn't pass gaming, particularly Ohio, Rhode Island, any impact?

We were not spending a lot of time in those that didn't pass. We have spent time on Pennsylvania. And luckily, Pennsylvania is still going forward. But we had not -- quite frankly, we had adopted the wait-and-see attitude on those jurisdictions, Joe.

Very good. Also, there's been a -- you guys have come out with a whole slew of really positive announcements, which hasn't been reflected in the stock price at all.

Right.

Could you give us some comment on that or a little bit of color?

Well, it's always disappointing for us that our stock doesn't react necessarily to what we think is extremely good news for the Company. But as you know, unfortunately, we can't control that. We have been as a result of the events and including the note transaction, we have been locked out of the market both individually and as a company for the bulk of the time that this dwindling down and this dripping effect on the stock has been occurring.

Again, we expect positive things after everyone sees our products at G2E.

Unfortunately, I won't be able to make that trip.

Eric Swergold, Gruber & McBaine.

Very bullish call today. Could you speak to a couple of items? First of all, the top line in the quarter looks like your momentum was pretty solid there, despite the number of changes and things you had to go through in the quarter. If you didn't have to go through all this restructuring stuff during the quarter, do you think you could have posted an even higher top line?

And then secondly, in looking at the new product set, do you have any idea what your kind of upsell rate has been as a percentage of the number of opportunities where you have been able to pitch the upsell on contract renewals?

Absolutely, Eric. Let me take the second question first. We have in each of the RFPs, especially now that we have beta sites for cashclub. We have our e-check cashing system already in place in 14 locations. We have continued to upsell that.

In terms of upsell, one of the things I should note is that in one of the large locations where our check cashing product was initially baited and then has been retained, we've been able to actually provide in excess of 100%, closer to 200% more cash to the floor as a result of that check cashing system. So the ability of us to upsell into our existing contracts obviously has been effective, since we're now going to 20 locations. But more importantly, the product itself upsells customers in the casino, which is of course great news for our casino operators.

Clearly, many of the customers that we've been talking with and some of those who have existing RFPs on the street have been waiting for the show in order to come out and see the demonstration of powercash. So we're looking forward to a lot of activity in our booth during G2E.

With respect to the top-line growth, I would leave that to Andrew to go through with you.

Is your question that it was a distraction during this quarter that we didn't hit other top-line things? Because we don't seem to have a top-line issue.

No, my point was you did have a very strong top line that I think exceeded all the analysts' estimates. But I'm wondering if given that you were focused on moving the switch, cleaning up the bank line and a whole bunch of other items, getting your new products ready for G2E that if you didn't have all those added items, you would have beaten the top line by even more.

Our sales efforts continue. We're out there every day hitting the customers.

Yes I mean obviously on the check cashing alone if we had not been focused on instituting the other technologies, we would've been rolling the check system out much more rapidly. And that clearly would have impacted the top line as well, Eric; you're right.

Then lastly, with this new convert out, can you give us a share count?

Well, the share count is 17.7 today. And then, when we issued -- with the new debt convertible, it's 2.5 million shares and then 312,500 warrants.

Chris Krueger, Miller Johnson.

I don't know what happened before, but I'm back.

Glad you're back.

I guess the first question just in a nutshell, would you consider this time period you're going through right now or this third quarter to be basically the bulk of the end of a transition period where going forward, we should see things go in a positive direction, whether it be gross margin, things like that? Does it feel like it's kind of near the end?

Yes, correct. You're exactly right under that. Again, I've been here for a full two quarters in this, and we had to clean up some stuff. But again, we've been implementing TNS switch, working on banking relationships, working on vault cash relationships. We've discussed on the last quarter we've done a lot of work here, and we think there's only positive stuff going forward.

Chris, from my point of view, we clearly are past some pretty significant milestones now that we have the technology in place and the products are moving into beta. So clearly, we're coming to the end of the cycle no question.

Any indication of how much your gross margin may improve next year versus this year or maybe at this time next year versus this time this year or some kind of time period like that?

I think in the last call I mentioned and I will reiterate these things, I mean from the processor changes that we've implemented by taking the TNS in-house along with the relationship with TSYS in there, a 20% savings on the processing line. So you can do the math on that one.

And then also with the check product, as we roll that out, we expect to save anywhere from 20 to 33% reduction in that line.

Last question, can you indicate how active your RFP activity has been monthly or quarterly or some kind of period like that?

Yes, we've been extremely active there. Currently, I believe there are five RFPs that are out for consideration that we have made presentations to. And we're in the process of preparing responses to I believe three additional RFPs at this point, Chris.

Good quarter and I will see you next week.

(OPERATOR INSTRUCTIONS). [Roy Grub], Private Investor.

Let's say I got a question regarding the cashclub. The industry has gone from coins to paper. Is this -- cashclub have the potential to eliminate the paper?

Yes, it's actually -- I understand the question. It's actually cashclub when put in combination with powercash.

Yes cashclub and powercash.

Right. When you add the two of those together, you have the potential to eliminate any need for tickets on a casino floor. Because then, you are truly in an electronic funds transferring environment that doesn't require people to carry currency to a casino and does not require a machine to spit tickets out in order for people to move their money from machine to machine. So you are absolutely correct.

Also, as far as the -- is it going to take a lot of scientists for these people to figure out this technology? And are you going to have your own training kiosks, or is something set up in these casino so that these people know how to implement this, not like the handheld which was being used at the bicycle clubs and more or less thrown in a drawer because there was basically no training involved in it?

No and that was clearly one of the issues when the handheld was first introduced in 2004. It's one of the reasons that we've discussed previously that I pulled it back so that it would work with all of our new technology and also us specifically. So we can provide a complete marketing program. And by that what I mean is that we not only go in and train the casino employees so that they can help casino patrons that may have any issues, but we also provide people on the casino floor once the product is introduced who can work with customers as well and walked them through what is necessary.

I mean the nice thing -- and you'll see this at the G2E show next week in Las Vegas -- is that the environment in which this works best is an environment that has an additional screen on the gaming device. And Bally's additional screen is called an iVIEW. IGT has their own version. Aristocrat has their own version as well.

These screens allow us to put up messages that mimic the ATM devices today. So it becomes very easy to convert a customer, who is accustomed to using an ATM, over onto the gaming device itself.

But we're still providing for the beta sites. And then for each of the sites, we will have marketing people involved in making sure that we have training both for the employees and for the customer base. Because clearly, that's going to be important in order to get quick acceptance and uptake of the product.

But how difficult is this going to be for the average individual to figure out? You can push a button and it gets your paper ticket out. That's real easy. But some of these things can be technically difficult.

Oh, sure. Let me -- perhaps I didn't give it a complete enough explanation in my prepared remarks. The ability to fund your wagering account from the gaming device is a series of functions that are mimicking the functions that you would use at an ATM today. So you request your cashclub function. You ask for credit or debit or check cashing. You then select an amount, we go out, we get an authorization, come back to you and show you the fee for that amount. If you say yes, we then come back to you with the message that the transaction is completed, and you now have x amount of dollars in your wagering account. How much would you like in the machine? You then select say a dollar amount -- y dollar amount down to the device.

When you are done playing, you pull your card out of the device and those funds are put back into the wagering account. When you sit down at the next slot machine, you put your card back in, you put your pin number in and you simply draw down the amount of money you want. You don't have to go through the funding of the account again. So, in our testing -- internal testing as we go through this, we're making this as simple and as easy as possible for the casino customer to be able to use this card to carry cash value around a casino floor.

Now cashclub has been beta tested at these two locations. This powercash is -- this is the first time this is out. It will be at the G2E show. I've heard this referred to these two things along with the wireless as the -- what the heck was it -- the holy grail of the cash access business. Was that overstating it or is that kind of still the feeling?

That's a little hyperbole. But at the end of the day, the whole purpose of casinos adopting ticket-in/ticket-out technology and doing it as rapidly as they did was to eliminate significant costs in their casino operations. Because cashclub and powercash will also eliminate significant costs to a casino operation, it's going to be in the casino's best interest to introduce these products.

The key is for the customers to accept these products as being the best method for accessing cash on a casino floor. And we believe that not only the security features around this of not having to carry currency, of not having to worry about losing tickets or tickets that have something spilled on them and become illegible and unreadable by the system.

But over and above that, the fact that most people today are accustomed to using cards in multiple transactions in their personal life, if not all transactions in their personal life, is going to drive the customer acceptance of the product as well. So in those regards, this is truly something the casino has been looking for as another way to reduce significant costs in operations.

Traci Mangini, ThinkEquity Partners.

I just had a question. Thank you so much for actually going over and reviewing the line items and gross margin on the savings, Andrew, from last quarter. Could you also refresh our memories on what you expect or an update on the vault cash agreement and getting that down? Was it about 30% or so I think and when would we expect to see that?

You're going to see a partial benefit of that in the fourth quarter here. And that was going to be roughly a 20 to 30% reduction in there. It's -- yes, 20 to 30% reduction.

Then, Mike, I apologize if I missed this, but could you go over just the Nevada regulatory situation when it comes to Stay 'N Play and also powercash, the timeline and what you expect to see for commercialization in that market?

Sure. Stay 'N Play was actually offered for consideration to the Nevada regulators before I joined the Company, and it was in 2004. And at that time, Nevada neither approved it nor disapproved it but simply requested that the Company supply additional data to the commission in Nevada from other jurisdictions of where the product has been introduced. So we will start gathering that data both from the beta operation but also as we start spreading the product throughout.

I would want to collect a few months at least of data in order to provide something to Nevada to show them both the efficiency and effectiveness of the system but also whatever social impacts might be gleaned from that kind of data. And so, I would anticipate something on a six-month time frame before we would be prepared to come back in Nevada with a handheld wireless device.

Powercash -- however having said that, obviously that is only the Nevada marketplace that we have that restriction in. We clearly can place this in other jurisdictions. No other jurisdiction has said no to us so far. The powercash product requires Nevada to do a laboratory test and then ultimately have the board and commission approve the modification to the Bally systems that we will be interfacing with.

The actual procedure for doing that is generally administrative and it's not difficult. It's a technical test. However, it's clear that in Nevada, we're going to have probably hearings around the question of responsible gaming and whether this will have an impact in responsible gaming.

As you can imagine, we're preparing for those hearings. We know that they will come. But initially, our intention is to launch this product in Native American casinos and in non-Nevada jurisdictions. Because as you know, more than half of all of the gaming revenues in North America are coming from outside of the state of Nevada. So we have very large target market to penetrate before we need to come back and have those hearings here.

So I would not anticipate that we would be focused on a Nevada approval of powercash for something beyond the six months, maybe even in a 12-month time frame. And in the meantime, we will be distributing powercash throughout the rest of North America.

[Fred Butson], Private Investor.

I think Traci kind of answered my questions or you answered my question for Traci. I was going to ask you I'm in Las Vegas for the winter, and I was going to ask what casino has the most full-blown system that Cash Systems has. And it sounds like with your answer to her, we don't have it here in Nevada yet and won't for the (multiple speakers).

Right. Of the three products that I've talked about so far -- the handheld device, cashclub and powercash -- the only one of those three products available in Nevada currently is the cashclub product at Boomtown Reno. And it is on beta test there. But powercash is not in Nevada yet, and the handheld is not either. You are correct.

[Rick Rough], Private Investor.

A couple questions. Are there any Las Vegas or any large casino contracts ready to expire that we will be working on in the near future?

Yes. When I joined the Company in January of 2005, most of the major casino operators either had already determined on their RFP who their provider would be or they had already had their RFP presentations completed and were in the process of making that selection. So all of those have already been given to other cash access providers.

The first of those I believe that's going to come up will be toward the end of '07. And then, others will come open again in '08 and '09. And we will be bidding on each of those.

One of the interesting aspects of introducing new products in this business is that some of the casino operators, including some of the larger ones, include in their contract with their cash access provider a requirement that the cash access provider must provide any new technologies that are distributed in the industry within a particular period of time or the contract comes open for rebidding. So there's always the outside possibility that one of those contracts may open up as a result of the technology that we're introducing.

Somebody that already has a contract can't get your new technology until the contract is up or that legal stipulation comes through?

Right. Unless if they have a technology clause, that's right -- one of those two ways.

Are you hiring new personnel at the moment, sales or--?

Yes, at this point, we're fairly stable in our employee workforce. We have about the right mix. We always have vacancies in our employee workforce, but we're not significantly expanding it, no.

I read an article -- it was a news article from last weekend. It seemed as though there was a person that was the anti-gambler type, and he mentioned that this might also be good for the heavy gambler to be able to restrict his taking of money out of accounts. Is--?

Right, you know that's absolutely correct. We have actually designed the products, both cashclub and powercash, to allow anybody who thinks that they may have an issue with gaming to limit the amount of money they can receive from any of their sources of funds through our system on a 24-hour basis. So, a customer who is signing up for cashclub and ultimately a customer using powercash will be able to limit themselves to any dollar amount they think is appropriate for their purposes in any 24-hour period from our systems.

In addition to that, if a customer believes that they have a real problem with gambling or they have a disorder, they can ask us and we will exclude them entirely from our system so that they will not be able to use any of our products including ATM devices.

Do actually the anti-gambler people or groups ever come to you with this type of a question about your technology or do you speak to those people?

Oh, we do. We have conversations with -- we've had conversations with both the national council as well as local councils on problem gambling throughout the country.

So this might work as a positive on their end too?

We believe that this is another tool that can be used to help anybody who thinks they have a gambling problem help themselves. Absolutely.

Roy Grub, Private Investor.

One last thing I would like to bring -- you made the statement that you've been locked out as the stock has been dribbling down.

Correct.

As an investor, I would like to know when that restriction comes off. And also, I will see you at the G2E show on the 14th, 15th, and 16th.

Great. We look forward to it. Our policy is that we may not be in the market for 48 hours after this call today.

At this time, there are no further questions. Mr. Rumbolz, are there any closing remarks?

No, Operator, thank you very much. I just would like to thank all of you for being on the call today. And for anybody who can make it to G2E, we certainly look forward to seeing you there and showing you our new products. Thanks again.

Thank you. This does conclude today's conference call. You may now disconnect.