Everi Holdings Inc (EVRI) 2007 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2007 Global Cash Access earnings conference call. My name is Lauren and I will be your coordinator for today. At this time all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Mr. Harry Hagerty, CFO.

Thank you, Lauren. Good morning, everybody, thanks for joining us. With me at GCA this morning are Kirk Sanford, our President and CEO; and several others of our senior executives. Hopefully you have seen the press release for the earnings this morning. During the course of the call, we will make forward-looking statements on matters such as financial trends, customer contracts, new products and new markets, and those statements can be identified by the use of words such as estimate, expectation, intention, projection, goal, or forecasts. And because those statements deal with future events, they are subject to various risks and uncertainties and our actual results could differ materially from our current beliefs. Factors that could cause or contribute to such differences include but are not limited to the growth in gaming revenue in our existing markets, the win or loss of various customer contracts, the development by us and acceptance by our customers of new products, the actions of competitors and the likelihood and timing of gaming expansion in various markets. For other factors that could cause actual results to differ materially from those described in our forward-looking statements, we refer you to our various SEC filings and specifically to Form 8-K which covers today's earnings release as well as the risks factors of our various SEC filings. I would also like to refer you to today's press release and the 8-K for a reconciliation of GAAP to non-GAAP measures and a reconciliation of actual to adjusted items. As usual, I'll start by summarizing the consolidated results of operations, and Kirk will talk about our strategic initiatives, and then I'll come back on to talk about balance sheet, cash flow, and financial guidance and we will finish up with questions.

So turning to the financial results, results for Q1 were consistent with our expectations. Revenues were $148.7 million, cash EPS was $0.15, and adjusted cash EPS, which excludes stock compensation, was $0.17 a share. Revenue growth over the first quarter of last year was 14.6%, our same-store increase in surcharges and cash advance in ATM was 9.9%, which was consistent with our expectation of 10% for the quarter. Year over year revenue growth in Q1 was lower than in the four quarters of last year as we anniversaried the beginning of our business with MGM Mirage in Q1 of this year. Our cash advance revenue was up 15.4%, and that was driven by a 14.1% growth in the dollar volume of transactions. Our ATM revenue was up 14.3%, and that was driven by a 13.1% increase in the number of transactions and 0.9% increase in revenue per average transaction. Our check services revenue grew 1.5% and our central credit and other business posted a revenue increase of 35.3%. That increase was largely due to the recognition of Arriva revenue in Q1 of 2007 where there was no Arriva revenue in the corresponding quarter of last year. If you exclude the Arriva revenue, revenues in our central credit and other segment were up 11.4%. Our gross margin in the quarter was 28.2%, and our gross margin was adversely affected by cost of revenue in Arriva exceeding the revenue in Arriva. Excluding the impact of Arriva, our gross margin was 28.5%.

Moving further down the income statement, operating expenses were $17.9 million, and of that, $2.9 million was non-cash compensation expense. Excluding the non-cash comp expense, adjusted operating expenses were $15.0 million in the current quarter compared to $13.3 million in last year, which is an increase of 12.5%. So of the $1.7 million year-over-year increase in adjusted operating expenses, approximately $550,000 relates to higher professional services fees for financial statement audit and Sarbanes-Oxley compliance expenses and approximately $200,000 relates to higher operating expenses for the Arriva Card. Depreciation and amortization increased 7.4% to $2.8 million, and this increase was principally due to the commencement of depreciation on the assets that we put into service last year for our operations with MGM Mirage. Our interest income rose from $555,000 to $896,000 and our interest expense declined approximately $600,000. Interest expense reductions would have been higher but for the increase in LIBOR in Q1 of this year as compared to Q1 of last year. Our tax expense was $4.7 million in the quarter, and that's based on an estimate of the effective rate for the year of 38%. Our net income was 7.9% and to that we add $4.3 million in deferred tax amortization to arrive at cash earnings of $12.2 million. And then adding back the after-tax non-cash compensation expense, we get to adjusted cash earnings of $14.1 million, and using diluted shares of $82.0 million produces cash EPS of $0.15 and the adjusted cash EPS of $0.17. So that's the overall earnings picture and I'll turn it over to Kirk now to talk about our key business initiatives.

Thanks, Harry. Good morning, everyone. Our first quarter results were strong and right on our expectations. While Harry has given you the overview of what happened in the quarter from a financial perspective, I would like to focus on the things that happened that are not immediately visible from the financial statements. As usual, we continue our solid track record of renewals and new wins. During the quarter, we renewed four locations and signed nine new ones. And the pipeline of new business possibility looks strong, and we feel confident in our ability to bring additional business on later this year. The migration of the ATM business to the redemption kiosk platform continues to keep pace with our expectations. As we stated in the past ,the redemption kiosks help us by lowering the operating and interest expense associated with the ATM transaction. As of the end of April, we had 493 NRT devices active with our 3-in-1 service. At the same time we began a field trial of the 3-in-1 service on another redemption provider called Western Money Systems at locations in Nevada --

California.

California. I'm sorry. After results of that trial, we anticipate this product is going to be submitted for approval in Nevada. We do have one of our major customers who has committed to a 200 unit test of the product. The impact of the redemption kiosk migration is significant. For example, our armored carrier expense per machine in the first quarter of this year was $369, which is down 9.8% from the $409 dollars that we saw in the first quarter of last year. We saw similar reductions in our other cash handling costs as well.

With respect to EDITH, we have delayed our submission to the Nevada regulators. As we approached the time for this submission, we recognize the need to educate the key regulators about the fundamentals of cash access in casinos. While these regulators know a great deal obviously about casino operations, it became apparent that they are less familiar with the products and services we provide and how they impact both the gaming patron and the gaming operator. We felt it was critical for the regulators to understand the background of cash access in casinos in order for them to understand how EDITH fits in to that background as a logical extension of the current trends. While it's a slight setback to our goal of being approved in the second quarter of this year, we still believe we are going to be approved and installed in Nevada in 2007. With respect to other EDITH installation opportunities under our existing GLI certification, we are working with IGT and other slot system vendors to develop versions of EDITH that work with other slot ticketing systems that are in use. We are doing this in order to address the significant demand for EDITH from customers who are on systems other than the IGT system which we initially developed on.

Our Arriva operations continue to gain momentum. At the end of April, we had 5,266 accounts, of which 75% were active. We have done just under $25 million in cash advance on the Arriva Card. We continue to market aggressively to build cardholders, and we have a significant mailing going out in mid-May. From a credit perspective it's still too early to have data that's statistically meaningful. But as of the end of April, our cumulative charge-offs were $460,000.

We have been very focused on our international opportunities. We are already up and operating in Galaxy Starworld property in Macau and we will be expanding the set of products we have deployed there over the next several months. We continue to have active dialogues with other customers in Macau and we expect to announce one or more additional customer wins there in the very near future. We have a similar set of circumstances in Europe, where we also hope for an announcement in the near future. So in conclusion, I think we're on track for some exciting things in the second half of this year, based on the activity that we're seeing here in the first quarter. So that's the business review. Harry, I'll turn it back over to you for final numbers and Q&A.

Okay. Thanks. As we announced in the release, we had $52.6 million in unrestricted cash at March 31, our debt was $274.2 million and our total leverage ratio was 2.57 times. Our senior leverage ratio, which is the one on which our bank debt is priced, was 1.14, and at the beginning of April, the interest rate on our senior secured facilities dropped by 25 basis points to LIBOR plus 112.5. Our capital expenditures were $2.4 million in the first quarter of '07, and that's about the same as last year, and it is on track for the forecast of $10 million for the year. During the quarter, we begin share repurchases pursuant to a 10B5-1 plan. As of May 4, we had repurchased approximately 176,000 shares, total purchase price of $2.8 million, and an average price per share of $15.69.

Turning to guidance, our 2007 expectations remain in place. Revenues broadly in the range of $641 million to $652 million. Adjusted diluted cash EPS in the range of $0.75 to $0.77. And for the second quarter of '07, our expectations are for revenues in a range of $150 million to $155 million and adjusted diluted cash EPS of $0.18. I need to remind investors that our guidance is based on what we know and forecast as of today. Events may occur and circumstances may change in a way that would alter the things that affect guidance. And things that could affect our business -- and therefore our guidance -- include but are not limited to economic growth, interest rates, political developments, regulatory developments, expansion of gaming in new jurisdiction, the retention and addition of our customers, interchange and other impositions from the card associations, and the products and the prices offered by our competitors. We may not know if or when these factors have changed and we disclaim the obligation to update our investors on our guidance or the factors that contribute to it. So that is the end of the prepared remarks, and Lauren, we'd now be happy to take questions.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Liz Grausam with Goldman Sachs.

Great. Thanks. First, on the share repurchase program -- Harry, can you help us understand your uses of cash going forward? And the choice to initiate that program at this point in time?

Yes, I think we talked about it last quarter. Our use of cash is going to be oriented towards where we see it as being accretive to current year EPS. And at roughly prices above $16.25, $16.50, it's more accretive to pay down debt, and below those numbers it's more accretive to buy back stock. And while we may deviate from those rules in the future, that's kind of what is guiding us now.

Great. On the progress with EDITH that you have, can you explain a little bit more about what you need to do with the regulators to get them over the hump in approval on this process? And secondly on the other vendors you are looking to develop with other than IGT, are you going to pursue exclusive relationships with those vendors?

Let me first talk about the sort of backdrop of the regulatory situation in Nevada. This will be a little bit lengthy, but I think it's a useful education for investors who really aren't familiar with the gaming companies. There are two regulatory bodies in Nevada. There is the Nevada Gaming Control Board, which is a full-time set of people devoted to implementing the rules and regulations affecting the gaming business. They are intimately familiar with what we do and our conversations with them have at this point brought no issues to the fore. That's not a guarantee we w'll be approved but we feel good about it. The Gaming Commission, on the other hand, is the second body out there, and many of the people there have other activities that they are focused on and are not as involved day-to-day. We need to get approval from both of those organizations to make it on to the floors. In our discussions, we found that the latter group of people, the Gaming Commission, are not as aware of what it is we do and the significance of our products and services to gaming enterprises. And if we told them that 50 to 90% of gaming revenue is derived from cash that's sourced within the four walls of the casino, they would probably find that to be new information to them. So what we're doing is setting the stage for them by describing what it is we have been doing -- not we, GCA, but we as an industry -- for 10-plus years in terms of providing cash to patrons in casinos. So that they understand the concepts there, and what happens and how familiar and how routine it is for patrons in casinos to get cash for the products and services we provide and why EDITH is just a logical extension of things that are already out there. That's really what we're doing -- it's sort of a political and educational effort. We continue to believe that there are no regulatory or technical issues there, it's just -- making the key decision-makers aware of what it is we do and how it fits in to the existing operation.

The other question, I think you had, Liz, was about other operators, and the subtlety here is that there are different slot systems out there. IGT has a variety of systems, Bally has I think two systems, Aristocrat has a system -- and while all of those make use of the IGT SAS protocol or variations thereof for recording debits and credit to the system, they are each different systems, and we need to modify EDITH to be able to talk to each one of those things. In terms of exclusivity, I guess I'll just say we try to get the best deal we can with all of those people and move from there, but since a number of casinos are on slot accounting systems or slot systems other than the IGT one on which we were initially developed, we need to modify EDITH to be able to work with each one of those things, and we're in the process of doing that.

Great. Thank you.

Your next question comes from the line of Jim Kissane with Bear Stearns.

Thanks. Hi, Harry and Kirk. Can you give us an update on your progress in Macau and do you still expect revenue in the second quarter from Macau? Thanks.

We do still expect revenue in the second quarter from Macau and the $1 million a quarter in Q3 and Q4 that we had initially talked about at last quarter's call remains in place. As Kirk said, we are in a number of constructive dialogues with customers over there and we're hopeful to have some additional customers to talk about there in the very near future.

And as Macau and other international markets ramp, what will the impact on margins be?

The impact on margins should be positive. Generally the margins on international business are better. So that's our hope, but they will clearly be additive at the top line or the bottom line.

One last question, Harry, the incremental professional services cost in the quarter -- are those recurring or nonrecurring?

They will be recurring next year in a magnitude that I can't yet predict, Jim. Most of the activity that takes place around -- for us this year in Sarbanes and for us every year the annual year-end audit takes place in the first quarter of the year. So our Sarbanes expenses will be spread out more during the course of the year, but I think that the end of year audit stuff will be the same next year.

Okay, so they won't recur, though, in the second, third, and fourth quarter of this year.

I don't think it will be as high in the second, third, and fourth quarters of this year.

Great. Thank you.

Your next question comes from the line of Tien-tsin Huang with J.P. Morgan.

Hey guys, it's actually Reggie [Sumin] in for Tien-tsin. Had a question on Arriva -- could you talk about the respond rate you saw in the first quarter?

We continue to see response rates that are slightly below our expectation, but a little bit better than I think the industry experiences. And we see approval rates that are just slightly above industry expectations, but again, below our original expectations. So we're having to work a little bit harder to acquire accounts than our original projections, but we continue to focus on the tools that work for us.

Average vault cash for the quarter?

Man, you are taking Tony Wible's questions here. Average vault cash for the quarter was $280 million, and it was at a peak of $320 million, I think at the end of the quarter.

All right. And then one other question, interchange -- did you guys see any change in the interchange rate? I guess Visa is changing some interchange rates in April or something. Anything come through that affects you guys going forward?

I will tell you that there may have been some changes to some minor card categories that aren't significant components of our overall business, but we have not been informed of changes that affect the broad -- that the categories of cards that we do most of our businesses on for either Visa or MasterCard.

All right. Thanks a lot.

Your next question comes from the line of Moshe Katri with Cowen and Company.

Thanks. Going back to EDITH, can you remind us if any contributions from EDITH were factored in '07 guidance?

They were not.

They were not. Okay. Great. And then when we're looking for certification to take place sometime in the second half of '07, your view -- are we talking about Q2 -- maybe Q3 or Q4?

I would say that our hope is to have machines on the floor in the -- let's call it the later part of Q4. So I think we're talking about an expectation of approval sometime late Q3, early Q4 to do that.

Okay. And then you had some operating losses from Arriva during the quarter, which was expected. How much are we factoring that in terms of looking at our '07 guidance?

Well, we're expecting operating losses for the full year. I think we had said about $0.02 a share. Obviously it's been about a $0.01 per share in the first quarter already. If I compare the revenue to -- and the costs -- we're seeing a narrowing compared to the fourth quarter of last year, so we're moving in the right direction, but it won't turn positive in 2007.

So are we still on track for a $0.02 loss? Do you think it's going to be less or more than that?

We stick to our initial guidance of $0.02 at that point. I have no reason to change that at this point, Moshe.

It seems like there has been a significant uptick in transaction volume through Arriva in Q1. What is really accounting for that?

More cards. More cards and repeat business and more card holders. This is a revolving credit portfolio -- it's designed to allow people to do cash advances each and every time they go to casinos, so you would expect -- and we're getting what we would expect here, which is the increase in volume.

Okay. And then finally, just from a big picture perspective, any comment on activity -- gaming activity that you are seeing at this point?

I would say that our expectation -- that the business has met our expectations. Obviously the same-store sales growth is down from last year, but we had forecasted that and it more or less has come to pass but it's still ahead of what our longer term historical trends have been. We're not an economic forecasting shop, but we saw business that was really strong last year and we expected it would revert to historical trends, and it seems to be doing that.

Thanks very much.

Thanks, Moshe.

Your next question comes from the line of Chris Mammone with Deutsche Bank.

Hi, thanks. Just on the domestic market can you talk about maybe opportunities to win new business in South Florida? It looks like the state government there is going to allow ATMs on the casino properties. And also maybe any other domestic market besides Pennsylvania that could be expansions in late '07, early '08 time frame?

I would say, Florida, has been a positive development for us. We have some accounts down there. I think it is premature to talk about what the volumes there could be until we have some history of operations in the property as opposed to across the street or wherever else people have had to get cash. Other jurisdictions that might develop in 2007, I think I would be reluctant to talk about these things, because history shows that there's always some political development that causes things to happen more slowly than we would like. For 2007, we're focused on opportunities in existing jurisdictions, including Native American properties, that have business in place already that includes Pennsylvania and now Florida. But something breaks our way, you can be pretty sure that we'll be on it and looking for opportunities there, but I wouldn't build it in to a model at this point.

Okay. That's all I had. Thanks.

Thanks, Chris.

Your next question comes from the line of Tony Wible with Citigroup.

Tony?

Tony, did Reggie take your patented question?

Yes. I have one last question, so I figured I would have a moment of silence there for you. The patent ruling that went into effect, I guess by the Supreme Court a week ago -- does that create some opportunity for you guys introduce some new products that your competitors otherwise had patents on?

We're all looking at each other, like did we miss something?

Yeah, the Supreme Court, I guess about a week ago had a ruling on patents -- it was versus a brake company.

Yes.

I can take this offline--

Now I know what you're talking about. Whether it may make it more difficult to put in place business process patents?

Yes, I know there is a couple of competitors of yours tout that have some technology process patents, and I was just curious if you would see it opening up the door for you to introduce new products?

I would say -- and I guess you can judge from the fact that none of us was on top of this topic -- that we have not been informed that that Supreme Court ruling makes any difference to us positively or negatively. We may find that's the case in the future, but we're not aware of anything -- or any impact of that right now.

Okay. Qualitatively taking a look at the operating margins and the cash advance business, I guess there's a couple of things that could be moving that around between new products, international and then historic credit versus debit. How are you seeing those different drivers play out over the course of '07? Should we continue to look for migration to debit from credit? Or can you talk about each one of those three and how they influence the margins?

Obviously the debit product and the credit card cash advance have lower operating expenses as a component of the total expenses. They have been growing a little bit less rapidly than the ATM business has, so that has been an effect on margin. However, as we have been working on for a couple of quarters now, we're trying to move more and more business onto the redemption kiosk platform which has lower operating expenses associated with it. We're on track for the 800 units that we talked about -- Kirk talked about improvements in operating expenses per machine. We're seeing the same sorts of trends in the interest expense per machine, and we're moving in that direction. We do have some expenses in Q1 related to the Arriva buildup that affected the business, related to the normal Sarbanes and audit stuff that affect the business. And we're expecting growth in the business in the second half of the year in jurisdictions around the world, and we have had to put in place some resources in anticipation of that.

Okay. Within the cash advance revenue segment, are you seeing credit versus debit -- that mix shift change at all either towards debit or toward credit?

Not noticeably.

Last question -- do you know what the subscriber acquisition cost is now running on Arriva?

I think the subscriber acquisition cost last I heard is about $140; is that right?

Yes.

Thanks very much, guys. Good quarter.

Thanks, Tony.

(OPERATOR INSTRUCTIONS) Your next question comes from the line of Keith [Goodus] with Guggenheim.

Hi, guys, how are you? Couple of quick questions for you. First of all the share and price inflection point that you mentioned earlier relative to buying back debt or equity? I got the first part of it, it was in the 16 handle, but what was that full price?

I'm sorry?

What was the share price that was the inflection price at which you would buy back debt versus equity?

I don't think I specified in exact pennies. I said something between $16.25 and $16.50.

Exactly -- that's perfect. Relative to buying back debt, I noticed that you guys have about $122 million under your senior secured credit facilities and obviously $150 million and change in your senior subs. If you (inaudible) back debt, would you look to pay down the revolver first? Would it be a matter of paying back that higher interest rate on the senior subs?

I guess we have not talked about buying back debt. We have talked about paying down debt, and we have historically done that by paying down the revolving portion of our senior secured because obviously we can reborrow that if we want to.

Sure.

We always have the opportunity to repurchase the bonds or to pay down the term portion of our debt, but I don't think we have made any public statements about our intentions of doing either of those.

Okay. One final question, related to your fiscal year 2007 outlook, where are you guys looking at EBITDA for the year?

We have not given guidance.

Okay. Excellent, thanks.

Thank you.

(OPERATOR INSTRUCTIONS) There are no further questions in the queue. I would now like to turn the call back over to management for closing remarks.

All right. Thank you for joining our conference call today. As always we're available to take your questions offline, and we appreciate your interest in GCA and look forward to updating you on our progress throughout the course of the year. Have a good day.

This concludes the presentation. You may now disconnect, and have a great day.