Everi Holdings Inc (EVRI) 2006 Q4 法說會逐字稿

Welcome to the Cash Systems CKNN 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. Please go ahead, sir.

Thank you, Operator. 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 strategy 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 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'll undertake no obligation to update any forward-looking statements that we may make today.

With that said, for the fourth quarter of 2006, revenues reached $25.4 million, a 55% increase over the fourth 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. Organic revenue growth was approximately 24%. The increase in cost of sales reflects the increased commissions and processing costs and to a lesser extent, check cashing costs, and armored car services all of which are directly related to our revenue growth. These costs did grow slower than our revenue which led to a gross margin improvement. As gross margin reached 23.1% versus 16.1% in the prior year quarter. Gross margin is defined as revenue less commissions, processing costs, check cashing costs, and armored car services. Our cost initiatives in the cost of sales line items are starting to show improvements. That improvement was also achieved despite the continued shift in revenue toward lower margin ATM revenues. As we've stated before, in order to get our All-in-1 functionality deployed on the ATM, we had to take over the processing of ATM business at certain locations with little to no margin.

Importantly, our payroll costs and professional fees were down compared to last year's fourth quarter; however I have to note that we did a reclass of $472,000 of Board stock comp expense from payroll to other G&A in Q4. With adding back the $472,000 to the payroll, we are flat to the prior year quarter in the payroll line. In total, SG&A related expenses declined $184,000 from prior year. For the quarter we generated $336,000 in EBITDA, compared to an EBITDA loss last year. Depreciation and amortization increased to 880,000 which reflects an increased appreciable base from capital additions in the IGS acquisition. The IGS acquisition accounts for $416,000 of this increase. Higher interest expense is a result of the increased borrowing outstanding with the IGS acquisition, the convertible debt deal as well as interest on our vault cash agreement. Of the 1.3 million of interest expense, approximately $700,000 related to the vault cash agreement and $286,000 related to the new convertible debt, and $214,000 to the old line of credit credit and $100,000 which related to the write-off of our old debt issuance cost and expensing of our new debt issuance cost.

The income tax line reflects a write-off of our deferred tax assets in the amount of $5.2 million. We fully expect to take these back in future periods when the Company shows profitability again. From a balance sheet perspective, we finished the quarter with over $24 million in cash. Capital expenditures for the quarter were $942,000.

Now on to guidance. For 2007, we expect revenue to grow in excess of 20% to between $115 million and $120 million. We expect material operational leverage from revenue growth and cost containment to generate positive EBITDA in 2007; however, we are not giving specific EBITDA or net income guidance at this time because a significant portion of our forecasted operational improvements in 2007 should occur in the second half of the year as our new products are commercially launched, although we do expect to generate positive EBITDA in every quarter of the year.

The timing of the business improvements are still too difficult to precisely forecast at this time. Some of these improvements include higher margin sales of our new products and services that are subject to testing periods before a customer actually rolls out the product throughout its casinos.

We have signed new contracts which are expected to be installed in Q2 and throughout 2007. Mike will speak to that. While we are not giving specific EBITDA guidance at the current time, we do want all of our analysts and investors to recognize that our business has potential operating leverage, tremendous operating leverage, meaning we operate with a substantial amount of fixed costs where increases in volume and revenue can translate into substantial increases in EBITDA from quarter to quarter. We expect our current plan business plan to generate long term EBITDA margins that will be in the low double digits. We believe that's achievable based on our continued revenue growth and the higher margin potential of new products and services. 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 by talking about our strategy and our outlook for 2007 and beyond. We have intellectual property and proprietary products that we are confident will drive a long term replacement cycle in cash advance technology that will generate substantial profitability and shareholder value. Our joint venture with Bally and Scotch Twist has patented technology which we debuted at G-2 E. PowerCash which is the first product of our joint venture will change the way casino players access their funds on the casino floor in the future. Once patrons have enrolled in the Casino Players Club program with our cashclub functionality, they will be able to access funds from their credit, debit, or checking accounts while seated at a gaming device. Players will be able to request funds from their designated account, transfer those funds to their player's club wagering account and then transfer down to the credit meter on the gaming device the amount of money that they want to put in play. This disruptive technology will be the first cash access product that allows a truly cashless casino floor.

Our upcoming beta test of PowerCash should also provide us with with both customer and technical feedback to prepare us for a full blown commercial product launch in the second half of 2007. As we prepare for that launch, I'd like to take a moment to review how previous introductions of disruptive technology have impacted the gaming industry. I think this is important because as many of you know, new technologies have caused rapid replacement cycles in the gaming industry in the past. Remember the shift from coin in to bill acceptors? The slot machine market took less than three years from when these products were first approved to the point at which they penetrated the majority of the installed base and what about TITO or ticket in, ticket out. TITO took about five years from initial approval to reach approximately 80% of the gaming devices installed in North America.

So what can we learn from these past examples of technological change on the slot floor? Well, first, we believe you can expect PowerCash penetration to occur over a similar period of time. Although replacement cycles based on major technological improvements have occurred rapidly, they have still required multi-year cycles. Secondly, based on the timing of these cycles, the near term impact on financial performance was always extremely difficult to predict. Now with that said, the long term impact hasn't been hard to predict. Technological change creates substantial profits and shareholder value for those companies that develop it and bring it to the market.

Now for those of you not familiar with the story, one of the major public Company beneficiaries of TITO saw their stock increase tenfold from 2003 to 2005 as a result of just that technological innovation. And my third point is that early adopters of the technology will prove out the substantial benefits of introducing such innovation to their casino floor. There are many naysayers when bill acceptors came to the market. They said the devices were too bulky or caused too many bill jams and down time on devices. Remember when people said that TITO would never work because customers like to hear the sound of coins hitting a tray? Why did these products work? Well, they worked because creating more efficient ways for customers to access funds and thereby play slot machines also creates customer and casino efficiencies. Historically the casino industry has consistently adopted technologies that create efficiencies and provides a substantial financial benefits that come with them. So what's next for PowerCash?

Well, we'll continue our beta work through the first half of 2007 to prepare for a full commercial product launch in the second half of the year. We then expect to sign a number of deals with early adopters and once we've acquired data from these installs, we then plan to take our casino and customer findings to the major regulatory bodies in both Atlantic City and Nevada some time in 2008.

While we've been working on PowerCash, we are also introducing products that create a seamless solution for our casino customers. At G-2 E, we showcased cashclub which as many of you know enables existing players club cards to be used at an ATM machine for credit, POS debit, and check cashing transactions with the patron receiving their cash directly from the ATM. This means that players get back to the casino floor immediately instead of waiting in lines at the cage, and it gives the casino operator the additional benefit of removing pressure from their cage operations and reducing their cage currency requirements. Cashclub is in beta sites today and we are fine tuning and tweaking this product offering based on these field tests. We expect to have our next released version available for cashclub in the next few weeks.

We also debuted E-cash systems and E-cash checking at G-2 E, which are products that were developed by Indian Gaming Services, the Company that we acquired this past February. E-cash system is a web-based software that facilitates the access of funds from credit and debit cards within a gaming environment through the casino cashier cage and it does it one simple and easy-to-use application. E-cash checking is our new check cashing and check guarantee product. This product is already deployed in 25 locations and we expect many more locations to install over 2007. E-cash checking is the fastest check cashing technology available in the industry. After an initial application, casino players can cash checks in less than eight seconds. In addition, E-cash checking eliminates the need for depositing of checks thereby reducing the casino cashier's workloads and we're currently working to implement this at all of our existing customers especially since we're currently using a more costly third party application.

Once fully implemented across our customer base, we believe we'll realize additional cost savings in our check cashing business. And once our commercial installations of PowerCash have begun, we will reintroduce our table game solution, Stay 'N Play as an integrated product allowing players to access their PowerCash accounts in the pit area as well as on the slot floor. This product suite of cashclub, powercash, Stay 'N Play and E-cash checking will provide casino operators with financial service coverage over their entire casino floor, and most importantly, we will deliver our services to the customer of the casino at any location on their gaming floor.

Now with this set of product innovations, we are very confident in our technology path and we are continuing to execute against the plan that we developed in 2005. From a financial standpoint, we're very excited about the future of the business. As Andrew said, we expect 2007 revenue to grow in excess of 20%. To that end, we've recently announced that we've acquired three new contracts. Today, we included the new Meadows Casino in Pennsylvania to our recent additions of Canterbury Park Racetrack and Card Club and the Choctaw Nation of Oklahoma casino operations.

Over the last two years we have developed a highly scalable, processing business engine, and a financial model that has substantial operating leverage. As our new products hit the market and generate incremental revenue and as we continue to win new accounts, these increases in revenue can add materially to profitability. Our technology path gives us a high degree of confidence that we can generate long term EBITDA margins in the double digits.

Now while I don't believe that we'll get to that double digit target in fiscal 2007, we do recognize that we have an obligation to our shareholders to bring our business and our technology plans to fruition. Last week, we announced that I've extended my employment contract to show my committment to get this job done, and I've shared our shareholders frustrations with the short-term stock price volatility. I can assure you, we are dedicated to creating long term shareholder value. For those of you familiar with my background in the industry , I hope you'll appreciate that while it took time, we were able to create substantial shareholder value at both Anchor Gaming and Casino Data Systems by introducing new, groundbreaking technologies to the gaming industry, and I believe we have the same unique opportunity here at Cash Systems. I look forward to reporting our progress to you in the future. Operator? With that we would like to open it up for

Thank you. [OPERATOR INSTRUCTIONS] We'll go first to Traci Mangini with ThinkEquity Partners.

Thanks. Hi, guys.

Hi, Traci.

Just had a question on the guidance on the top line. Can you tell us how much of that is incorporating the new products, if any?

Well--.

A portion of that is, Tracy, but given our growth both organically as well as the new contracts that we already have in place, we're comfortable that we'll be able to reach that easily in '07.

It's actually not that material to that top line number.

Okay. And then just on the commission line item, maybe Andrew, can you go over it in a little bit more detail again why that number came up a bit? I realize it's a mix of ATM but just kind of remind us on the background there?

Well, again at the same time, we renewed the Seminoles as well so we had a slight split change there but basically, it's a little shift in the ATM margin where we go out and take over some ATM's and basically to get our All-in-1 ATM, -- All-in-1 functionality on the ATM, we basically, we take over and pass through all of those revenues back to the existing ATM provider.

Okay. So is this kind of a good number to ramp off of going forward until we see new products coming out?

I believe so.

Okay. And then on the check cashing side of the business, it looks like, I mean those numbers declined in terms of the costs of it declined dramatically. Is that a function of the -- more the new check cashing product or also just a function of the percentage of revenues that came from check cashing?

No. Mainly with the rolling out of the E-check product itself. Again, we did a pretty good job of managing bad debt expense which is part of that number at this time.

Okay. And then just lastly, Mike, can you remind us where we stand with the regulatory approval for Stay 'N Play in Nevada?

Yes, Stay 'N Play, Nevada made it clear they didn't want Stay 'N Play to come back to Nevada until we had generated some factual data in other jurisdictions, and so we'll bring that back to Nevada at the point in time that we have had enough information that we feel comfortable telling the regulators this is what it does or what impact it can have in a given jurisdiction, but I would at this point assume that we'll bring Stay 'N Play back probably in '08 as well as PowerCash.

Okay, thank you.

We'll go next to Chris Krueger With Northland Securities.

Good afternoon, guys.

How are you doing?

Good. A few of my questions were already asked, but the new contract with Meadows Racetrack, it looks like it could be as big as 3,000 slot machines once it's completed. How does that rank with your current customers? Would that be one of the top two or three casinos out there for you?

It will be one of the largest casino customers that we service, no question, and as you can see from the release, they will be the closest casinos to the Pittsburgh market.

Right. How about other opportunities, I mean, are you guys bidding or presenting for a variety of other things that are in the pipeline right now?

We are. We have approximately five that are already submitted recently and we have at least five more that should be in one stage or another of the RFP process here in the next three to five months.

And refresh my memory. Probably in the mid to late '05 that you hired a Head of Sales and kind of organized that group. Can you see real progress being made in that regard with these presentations? I mean, do you feel better about your chances now than maybe a year ago?

Well, I think it's a combination, I do, Chris, and I think it's a combination of the presentations, the professionalness of the sales staff, including the ISOs that we have and in addition to that, it's the excitement that gets generated around having the product set that we've developed available to them during the course of the contract that they would sign with us. As you know, our contracts are three to five years and so a large portion of our presentations is around how these products would interplay on their casino floor.

Okay. Any other key hires that need to be made yet in '07?

The person that left the Company and Chris had a strong background in the processing business. We've been using outsourced processing expertise in order to fill that gap. We will continue to look for someone for the operating role but it isn't something that we feel is pressing at this time.

Okay. Last question. This morning, Bally Technologies announced a contract with the Chickasaw Nation to provide, it looked like various systems to replace a different provider. I don't know if you saw that yet but there's a comment made that Chickasaw wants to use Bally's technology to introduce common Players Club across all of its locations. Just in general if you look ahead to when you start rolling out these joint venture products, is this a good sign that that could be an early adopter? I certainly would read it that way. I mean, obviously they are already our customer and we've had lengthy discussions with them over the past year. Showing them the benefits of the PowerCash product and how its interaction with the Bally system is going to revolutionize the slot machine floor, so I think you can read it that way safely. Okay, that's all I've got. Thanks.

Thanks, Chris.

Next to Gary Prestopino with Barrington Research.

Good afternoon.

Hi, Gary.

I'm glad you signed up [Inaudible - audio difficulties]. Could you hear me all right because I'm on a wireless device ?

Yes, you just broke up a little bit there, but we've got you now.

Okay, just a couple of questions. What was the option expense for the quarter?

For the quarter, about 38,000.

Okay. And then as far as the agreements or the deals you signed up to lower your processing costs and your vault cash, is it safe to assume that you didn't get the full impact of that in the quarter because they kind of came maybe mid to late quarter? Is that a safe assumption?

I think we've got pretty much the full impact here. Our 23% gross margin is the best we've had. Again, we're still looking for two points out there for the next quarter so we can see and roll from there. I think we got the benefit.

Okay, and as far as the beta test with PowerCash, what are you looking for and what is your test partner looking for? Certain milestones that have to be hit so you can roll this thing out into the market in the second half, obviously functionality is one thing but it is also the increased usage, more cash on the casino floor. Can you help us out with that?

Yes, actually there's a variety of things that we're going to be looking at carefully. Obviously first and foremost you're right, Gary, is functionality and making sure that it functions as designed and provides the security safety and the speed that we anticipate it's going to, so we'll focus on that very carefully as well as the security side of the system to make sure that we've put all of the safeguards in place that are necessary to make sure that this is a safe and secure system for both the customer and the casino.

In terms of player acceptance and the casino's interest in monitoring the players use of the product, a couple things we're going to look at. Clearly, we want to see how quickly those players that are currently cash access customers convert over and start using this, because that take up rate will be important, an important indicator of customer acceptance, but we also want to see how quickly we can bring the occasional cash access user or even those people that aren't currently using cash access across to using this product, recognizing that it provides both security for them but also allows them to manage their money very easily and very safely, and so we're going to be looking at that broad spectrum as well and then the casino is looking at a variety of things. Clearly, reduction in their needs for currency around the casino floor, the ability to reduce and ultimately at some point eliminate the need for all the paper that is currently generated under the slot systems that are out there, either TITO or otherwise, and the numbers of devices they needs they need currently for redemption around casino floors. They are going to be looking at all of those as indicators of potential cost savings to themselves, so in a nutshell, those are the kinds of milestones that we would look at as the product goes out.

And this beta test will be finished by the second quarter -- end of the second quarter?

It should be, yes. We would intend that it would be across the entire casino floor in the beta location in the second quarter which would be a definition for completeness.

And then just the casino industry, particularly the area that you're in, if one starts adopting, the others should fall into place?

Yes, what happens and it was in my prepared remarks part of what I was trying to indicate is there are always early adopters in the gaming industry and those are the casino operators that are either convinced that the product in fact has the savings as well as the efficiencies that you've outlined for them, or those that simply are always willing to try something new and different to see if they can receive a competitive edge from a new product. Once those adopters have proven out the product's value, then you very quickly see others start lining up. And the other valuable thing of having a beta test site is the ability to take existing customers or customers that we're trying to acquire to the beta site to show them the product in action being used by casino patrons and allow them to get an understanding of how it actually works in the real world.

Thank you.

We'll go next to Joe Hudak with Wachovia Securities.

Hi, Joe.

Good afternoon, guys. Traci and Chris, they actually asked just about all my questions, so I'll just ask one. Mike, you made comments before about enhancing shareholder value, and you've done it through contracts and new products but the reality is that we're still down below last year's levels.

Yes.

So what do you see on the short-term and longer term horizon to really bring pure value to the Company?

Well, as you know, Joe, it is extremely difficult for us to be pushing the stock price around on a daily basis, and from day-to-day the investment decisions that people make are going to be driven by their longer term views of company's opportunities and growth profiles. I think what we have been doing and what we will continue to do is probably the best thing to ensure that and that is to make sure that we stay true to the business plan and the product plan that we have put out, to actually get the products into the marketplace and start creating the excitement around the product mix that drives new customers into our core business, but having said that, at the present time, we have a processing engine that has the capability of accepting significantly greater volumes than we're putting through it today and so certainly we continue to look at ways of increasing the volumes that we put through our processing business in order to increase both EBITDA and get to profitability in that core business, so we are continuing to be focused on both new customers and other books of business that may come available.

Great. That's pretty much what I wanted to hear, and then on the other quick question I had on the contract side, how much are you looking at, you said you had five--?

Well, we have five RFP's that we've responded to and made presentations on, and so the decision is with the customer now as to who they go with, and there are at least five others that we know will be coming out in the next three to five months that we'll be presenting on.

Okay, great, and then as an add-on to that, how many contracts do you have that are in the process of being renegotiated or coming up for renewal?

Well--.

Only one significant one out there which we've renewed every year for the last five years.

Okay.

Yes, the largest one out there, Joe, was the Seminole contract and we renewed that and you'll see when we file the K, that we only have one customer that is greater than 10% and that is the Seminoles.

Okay, great. And the last question is right now we're standing around $25 million in cash, going forward with this big swing to the revenue side that you were projecting, what do you see cash going forward barring acquisitions?

We have sufficient capital to move forward with our current plans.

Yes. We're not going to put a projection out there, Joe, but we know we've got enough cash to handle where we're headed.

Finally, just for another real quick bookkeeping and housekeeping, what's our headcount?

I think the number is 265.

And going forward, same, higher?

Same except for if the new locations, if they require a booth operation, then we'll have some booth employees.

Okay, great.

The majority of those employees are in our booth operations today, Joe.

But the infrastructure here is place.

Very good, thank you.

We'll go next to Eric Swergold with Gruber and McBaine.

Thank you, I've got two questions, one a rather mundane question on the accounting charge that was taken, is there any forward impact on the forward numbers from that charge?

No, other than we will have to get to profitability next year for us to be able to take it back, so it's not going to be a quarterly exercise of popping in each quarter. It will be next year, same time. Before we have that ability.

Does it create any NOL for you or anything like that?

Our NOL's still exist today which is 15.5 million.

And then you mentioned with regards to new products, you're in five sort of process right now and then five RFP's separate from that.

Yes.

Can you kind of total that all up, can you give us a ballpark of what that -- obviously you're not going to win them all but you'll hopefully get some percentage of them? What would the total ten represent in terms of dollar revenue volume?

Well, we don't break it out. The five that haven't come out yet, we don't have the inside information because we're not the existing provider, so we don't know what the revenue numbers are in there. We have our own estimates. To be honest with you, I don't feel comfortable sharing all of that publicly because I'm not sure that our competitors are necessarily familiar with the ones that we're familiar with.

Okay, fair enough. Thank you.

Thank you.

We'll go next to [Greg Leber] with [Kurran] Capital.

Hi, Greg.

How are you doing? To do the '07 numbers do you need to win any new deals?

To make those work?

Well, we have the new locations coming on board. Yes, we do need to win a few locations.

Yes. The three that we have plus we will need to win some more but it would be a combination of some wins that would be comparable to our position, our share of the market today, so winning our fair share as well as the organic growth that we anticipate.

Right. That would be baked into the other number so you got to have some wins because at one point you were guiding to no wins in terms of the growth, right?

I'm sorry, you talking about last year?

Yes, the last couple years.

This has baked in it existing business plus a small portion of that will be from new casino operations, yes.

Okay. And could you give us a sense of what your organic growth was in '06 if you pulled out some of this ATM pass through business? Did that have much of an impact on that?

Well, we had 24% organic growth. Without the ATM -- increase in ATM revenues year-over-year, this year we ended up with 38.5 million of ATM revenues on $96 million. Last year was $22.3 million on $63 million of revenue in there, so I don't have my calculator in front of me, but -- you can pull out that ATM revenue.

So 35% versus 40%, went up a little bit.

It's 40%.

It's about a 5% increase. Not all of that was at 0 margin but a good chunk of it was.

Okay. Could you give us a sense of maybe some of the penetration then, given that you'd mentioned the ATM was driven by like three and one? Could you give us a sense of how penetrated that is in your base now?

The All-in-1s?

Yes.

The All-in-1 are I believe on well over 85% of the ATM's that we have out there today. And those that we wouldn't would be ones that as contract renewals come up, we would include an upgrade of a new ATM that would be able to take the All-in-1 functionality.

Okay. And what percent of your customers today are you providing check cashing for?

Boy, I don't have that number.

Yes, I don't either.

But I know that we have with the 25 locations that we have in already, we probably covered in excess of 70% of our check volume in terms of the number, or the dollar volume of check writing through the business.

Okay, that's helpful. So, back to the point about lower cost there for check cashing. You said due to less losses? Did you make it a change in your assumption of losses there or this is just absolute losses?

No, this is absolute losses. We've gone out and rolled out our E-check product of which we now guarantee the checks. We have our own product that we go out, bounce off a credit database, come back through a financial model and set up our credit line basically for somebody which allows them to cash checks, versus going through a third party which would guarantee the check and charges a couple of points.

We manage our own bad debt on this and then we use a third party for collection purposes.

Okay, so you're still kind of seasoning, I guess you know pretty quick whether or not the thing went bad, right?

Yes, exactly.

And we have a good collection rate as well.

We have a very high collection rate and remember, we have the information on these check writers because these are locations that were under contract to us.

Beforehand, right?

Right.

So at this point you're not going to try to rollout the check cashing product to the non-check cashing locations yet.

No, not yet.

Right. Okay. I think that does it for me. Thank you very much.

Thank you.

We'll go next to [David Bernstein] with [Vanadium].

Hi, good afternoon. I just wanted to ask you, I think Andrew mentioned that you're trying to get an additional 2%. Is that what I heard earlier in response to somebody else's question in the gross margin after the question about was this fully -- the 20% cost of goods sold improvement that you expected, you got that but now you're targeting another 2% is that what you said Andrew?

No. I said this is the best gross margin at 23.1% for the quarter in there and I project we're going to do 20% or plus of that going forward, but I wouldn't expect beating 23.1. Until I get a second point, i.e. next quarter, let me get another barometer.

When he said two point, he meant a second point in time.

Oh, I thought you meant two point.

No, no, a second point in time to measure it against.

Oh, okay.

I'm glad you clarified that.

So it looks like if I'm correct, if I, I guess add back some stock compensation, what is your adjusted EBITDA, about 3.5 or 3.4%? You said 400,000 is reported but it looks like if you did about 3.4% EBITDA margin and thinking about a bridge going forward, how do I get to even move forward towards the 8% if this is sort of the best, help me out. Do I have SG&A savings? Do I have payroll savings? How do I beyond just the leverage, how do I improve the percentage?

Well, again, we continue down the path on cost containment side here and our initiatives on the cost of sales have been working. At the same time, we need to drive more revenue through. We project that as well.

And part of the, I mean the second half of the year with the new products, the revenues that we are anticipating from those come in at very high margins, and I mean extremely high margins. They are basically, it's software installations that we're doing.

Right, but your guidance, I think you said to an earlier questioner's question that your revenue guidance for '07 did not really include a lot of contribution from new products. Is that accurate or not?

Well, no. I just said it wasn't material to that number, that grand number.

Okay. Is there anything you can do on the, is that again it looks like combined payroll and SG&A is about 19%. Is there anything you can do there without waiting for the new revenue or is that pretty much what we should expect as well?

For the short-term being the next quarter that's what I would expect; however, we continue down the path to try to consolidate some things.

Okay. And I think that's it. Thanks so much.

Thank you.

[OPERATOR INSTRUCTIONS] We'll go next to Rick Petersen with True Capital Management.

Hi, gentlemen.

Hi, Rick.

Future looks great, and Mr. Rumbolz, I'm glad that you signed your two year contract extension on there. I was very glad to see that.

Thank you.

But as a Private Investor, can you explain more on this $0.40 loss? As late as the third quarter, when you were reporting in the fourth quarter, you said that you would be profitable in fiscal fourth quarter, and I guess for most people this must be something that everybody understands because nobody has asked the question, but from a worst case scenario, we're looking at a minus $0.03 and now we're coming in at a minus $0.40, I'm having a hard time understanding that.

Yes, and I understand and the $0.40 is the $5.2 million write-off on the tax side, but even before that though, I mean, basically from the top line revenue side, we had projected that we would have a little more revenue and then interest expense came in higher than we had expected.

But you were into the fourth quarter when you were making these assumptions that you would be profitable. Now for adjustments on this tax issue that you mentioned of of the $5.2 million, where would you have been without that adjustment?

Well, it would have been 1.8 million times--.

Is that what it is about $0.10?

I think it's like $0.06.

Minus $0.06?

I believe so. But at the same time, again, the last quarter we gave that guidance it was November 9, in there so I don't know about half way through the quarter or into the fourth quarter.

Right. At that time did you know you were going to take this income tax provision?

No. No, certainly not.

All right all I got.

Okay.

Thank you.

And we'll go next to Nick Danna with Sterne Agee.

Good afternoon, guys.

Hi, Nick.

Two detail questions and then I guess one bigger picture. When you look at the $2.5 million in payroll for the quarter and the $2.5 or so in other, how much of that was associated with the one-time item?

The $472,000 for the quarter was a reclass of the Board stock option expense. That was a year-to-date piece, but for the quarter itself, only $38,000 was stock option expense.

Okay, so the -- so those are basically good numbers to go forward with?

Yes.

And what was the increase, because other SG&A had been running more in the 1.6, 1.7 range a quarter. What's the increase there?

I think it's -- I think after you back out the 472 or so in there, I think we're kind of flat or up 100 grand over last year, and I think we're actually down from the prior quarter. I don't think we're really up.

Okay, so then the other would be two a quarter going forward?

Yes.

Okay. And then interest expense, the 1.3, was that -- did that include a full quarter of the new note convert?

Yes, it included -- well actually, it excluded 11 days of it, however we got a little dinged on the way out from our previous bank, so it was October 11, that we converted that.

Okay, so the combination of the convert plus the vault cash would put us around the same level going forward?

It should be less, actually.

A little bit less?

Yes.

Okay. And a bigger picture, when you look at the rollout of PowerCash and the pricing of that, you talked in the past about I guess several components and up front fee per, I guess per transaction fee and then the overall transaction still being priced in a similar way to it is today. Can you sort of refresh our memory on those numbers?

Yes. I mean, we've publicly stated that we were going to sell licenses on a per game basis for $250 a unit, a 20% annual maintenance to that for the module to go out and do that and then at the same time, we were going to charge a convenience fee to be split by the joint venture partners of $1.50 split three ways so $0.50 contribution to ourselves, and we also talked about potentially doing split change out on the floor as well of the fees.

Okay. And so those fees would all be on top of whatever fees are associated with doing the debit transaction and doing the credit transaction?

Correct.

Okay, thanks a lot, guys.

Thanks, Nick.

And we'll go next to [Alan Margolis] with [Forsman Left].

Hello.

Hi.

Just a follow-up, more specifically on some of those questions, actually. I respect the fact that you don't want to give any kind of guidance regarding the bottom line and that you want to give the top line, so I'm trying to figure out what the swing factors are in the expenses because like the gentleman said before, you were about a month into the quarter and you're still coming up short so I just want to see what the issues are. On the payroll side, if I look at your income statement, it's $2.5 million based on what sounded like some one-timers, that should be more at at the $2 million level going forward.

No, I think that's a good number.

Okay.

That's down about $0.5 million from the prior year quarter.

Right, okay. And on the interest expense side, so you got dinged?

Yes, with the previous bank.

Right.

Exactly.

Okay. So that should be closer to 900, between 800,000 and 900,000 going forward?

Well, it all depends on the vault cash outside, how much vault cash I have out in the Street.

Okay.

Meaning we all can do the $20 million interest calculation, but the vault cash is something that varies.

Okay. And on the gross margin, the gross margin do you think should be at least, it doesn't sound like you want to anticipate that growing, but it should be stable?

That's correct.

Yes.

Again we believe it's going to be over 20% or greater gross margin percent but again until we get another quarter under our belts with rolling out the check cashing products and the processing side as well.

Right. So what's the swing factor in some of these expenses as you rollout some of those products as you go through beta and I imagine some of the early adopters will get some pricing incentives things like that, those will be the swing factors to any of the numbers we just discussed.

Correct.

Yes. I wouldn't expect any price incentives.

Okay.

In these betas. I mean, we may not start charging for some period of time but we're certainly not going to undercut in order to put the product in.

Yes.

So we're not going to reduce, in a location we're currently operating in we're certainly not going to reduce our current level of revenues from that location simply to put the product in.

Right. All right, thank you very much.

Thank you.

And we'll go next to [Bill Benjis] with [Lantern Lane] Capital.

Hi, Bill.

Quick question for you on the rollout of cashclub. You said you were rolling it out at Agua Caliente. What's the timing of that and can you maybe talk about what you're doing differently as compared to the beta sites in Delaware?

Actually the next version is where we intend to include the ACH capability with the product which allows electronic check cashing.

Okay.

And that's the version that we've been working on while the betas have been ongoing. With the Agua Caliente, we've actually rescheduled it twice and it's based on the casinos marketing schedule. As you know casinos have events and they have invitations that they send to players for various things and we've been trying to get shoe horned into the marketing schedule in order to do that because part of the product launch has to be the marketing department of the casino contacting its customers and pushing the product at the same time, so it currently I believe is scheduled for some time in late April at Spa Agua.

Okay. And then on the PowerCash side, do you have beta sites up and running yet or is that still not--?

No. We don't have a beta site up yet. We're at a point where we are beginning our testing between Bally and ourselves in the systems. We'll be putting it into the beta site laboratory so they can look at the testing and get the results and then roll it out on their floor. Probably initially in a small number of machines and invite a small number of their customers to start experimenting with the product and then ultimately start rolling it across the entire casino floor.

Yes.

That will be occurring over the rest of this quarter and into the next quarter.

And you haven't announced that site?

We've been specifically asked by the beta site not to make the announcement yet. Okay. And then lastly, maybe bigger picture, just be curious to get a feel for how you're working with Bally, like for instance, on the Chickasaw deal that they just signed up, how closely are you working with them when you look at the launch of PowerCash, maybe you can speak to that a little bit. Sure. We've been working very closely with Bally over the last probably eight to nine months as we have put our salesforces together, we have done joint presentations with both our salesforce and their salesforce in the room. We have -- amongst our salespeople, we have exchanged the leads and have offered one another the opportunity to talk to the others customers, and frankly, with most presentations now, if PowerCash is going to be a component, you'll see members of both sales teams in the presentations.

Okay. And is it a part of basically all of their systems sales, new system sales going forward or is that a little bit too aggressive?

Well, it will be part of all of it. That's not too aggressive. It will be part of all of the new system sales as they module available on each of the systems that they have available. As you know, they have three primary systems in the market today and PowerCash will be available on all three of those.

Yes. So when they are out there pitching new system sales, are you along with them on every new system sale pitch?

Not every one, no. I mean, they have a much larger sales staff then we do. We're the ones that they feel it's important for us to do their to do the presentation with them.

Okay.

And vice versa.

Okay. That's great. Thank you.

And we'll take a follow-up from David Bernstein with Vanadium.

Sorry, Andrew, just wanted to make sure, in the press release it says 700,000 -- 0.7 million of stock option expense for the year. That's correct?

Yes.

And then the way I look at it in the past couple quarters it looks like you've got only 300,000, so I was backing into 400,000 for the quarter. What am I doing wrong?

It's split, we're still included in the payroll line item is approximately 300,000 for employees, and the other 472 has been reclassed down into other G&A.

So in the other G&A, in the fourth quarter, there's 472 of stock option expense?

Yes.

That's non-cash?

Correct.

Okay, that's what I wanted to know. Thank you so much.

Thank you.

And we'll go next to Rick Ruff, a Private Investor.

Hi, Andrew, Mike.

Hi, Rick, how are you?

Andrew, I'll get you a new calculator here shortly. But going back to Rick Petersen's question, my concern with the loss was I read in probably the last 30 days, 60 days, two analyst reports and they had CKNN at minus $0.03 and obviously back in November, December era, you guys had yourself at a about $0.00, $0.01. How does an analyst know so much about the Company and they don't know anything because you're not giving me any guidance?

I mean, again, Rick, I think you've called me many times on this stuff and again, we have fair disclosure here. We don't -- we haven't told any analyst something that's different than--.

Well, how are they so good and you guys work for the Company and you can't get it right?

Well, I mean, you know Rick, I don't know what to say to you except that the analysts that are in print at a $0.03 loss were wrong and we did not in the fourth quarter have information that would have led us to change that guidance or we obviously would have changed it when we had that conference call on November 9. I mean, analysts do their own work, they create their own models, they do their own channel checks with customers. How they arrive at those numbers is proprietary to them which is why they copyright the research that they do. We gave the best estimate we could at the time and that estimate was wrong.

Okay, now, going forward with our management team, do you think we have the right people to take this company then to the next level at this moment?

I am satisfied with the management team that is in place today. That does not mean that I wouldn't make a change in some area of the Company, but I'm telling you that the people that are here today I believe can take us to the goal line.

So this sales department with the new technology coming online is well prepared for all this stuff coming in the future?

This sales department is fully acquainted with these products. They present these products to customers in a professional and I think in an excellent manner. There's not a salesforce that I'm aware of that is capable of forcing a customer to change to us as their cash access provider simply by force of will. I mean, there are lots of decision points that go into a decision to change cash access providers and in the last month, we've shown you three or two of the three that have chosen us, one is a continuing customer that has decided their new property will go with us.

Right. Well, my next question would be that since you got three new contracts, who were the previous providers to those sites for Canterbury, the Meadows, and what was it, the Chickasaw or the Choctaw?

The Meadows. The Meadows is a brand new casino so they didn't have a--.

Well, I'm only a half an hour away from there.

Oh, good. Well, hope you're a customer there.

I go to Mountaineer.

Oh, well, they haven't opened yet.

But also, with the Meadows, they are going to come on line in May, right?

May 1, is their target date for opening their temporary casino.

And our system will be in there for the opening?

That's our target date as well, absolutely.

Okay, another -- the other question, and I don't know if you heard it, was these previous to Canterbury, who was their previous provider.

I heard the question. I'm just sitting here racking my brain and to be honest with you, I know that I was aware of who the previous providers were but I just don't recall at this moment.

The reason I ask that is since we're getting these new contracts which is fantastic, are they looking at the -- down the road with these new technologies coming and they want to be ready for it? Is that the reason?

That is part of, I believe part of the reason that everybody is going with us. Even if they aren't going to look at PowerCash, for example, Canterbury Park, has a card club, they do look at products like Stay 'N Play and its application in the card room, they look at the cashclub product and its application through the racetrack side as well as the card room side, so I think they are looking at the product. It's not -- I mean, it's a combination of all of the products that we're offering at this point.

Right. Now, my last question has to do on the engineering side. And I've talked to Andrew about this and I want to know where we stand and I know integrating the two software systems into one unit before the beta goes out, where does that stand, and I know in engineering there's always glitches and things that come up, but do we have a timetable that we need to meet and are we on top of that?

Well, we are on top of it. We have both internal milestones and then milestones that we hold each other to between us and Bally, and this is not integrating two systems. This is a system to system product, so it's actually making sure that the systems are speaking to each other with the proper protocols and all of the necessary messaging as well as the security around that. So our product side that we have to accomplish is complete. We need -- the final engineering piece is the system to system piece, because Bally has already done their project side for talking. I mean they already talked to the gaming devices. They can already send the messages, but no, that is in process and that is on the time frame that I'm satisfied is going to hit exactly the targets that we announced today in this meeting.

Well, that's it. Hopefully we move forward. Thanks a lot.

Thanks, Rick.

And that concludes the question and answer session. I'd like to turn the conference back over to our speakers for any closing remarks.

Well, thank you, everyone. I certainly appreciate you coming and listening to our call today and we look forward to giving you more results as we go forward with this. Thanks again.

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