Everi Holdings Inc (EVRI) 2007 Q2 法說會逐字稿

Good day, and welcome to today's Cash Systems Inc. second quarter conference call. As a reminder, today's call is being recorded. And at this time, I would 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 limitations, statements concerning future, financial, and operating performance. The impact of partnerships and alliances, future strategy and plans are market conditions that may constitute forward-looking statements. Such statements are based on current belief 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'll undertake no obligation to update any forward-looking statement that we may make today.

With that said, for the second quarter of 2007, revenues reached $26.6 million, a 10% increase over the second quarter of 2006. Revenue growth was due to organic growth and the additional new contracts. New contracts only contributed $300,000 of revenue in Q2 due to delays at the Meadows and Canterbury Park. A full quarter of these properties, along with the recently installed Marnell Sher properties, should provide revenue of between $1 million to $1.5 million per quarter. Despite our recent press release for Fantasy Springs, we have not recognized any powercash revenue in the quarter. This will come as we install the software and go live, and recognize software license fees and maintenance fees over a 12-month period, along with our higher margin transaction fees. Mike will provide the update on that front.

The increase in cost of sales reflects primarily increased commissions, and, to a lesser extent, armored car services. Processing costs were up slightly, and check-cashing costs were down, but not enough to offset commissions, causing gross margins to decline to 20.4% versus 22.7% in the prior year quarter. As a reminder, gross margin is defined as revenue less commissions, processing cost, check-cashing cost, and armored car services. The decline represents the continued shift in revenue toward lower margin ATM revenues. As we stated before, in order to get the our all-in-1 functionality deployed in the ATM, we had to take over the processing of ATM business at certain locations with little to no margin.

We are currently working a partnership with a large bank in order to address this low margin ATM business. We expect to announce more on this on or prior to our next conference call. This will allow us to overlay our software on their ATM machines, while allowing us to process debit, credit, and checking cash advances, thereby reducing our exposure to the lower margin business.

Our payroll cost and professional fees continued to decrease, and other G&A was essentially flat. As a percentage of revenue, these categories improved 220 basis points to 19.3% of revenue. For the quarter, we had approximately $300,000 in EBITDA, compared to $280,000 last year. Depreciation and amortization increased to $896,000, which reflects an increase in our depreciable base from capital additions. Higher interest expense is a result of the increased borrowing outstanding with the convertible debt, as well as interest on our bulk cash agreement. Of the $1.3 million of the interest expense, approximately $877,000 was related to the bulk cash and $465,000 related to the convertible debt. From a balance sheet perspective, we finished the quarter with approximately $17.9 million in cash. Capital expenditures year to date were $1.3 million.

Today, we also announced that we have obtained a waiver and are restructuring our convertible notes. We needed to restructure the terms of the notes to create additional flexibility in the EBITDA covenants. This was required due to the delay in the powercash product deployment and the lack of originally projected savings from our TNS switch implementation. We have agreed in principle to the terms of the amendments to the notes. However, we have until August 20 to execute final documents.

The terms include an increase in the face amount of the notes from $20 million to $22 million. We are issuing an additional 175,000 warrants, and adjusting the exercise price of the original 312,500 warrants, along with the new warrants, based on the volume-weighted average price through next Tuesday, August 14, multiplied by 120%. (inaudible) of $7.25 in a ceiling of $8.

We have also obtained the ability to redeem approximately 36% of the notes, or $8 million, at 130% premium in late 2008. The note holders will have the ability to put the same amount to us at par on that same date, as well. The waiver, along with the amendment terms to the convertible notes, will be filed as an 8-K today.

The impact of this restructuring of the note will impact our Q3 results. Although we have to work with our auditors on the final accounting of these changes next quarter, we expect to treat this as an extinguishments of debt. The impact will be to write off the original debt issuance cost of approximately $1.5 million, along with the fair value difference between the old debt and the new debt, which is expected to be approximately an additional $1.7 million.

From a guidance perspective, based on second quarter revenue, contract installation delays, and uncertainty regarding the timing of new contracts, we expect revenue to increase in the low teens from 2006 to between $105 million and $110 million in fiscal 2007. We continue to expect our business plan to generate long-term EBITDA margins that will be in the low double digits. And as Mike will describe, we believe that's achievable based on revenue growth and the higher margin potential of new products and services, like powercash.

Of course, as you all know, I must note that events and circumstances may change, which may impact this guidance. We expressly disclaimed the obligation to update investors on our guidance for 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. Before I turn to the business update, I wanted to welcome Charles Crawford to Cash Systems as our Executive Vice President of Operations. He will oversee the day-to-day providing of services for Cash Systems' new and existing casino partners. His division also maintains the continued reliability of our real-time services and technical support, and he will be involved in operational planning and implementation of our new product offerings. Chuck joins us from Optimal Payments and brings a dozen years of payment transaction industry expertise, as well as substantial experience that he has gained in other industries. For those of you not familiar with Optimal Payments, it is a multinational provider of payment transaction, banking, and processing services for tens of thousands of retail and eCommerce merchants. His experience, rather, is also representative of where we see Cash Systems transitioning as an organization.

Although our second quarter performance was less than we expected, it reflects where Cash Systems has been as a business and not where we are going. We have been dedicating a substantial amount of management's time and corporate resources to drive payments-related business opportunities, which carry superior margins compared to most of our existing products and services.

Having said that, the timing of the financial improvements we expect are still too difficult to precisely forecast. We do expect substantially higher margin sales on our new products and services, although our ability to sell such services will be subject to testing periods before a customer actually rolls out the product.

In addition, we are also subject to casino floor priorities, meaning that at certain times, casinos may be reluctant to test and/or to switch over to a new technology until other priorities have been addressed. Since powercash requires an interface with the casino's slot managing system, most casino customers will need to be comfortable with their existing or their upgraded systems before they add new modules like Cash Access. And lastly, we are being impacted by the timing of our customers' rollouts, as well as our ability to predict when some opportunities in our pipeline might convert to actual revenue.

These are the primary reasons that we are taking a more conservative approach to revenue guidance in 2007, and that we've gone through the amendment of the notes, as Andrew has described, previously. Despite these issues, we are more encouraged than ever about the market potential based on what we are seeing and hearing from both our existing and new potential customers.

Let me provide you with an update on powercash. On June 26, we announced a multi-year contract for powercash with the Fantasy Springs Resort Casino. We estimate the value of that deal at about $1 million before transaction fees. Fantasy Springs management chose the product because of its clear benefits, because of the responsible gaming features that we've built into the product, and because of powercash's ability to create a competitive advantage in customer service. What's even more significant to Cash Systems is we do not have to bring the lower margin ATM processing in-house in order to sell powercash. In fact, Fantasy Springs has an existing relationship with another ATM processor.

Now, while we are certainly not abandoning the ATM business, we think the Fantasy Springs contract demonstrates that any casino can layer powercash into their cash access solution. This is not just a product for Cash System's current customers. This new relationship shows everyone that the decision to purchase powercash can be made separate and apart from the usual RFP process.

In order to make powercash available to every possible casino, we obviously need certain approvals. I'm happy to say that we'll be submitting the powercash PowerBank Bally module to Gaming Laboratories International, GLI, within the next several weeks. This is essentially the gateway from the Bally casino management system for our cash access services. Although we can't predict timing, we think that GLI approval will be another crucial milestone in our rollout of the powercash product.

In addition, within the next 90 days, we expect to have two powercash sites installed so the casino customers can begin utilizing the product on the casino floor. These sites will also provide great opportunities for us to showcase the product to new potential powercash customers.

Now, while powercash has and will continue to get a lot of our attention, we still have remained focused on delivering a full product suite, with cashclub, eCashsystems, and Stay-N-Play, in order to provide casino operators with a seamless solution over their entire casino floor. We remain confident in our technology path, and we are continuing to execute against the business plan that we've developed to drive our future performance.

As our press release indicates, we continue to expect 2007 revenue to grow in double digits. And we expect, over the long term, that our highly scalable business platforms and our financial model will provide substantial operating leverage as our new products and services contribute meaningfully to our financial performance. We continue to expect long-term EBITDA margins, as Andrew said, in double digits.

Now, as always, I look forward to reporting our progress to you again in the future.

And, operator, with that, we'd like to open it up for questions.

Today's question-and-answer session will be conducted electronically. (Operator instructions). We'll take our first question today from Traci Mangini with ThinkEquity Partners.

Thank you. Good afternoon. Hi. I had a question on the gross margin number in the quarter, in particular on the commission line item. It was quite a bit higher at least than I was expecting. Can you explain if there was maybe something one-time in there? Or is that a number we should be looking at as a good number going forward?

I think the number going forward is going to be between 57%, 58% in any quarter, all relative to the ATM volume in any one quarter, so it's going to be the revenue mix.

Okay. You were hopeful to get toward the, I think, what, like 22%, 23% gross margin number for the year, if I recall correctly from Q1? Is that still -- is that an optimistic goal at this point?

With the commission line hanging there, it would be optimistic to get up 2 points.

Okay. And then just on the SG&A line, is that a healthy number or run rate to look at going forward? I know you've had some increase in payrolls, but it looks like other was up quite a bit too. And is that a solid number in the quarter?

The payroll, the only thing that is going to bring payroll up in this would be the addition of some booth operations at Canterbury and then also at Choctaw that we have today in our numbers in there. So, the payroll should stay relatively flat in there, with the addition of a couple of booths in there.

As for other, I mean, we went from $1.6 million last quarter to $1.8 million this quarter. Again, we had some additional expenses related to some vacation accrual, which cost us an additional $100,000 for the quarter. We also had, I think, additional audits for AML which cost about $130,000, so I think we're going to end up being in that $1.7 million-ish number, $1.6 million, $1.7 million number, hopefully.

Okay.

And Mike, maybe on the powercash, is it just too early to say, but are we still expecting maybe three sites commercial by year-end? Or is that optimistic, as well, at this point?

Well, that may be optimistic. We are focused on getting our two sites up and running. That will drive, to some extent, the decision by a third and a fourth site. So, at this point, I'm only comfortable saying that we will have two up and running.

Okay. And those are trial runs, correct? Not commercialized runs?

Well, one is commercialized during the trial period, and the other one is a beta test.

Okay. And let me understand, and I apologize if I don't know who this is, I didn't see it happen, but it looks like one of your competitors has left the industry. And I was just wondering if you thought there was any significant contracts that they had that you might be able to go after?

Well, actually, the competitor who we believe is exiting indicated that they are now looking at strategic alternatives, so we believe that there will probably be a book available over the next 30 days or so, and we intend to look at that very carefully.

We've said all along that we believe consolidation is coming in this industry, in particular on the heels of the very aggressive competitive pricing that's been occurring for the last two years. And so, absolutely, we'll be looking at that very carefully and seeing if we can either acquire the contracts ourselves or purchases paid in the process as they look at alternatives.

Great. Thank you very much.

On our next question, we'll go to Chris Krueger with Northland Securities.

Hi. Good afternoon, guys.

Thanks, Chris.

Hi. Hey, as far as relative to my model, the total sales are a little bit lower than we had looked for. Have you lost any accounts this year?

No. We had one account, which was the Riviera, that we had processed through an ISO.

But it was not material.

Not material at all.

Okay. It's more or less kind of a shift towards more ATM revenues, which is just simply lower revenues?

And then also in the delay in the Meadows, where it kept getting pushed back, and the Canterbury. In there, we had some issues out there which got pushed off on some revenue there.

And then it would be the first quarter of having no new acquisition revenue. It's all organic, correct?

That's correct.

Okay.

There was a small amount, Chris, in the quarter, but it was very small.

And as far as, let's see, you already answered the SG&A question. In Florida, with the Seminole, is there any update on the potential shift to Class III there? I haven't really seen anything of recent, last couple of weeks. Anything you can talk about there?

There's nothing we can talk about. We know that they are in very -- well, they've been in very lengthy discussions now over a long period of time. The new governor has been given a deadline by the Department of the Interior, and we know they continue to discuss a compact that would allow that, but I don't have any update for you. You'd have to get that from Seminole.

Yes, okay. And then just to reiterate, within 90 days you hope to have two sites with powercash installed, one being the beta site, and the other, I assume, Fantasy Springs?

Correct.

Okay. That's all I got. Thanks.

Thank you, Chris.

And we'll go next to Eric Wold with Merriman Curhan Ford.

Hey. Good afternoon.

Hi, Eric.

On Q2, you gave the -- pro forma's not the right word. You guys had $300,000 in the quarter from new contracts. The rest were contracts of the previous quarter. Do you happen to know what that number was for Q1, so we can get a sense of kind of pro forma, kind of what Q1 and Q2 was organically?

Okay. There was no new revenue in Q1.

Okay. So, kind of [25.5] to [26.3] or so as kind of the organic?

Correct. So the $300,000 is the new [and so on.]

Okay. And then to kind of follow up on the last question on the Seminoles, you obviously, looking at a couple things, you want a Class III and some table games there. Is there any way that that -- that a scenario could play out with the Seminoles, given they're obviously your largest customer, that that would be negative for you? Or as, really, any of these options come on the table, (inaudible) would be at least neutral to positive?

No, we think the latter, Eric. At least neutral to positive for us.

Okay. That's what I thought, to make sure you guys are out there. And then, lastly, on the Fantasy Springs, on powercash, I apologize, I might have missed it. I know you said there's nothing in Q2. What's the earliest we could see revenues from that, and what would be the maximum potential amount of revenues that could fall into this year?

Well, we would -- I mean, they would be one of the two that we would expect to be up and running in the next 90 days. And the revenue stream will depend on the uptake by the customers of use of the product as opposed to use of the competitors' products on the walls of the casino, at an ATM or the cage. But also, our transaction split on the fees with them is at a higher rate than you would normally achieve if you were simply offering ATMs and cage software.

Right.

So, it will be fourth quarter revenues, and we're going to have to track that carefully, and then we'll let everyone know after the fourth quarter is concluded how that product is doing.

Outside of the transaction, of that $1 million, which is just the kind of site license fees and --?

Sure, correct. The license fee's in there. We had an update from Bally that said that they're going to start in groups of 50 in deploying these, the iVIEWS, the software on this stuff. And so it's going to go out over the September-October timeline to the property. But any license revenue from there we are going to take over the 12-month period.

Okay. And then, actually, a couple of last ones. On the powercash, I'm not sure if there have been clarified, but have you come to a decision as to the $1.50 split, how much of that $1.50 will hit your top line? Will the whole $1.50 hit? And then $1 below the line is cost? Or does just your $0.50 share hit the top line?

Yes, we're still talking with our auditors about how that's going to come in, and we'll give you an update on that. I mean, the minimum will be the $0.50 on the top line.

Perfect. Thanks, guys.

Our next question today comes from Nick Danna with Sterne Agee.

Hey, Nick.

Hey. Good afternoon. A couple of questions. First, what's the interest rate on the new convert going to be?

7.5%.

And is that going to be subject to new, I guess, EBITDA thresholds going forward?

It's 7.5%, fixed, and we have new EBITDA covenants with the 8-K filed today.

Okay. And then for Canterbury and Choctaw, are those fully online at this point?

Choctaw just went live the other day. Canterbury is up and running and processing, yes.

Okay, so we'll get, I guess, a full quarter of the Meadows and a partial of those two in the third quarter, and then full benefit in 4Q?

The Canterbury, we should get a full benefit in Q3, as well.

Along with the Meadows, and then Choctaw will be partial.

Okay. Global Cash today indicated that they expected to lose the Seneca contract. Are you guys in the running for that?

We were one of the finalists in that. We have not been informed that we have won that bid. We have been informed that there's a dispute over it, and that dispute has now been referred back to the property.

Okay, so do you think you're still in the running, or probably not?

Yes, I would have to think that we are probably not, only that I would have expected that they would have told us we would have won and that there was a dispute. Instead, we had just been informed that there was a dispute over the process. We know we were one of the three finalists.

Okay, understood. And lastly, for powercash, how many of these Native American casinos could you go into prior to GLI approval?

Probably about 20% of the Native American casinos out there today do not require GLI approval, or are not compacted to the point where a state would require a laboratory approval.

Okay, understood. Thanks a lot, guys.

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

Good afternoon, guys. Traci asked my questions, but just -- I think I may have missed something. On the gross margins, looking forward, so you're looking for 22% to 23% or 22% to 24%?

I don't think I ever said 24%. I think Traci brought up on the gross margin side on the last call as hoping to be able to get to that 22% level in there. And so, I'm saying we just ended at 20% in this thing, so depending on how the ATM volume in any one quarter happens and our share with the split on there with the property, I expect to be in the 20% to 22% range, but I wouldn't model 22% going forward.

Okay. That's it. Thanks.

Thank you.

And our next question comes from Matthew Farkas with Paradigm Capital.

Hey, Matthew.

Hi, guys. How are you?

Good.

Just, most of my questions have been answered. I think the one thing I'm just curious about, you think that G2E could be a catalyst for powercash?

Well, we absolutely believe it can, Matthew. There's no question that having properties up and running prior to G2E and then having the product displayed in both the Bally area at G2E and ours with the ability to share some information about customer uptake, we think, is going to be a great catalyst for us in that show. So, we're looking forward to it, definitely.

So, how many -- what kind of guidance do you think you could give next year for '08 in terms of new customers for this?

I go back to what I said in the prepared remarks, Matthew. It's so difficult for us, because we know, from our discussions with the customer base that's out there with our competitors, we know that they are looking for a live location to go see the product in action and be able to talk to management who has it up and running before they make their decision.

Right.

And so, until we have that occur and we can start getting feedback from both the property that it's installed at and the people we take to see it, it's going to be difficult for us to predict.

Okay, understood. Thank you very much.

Thank you.

We'll go now to [Kevin Banner] with LC Capital.

Hi. I just had a quick follow-up on the, I guess, the waiver that you're negotiating now, or that you have. I'm assuming there wasn't an actual notice of default on that since you're moving towards actually getting -- you have waiver terms, et cetera. Is that correct?

Yes, we went to our note holders before it happened.

Before it happened, okay. But it looks like, just from what you just filed, if you have to get agreement -- is it -- by the 20th or you're in default? Does that mean there's no cure period at that point? Or is that --?

Well, we go into default under our periods in the --

Original agreement. But the period between now and the 20th is for us to pay for the transaction and have the lawyers draft all the documents and get them signed.

Okay.

We just didn't have time to get that done before today's call. We've agreed to terms in principle.

Okay, but I mean the put doesn't -- the 120% put doesn't kick in right after that. There's still time after that? Or is that the time that's pretty much when you need to get that done by?

Under the existing notes, they have the right to put it to us in the event of a default, a covenant default. So, we would revert back to the original terms of the agreement if we fail to get documentation completed by the 20th.

At that point?

Yes.

Okay, and that would be beyond that, I guess?

Yes.

Okay. Thank you.

We'll go now to Adam Steinberg with Morgan Joseph.

Hi. This is actually Andrew Peters filling in for Adam. A quick question, I may have missed this, but does the new updated '07 guidance reflect any additional contracts besides Fantasy Springs?

No, it doesn't include Fantasy Springs either. This is very conservative, based on business in hand.

Okay. And then, so, is there the potential then for new customers to be added on to that?

Correct. Absolutely. I mean, we have at least five RFP presentations that we have done recently, but we are assuming for these purposes that there are no new contracts.

We have not included in those guidance numbers the Fantasy Springs revenue recognition there, Choctaw benefit, and so on.

Okay. Thank you, guys. That's all for me.

(Operator instructions).

We'll go now to David Bernstein with Vanadium Capital.

Hi. Good afternoon.

Hey, David.

Just to clarify, I'm sorry, the Choctaw is not in the new guidance? Or is in the new guidance?

To reach the, again, you can pencil out, to reach the minimum guidance, that $105 million in there will be -- truly, you could just take our base run rate that we've given out there, our actual numbers in this. For the top end of this stuff, it would be including Choctaw's and Fantasy's in this, but we have no other new contracts built into that guidance.

Right. But if I just take your average, let's say, $25 million to $26.5 million times four, and then I add, what'd you say at the beginning of the call, $1 million to $1.5 million for the Meadows and Marnell Sher, that gets me to the low end, right?

That's correct.

That's correct. Choctaw would be on top of that.

So, the Marnell Sher and the Meadows are in the low end of the guidance?

In the low end, but Choctaw and Fantasy are not.

Could you just -- $1 million to $1.5 million for the Meadows and the Marnell Sher seem kind of light to me a bit. Can you just go over, maybe, what exactly you're doing to them? Because I thought it was a full all-in-1 ATM. And I guess $1 million to $1.5 million for both the Meadows and Marnell Sher seems kind of light, so could you just review exactly what you're doing there?

For one, we're being conservative on the numbers on the guidance in this in there. But at Meadows, we have the ATMs and the credit and debit card cash advance stuff. We've run into some issues on the floor about getting the credit and debit card cash advance stuff up and running out there.

It's unique to the Pennsylvania laws as to how you offer credit card and debit card cash advance. And so, the current numbers with Meadows have not included any credit card cash advance.

Oh, okay.

We anticipate that that will change, but we, again, are trying to be very conservative with this.

Actually, okay, I wasn't aware of this. So, your 6% or 7.5% transaction fee that you would normally receive on a standard credit card cash advance that you receive in your other locations, you're not currently getting in Pennsylvania and you need to do some sort of regulatory change to get that at the Meadows?

No, it's just a matter of setting up the casino's own operated booth in order to do that.

Okay.

Outside operators are not allowed on the premises to do that, so it has to be the casino itself doing it, and we're working on that now.

Oh, okay, but that's a line share of the revenue, right? So, I mean, how much incremental, once that happens, how much more increment -- that's another $1 million a month, right? Because that's the biggest part of your revenue, right, is the credit card cash advance?

It is. Well, ATM volume is a big portion of the revenue in there. From the gross margin side, the credit card cash advance and debit card side are the biggest contributors there and a significant part of revenue, as well. But we have not included that. I wanted to be conservative this time around with what we have in the guidance going forward.

Okay, but just -- I'm sorry to harp on this, but it seems very relevant. But if and when, and I guess you're working on it right now, that you put up the full booth services in the Meadows, you would be doing more than $1 million to $1.5 million of revenue per month combined.

Yes, we would expect that. We would expect that.

That is correct.

Are you going to file an 8-K -- when can we expect to know? Should we give you a call back in a month to find out if you've done that? Or when can we expect to find out about that?

Probably the easiest way to do it would be just check with the property and ask them if they have credit card cash advance.

All right, guys. Thanks so much.

Okay.

And, ladies and gentlemen, this does conclude our question-and-answer session. I'll turn the conference back to our speakers for any closing remarks you may have.

Well, thank you, operator. Once again, everyone, thank you for joining on the conference call. We look forward to speaking to you next quarter.

Ladies and gentlemen, this does conclude our conference. We do appreciate your participation. You may disconnect at this time.