Everi Holdings Inc (EVRI) 2007 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Cash Systems third-quarter 2007 earnings conference call. Today's call is being recorded. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions. I would now like to turn the conference over to Mr. Andrew Cashin, Chief Financial Officer. 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 and may cause actual results to differ materially from such statements. Any forward-looking statements should be considered in light of the risk factors that appear in today's press release, as well as our Securities and Exchange Commission filings. We undertake no obligation to update any forward-looking statement that we may make today.

With that said, for the third quarter of 2007, revenues reached $28.3 million, a 9% increase over the third quarter of 2006. Revenue growth was due to organic growth in the additional new contracts. New contracts contributed $1.4 million of revenue in Q3. We have not recognized any Powercash revenue in the quarter. This will come once we go live at Fantasy Springs 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. Our gross margins during the quarter increased to 20.5% from 11.6% in the third quarter of 2006, largely due to the decline in processing costs and check cashing costs. As a reminder, gross margin is defined as revenue less commissions, processing costs, check cashing costs, and armored car services. We are continuing to work on a partnership with a large bank in order to address the low-margin ATM business. We expect to go live with one site in the first quarter of next year and then expand the relationship to other locations from there. The agreement will allow us to overlay our software on their ATMs while allowing us to process debit, credit and checking cash advances, thereby reducing our exposure to dealing with the more costly parts of the ATM business, which are vault cash, armored car services, ATM maintenance and capital expense.

Our payroll costs and professional fees were essentially flat and other G&A continued to decrease. As a percentage of revenue these categories improved 260 basis points to 19.6% of revenue. During the third quarter, we had $536,000 of non-cash stock compensation charges. Of that amount, $172,000 was related to employee restricted shares expense, which is included in the payroll line and $364,000 in the other G&A line for the annual Board of Directors grant of options.

For the quarter, we had approximately $234,000 in EBITDA. After excluding the non-cash stock compensation, EBITDA was $770,000. Depreciation and amortization increased to $909,000, which reflects an increase in our depreciable base from capital additions. Interest expense was $1,452,000. Of that, $984,000 was related to vault cash and approximately $468,000 related to debt. We recorded a loss on the extinguishment of debt of $4.3 million related to the amendment of our convertible notes. In August, we announced that the Company reached an agreement with its noteholders to amend the notes and related agreements, including the warrants that were issued concurrently with the notes. Amendments to the notes include lower EBITDA covenants and an increase in the interest rate from 6.5% to 7.5%, and an increase in the face amount of the notes from $20 million to $22 million.

From a balance sheet perspective, we finished the quarter with approximately $19.2 million in cash. Capital expenditures year to date were $1.6 million.

From a guidance perspective, we are reiterating our revenue guidance of 105 to $110 million in 2007 revenue. We continue to expect our business 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, while decreasing our exposure to lower margin ATM 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 for the factors that contribute to it. Now I will turn it over to Mike, who is rapidly losing his voice here.

Thanks, Andrew, and thanks, everyone, for joining us on the call today. I apologize in advance. I've been battling a head cold for the last several days so hopefully my voice will hold out for the entire call.

First I'd like to briefly address our recent stock price activity. While I generally prefer not to comment on such matters, as you can imagine, many shareholders have called us based on recent share price volatility. Unfortunately, short-term movements not only distract you, but they distract us. What's even more frustrating is it is nearly impossible to determine outside of the basic laws of supply and demand what influences our equity price over short periods of time. Therefore, we need to stay focused on what will drive our stock price higher and that is executing our strategic business plan. And for the record, many of you know I've personally been a buyer of stock over the last several years at prices that are materially higher than the current price, so I understand our shareholders' frustration personally.

Since joining Cash Systems, I have never been more enthusiastic about our future. Our business plan calls for us to grow revenue and earnings over the long-term through product innovation and technological enhancements that will transform our business into a software licensing and processor-like business model from a capital-intensive, lower-margin ATM style business. As many of you know, we believe the most significant transformational product in our portfolio will be Powercash.

Powercash will be on display at the Global Gaming Expo or G2E in Las Vegas next week in both our booth and the Bally Technologies booth. This new product, a joint partnership with Bally's and Scotch Twist, will be the only gaming devices displayed in any company's booth that feature cashless wagering technology. The demonstration will show how Powercash's cashless technology allows patrons to access funds from a debit, credit, or checking account directly from the gaming device, which turns a casino gaming floor into a truly cashless environment. We expect G2E, the world's largest gaming conference and exhibition, will be a great venue to showcase our technology and to drive interest in Powercash.

Today, Powercash is being tested in the GLI laboratory and is also live on a single game on the casino floor in a test environment, pending GLI approval. We expect to have that approval any day now, but certainly prior to the opening of the G2E show. Once we have this approval, the property will roll Powercash out to approximately 20 games in its high-end area and then it will spread it out to the rest of the floor over the next several weeks in conjunction with a large marketing push for the property in December.

We have had a great response from casinos in California, Oklahoma, Louisiana, and many other jurisdictions that are waiting to see this product on the casino floor. Some of these casinos have pushed off the renewals with their existing providers, pending our product introduction.

We are excited going into this year's show knowing that we have so many customer meetings set up to see and use our product in a live simulation and shortly we will be able to use the Fantasy Springs location as our showcase for these customers to see it in live operation.

Regarding the financial impact of Powercash and our future guidance, the timing of the financial improvements we expect our 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 is going to be subject to some testing periods before a customer actually rolls out the product. Now, while Powercash has received a lot of our attention, and rightly so, we are still focused on delivering a full product suite with cashclub, tablecash, eCashsystems and casinopc in order to provide casino operators with a seamless solution over their entire casino floor. We remain confident in this technology path and we are continuing to execute against the business plan that we develop to drive our future performance.

Now, as an example, in the third quarter, we announced a new contract with Suquamish Clearwater Casino Resort to provide our casinopc for cash advance services and all-in-one ATM processing services; and just last week we also announced the renewed contract with San Manuel Indian Bingo and Casino with expanded service of our eCash checking services, so we are getting good same-store uptake of our additional services from our new contract renewals.

As our third-quarter earnings release indicates, we continue to expect 2007 revenue to grow in double digits, and we expect over the long term that this highly scalable business platform 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 has told you, in double digits.

With that, as always, I look forward to reporting our progress to you again in the future and seeing many of you at G2E next week. And I'm glad my voice lasted that long. Operator, with that, we'd like to open it up for questions.

(OPERATOR INSTRUCTIONS). Traci Mangini, ThinkEquity Partners.

A couple different things. On the commissions, Andrew, can you just run through that line with me? I never seem to quite get it right in my model. And was there any upfront fee in there, or is this a really good number to be using going forward?

Okay, we had a $250,000 additional accrual or a catch-up, I will call it, on an account out there. So without that, I think it comes down about a point from [59.6] down to like [58.7], in there. And the only other driver to that is ATM revenue as a percentage of the overall revenue is 43% for this quarter in there. Last quarter it was 41% in there. So that's been driving that commission line in there. Again, I mean it really is dependent on that ATM side as a percentage of the overall revenues.

Okay. And then the relationship that you are working on with respect to the ATM --it might be too soon to try and speculate this; but what type of margin improvement do you think you could get if you were to roll that out to all your locations or a meaningful portion of them?

Well it's really to get the first one up and running in there. And again, the gross margin on our ATM side is down in that 8% or so level. So it's one of the least profitable things that we do today. So really, the -- and credit card and debit card being the highest profit margin side.

So really by putting a splitter on top of an ATM out there, an existing one under our customer today or moving this over and having them take it over, it really will make it where we get the highest profit margin piece of the business out there and let the banks do the ATM business.

And it does. The vault cash line goes away with that. The ATM maintenance side. It's just a whole slew of things.

Great. Well speaking of the ATMs, can you comment -- I heard on one of your competitors' calls, they were talking about certain casinos waiving ATM fees. Is this a trend that you are seeing or can you speak to that?

We have not seen that at our locations. Not at our locations.

But we have seen that they are -- in competitive environments, there are some operators that are doing that to try and give a competitive advantage.

Okay. Speaking of competitors, is there any update on Certegy that you are aware of or Fidelity, in terms of them selling that piece of the business?

I don't have any more information than we had on the last call, Traci, as to where they are at in their sale process.

But you would still be interested? (multiple speakers)

Yes, we still want to see the book of business and see if it makes sense. We will look at all kinds of strategic alternatives.

Great. And then just lastly, just for clarification, did something change with the debt charge, the extinguishment of the debt? I had understood it to be about $3.2 million. Was I mistaken or I just am curious what, if anything, changed to make it 4.3?

At the time when we did that, we -- the repricing of the stock on the warrant side or excuse me, on the warrants out there, so we had done a quick estimate last time saying I think it was 3.2 or 3.3 wrote off to come in there, pending final numbers and such. And so after close post closing of the deal, it was contingent on repricing some of the warrants out there. So that was a big part of that.

Okay, thank you very much.

Eric Wold, Merriman Curhan Ford.

Good afternoon. Can you just give us an update on what's happened since last quarter in terms of the number of RFPs out there -- what has been added and what policy you guys have either -- not in the running for any more or lost?

I'm aware of two that we did not win that we presented on. They were not -- obviously weren't our customers. And there are about nine I believe that we have presented on or are presenting on in the next week -- excuse me next two weeks, that we have yet to hear from.

Okay. And still the -- maybe you said this in the beginning -- but the guidance for the rest of the year, I guess for the year, excludes any new contracts you don't already have in place right now, correct?

That's absolutely right. And as I said on the prepared remarks, Eric, several of the customers that we have presented to in RFPs over the last several months have contacted us to let us know that they have held off making a decision until they see Powercash.

On that note -- that's the next question. So are they waiting to see Powercash in operation to see if they think it's a good [part] for them or are they just waiting to see if GLI approval comes and they are ready to go?

It's hard. I mean well they've told us they want to see it live in a casino operation. And it's going to vary from customer to customer as to what exactly they're interested in. Some will simply be interested in GLI approval. Others are going to want to see some metrics out of the casino operation to see what the uptake of their customer base is, the ease-of-use of the product on the floor, that kind of thing. So it's probably different measurements with each of the casino operators.

And from your point of view, your standpoint, do you need to see whatever, maybe a quarter, a few months of results out of Powercash before you are ready to roll out into additional casinos or if someone wants it, you will give it to them?

No, we won't need to wait for those. Obviously, we are very interested in those metrics, and we will fine-tune the program together with the property as we launch it. But no, we are prepared to continue on and start going to the next property and the one after that as soon as we have this approved and up and running.

And then lastly, Andrew, you gave the percent of revenues from ATM, you know, 43% in Q3 versus 41 in Q2. What was it in the year ago Q3?

41% as well.

Okay. Perfect. Thank you.

Chris Krueger, Northlake Securities.

I kind of need a little clarification on a couple of your comments. I was writing notes quickly; I might have missed. As far as the GLI approval, can you repeat that you expect that any day now and did you say you really believe it's before G2E?

Oh, it's absolutely, Chris. We fully anticipate it before G2E. It could be in the next two days or so.

And you have reason to believe -- is there a reason that you are working with them and they know you want it by then, if they are going to approve it or how do you know?

Yes, we've been -- as you can imagine, we've been talking with GLI daily, multiple times daily, as we've gone through the process. So I think we have a pretty clear indication of what it's going to take for them to get the letter of approval out and I'm confident in that information.

Okay, and then for Fantasy, again, I'm kind of asking you to repeat some stuff, but did you say that they would have 20 games at first and more of a bigger rollout in a couple of months? Is that --?

Yes, exactly. The plan is to open up the 20 games in their high-roller, high-limit area and to get those customers to start using the product as they slowly migrate it across their casino floor. They are planning on a large marketing push around their player club program in the month of -- late November, the month of December. And this will coincide then well with the introduction of their player program.

Okay. And did you just get to the 20 machines? Does that also await this GLI approval or is it going to go live tomorrow?

No, no, no, the 20 machines will be -- I mean we will get the GLI approval once we have that, then we open up on the 20 machines. We have one machine up on the floor today that is in -- that's roped off so it's not available to the public, but it's also in a test environment, so making sure that we have connectivity and that everything is working at the property itself. Once GLI approves it, then we are clear to put the first 20 up and running.

Okay. All right. As far as the potential two other beta sites, what is the update there? Is there a time frame on either one of those, do you think?

I don't have a hard time frame on them at this point.

Okay. Bally's, are they -- I understand that the Powercash is part of their sales pitch book or whatever. How actively are they including this and talking about this? Or they sort of have to wait for more of these approvals and such as well?

No, this is part of their presentation currently of their Power Bank and their Bally systems. You'll see that there is quite a section of their floor in the system side of their booth that is devoted to their products, but also highlighting the Powercash product; and they will have a live simulation. They will have the product on a, I believe 12 machines. It will be in a sign-up mode for a couple of machines but usable on 10 or 12 of the devices. So they are really pushing this in their booth as well as ours and in their promotional materials and in their presentations.

Okay. Last question. Did you lose any existing accounts during the third quarter?

No, we did not.

Okay that's all I've got. Thanks.

Adam Steinberg, Morgan Joseph.

I'll try and gear all of my questions towards Andrew then and save your voice.

Is Mike's enthusiasm coming across in here?

Loud and clear. Andrew, the interest expense came in a little higher than I was thinking and I was just wondering is that because the cage cash was higher? Was it because of a higher interest rate on that cage cash or was there costs related to amending the notes that's showing up in interest?

The vault cash balance outstanding was up a little bit with the additional Meadows contract out there, increasing the vault cash interest. At the same time, we have a quarter point interest benefit going forward now as we are tied to prime out there for the next quarter. So, again, it's us managing our cash and then at the same time, we had some increased cash out on the street.

Okay. And then the share-based compensation, I think you talked about why that was higher. Where should I expect that to be going forward?

I think the true run rate under there is --

A big chunk of that was options for the Board.

Yes. The options were $364,000 for the Board, so that goes -- that's an annual event and that goes away. But the true run rate I think is about $75,000 a month or so, something like that, for our restricted shares today.

Okay. And then the last question, either one of you can answer this, so, Mike, you can save your voice again. How long after the GLI approval will it take you to kind of get those 20 machines going?

I would think it would take us probably a few days to get everything up and connected and make sure it's running properly before we open them to the public.

Okay, thank you.

At the same time, Adam, I've got to tell you, the 20 iVIEWs actually from the Bally are installed there. It's all set up to go out there.

Once the approval is in we need to test connectivity with everything and make sure it's all operating properly. We have had the one up and running so that we could test that. But obviously we want to add all 20 of them and make sure they're all working.

Okay, but it's not -- you don't need a screwdriver in other words. You'll just kind of flip a switch?

Exactly.

All right. Thank you.

Gary Prestopino, Barrington Research.

Good afternoon, Mike and injury. I'm going to make you answer a question, Mike, but I'll ask Andrew this question first. Does the interest -- the interest on the notes reflects the full changes that you had to make as far as in the quarter, right? In terms of a higher rate, more outstanding?

Yes.

(multiple speakers) quarter, okay.

Yes, I mean it should be easy going forward to calculate.

That's fine. I just wanted to clarify that. And then Mike, can you possibly just talk to as far as what you feel would have been maybe on a property basis, really serious inquiries into Powercash where they are waiting for GLI approval or how it works at Fantasy Springs?

There are between four and six properties that are extremely interested; and by properties, I mean companies. Some of them have more than one casino. We have scheduled just -- so many meetings through the course of the show with customers, both existing customers as well as potential customers. It has created great excitement, but I would say four to six that are actively checking with us, wanting to know the timetable, wanting to know when they can go down and see it. Wanting to know what the live demo or the live simulation will be at the Bally. I mean really interested if that's what you're looking for, Gary.

Yes, I am. And then I guess in your experience in terms of adoption of new technologies, does it start as a ripple and then becomes a waterfall?

I wish I could tell you that it followed a particular path. In cash access on a casino floor, it started bill changer or bill validators, and then moved to ticketing, and both of those started out pretty much as a test amongst a handful of casinos. And once those casinos had proven the value of those products, then it rolled more as a wave and took something on order of five years to really be throughout the vast majority of the industry.

But I can't -- it's also different with every kind of product that you bring. Player club cards took quite a while to become ubiquitous throughout the industry, so. We believe that this will show a casino immediate results and will become very compelling to them on a quick basis, but the market will be the proof of that.

Okay, thanks.

Nick Danna, Sterne, Agee.

Well first, congrats on the GLI approval, assuming that comes and the installation. That's been a long time coming, so congrats on that.

Thank you.

Thank you very much.

Regarding GLI approval, have you had any conversations with the state regulators as to whether or not they are going to want any particular say so following GLI approval? I'm assuming once GLI comes, then most of the Native American jurisdictions would be fair game, but what about some of the regional riverboat type markets?

We've done a survey of state laws and regulations as well as compact language because compact language differs in each jurisdiction. And so we have a list of those that we believe are capable of adopting it tomorrow, that have no restrictions whatsoever and GLI being probably the only approval necessary in the vast majority of those. But I'm not prepared to share with our competitors who those are or who our targets may be. But we do not anticipate in California anything other than the GLI letter to satisfy the tribal gaming regulators.

Okay. So I guess GLI would cover most everything except Mississippi, Nevada and New Jersey and then there may be some states where a particular state gaming board would want to take a look at it?

Right. Or they might have something to be able to say about a product before adoption.

In terms of once you go live with Powercash, what's the thought process in terms of I guess incentivizing or motivating the players to actually go and sign up and attach their credit and debit cards to their player's card to utilize this technology?

It's -- we've come up with a variety of different programs for properties. The one that most properties have gravitated toward and seem to show the most interest in is the idea of rebating a portion or even all of the cash advance fee for using Powercash back in the form of promotional credits; promotional credits being credits given by the casino that can only be used on the gaming device and only used once they've used the equivalent amount of the cash advance. That's caught the eye of many of the marketing and slot operations' directors as being a great way to incentivize players.

In addition, we've talked to properties and Fantasy Springs is one that's going to do its own marketing program around its entire player club program and include this as one of the incentives to revamp their player club program, as another way of getting people in, getting them introduced to the product and getting them incentivized to use it.

Okay. And lastly, I am correct that you will not be providing the traditional cash access services at Fantasy Springs?

That's correct. We are only on the slot floor. We are not -- today, we are not providing the ATMs or check cashing or credit card cash advance services in the traditional modes. But in the future, it's entirely possible as that contract comes out to bid that we may win that business as well. Today we are starting on the slot floor in another cash access provider, one of our competitors, is providing all of the other services.

Okay. That's what I thought. Thanks a lot, guys.

Joe Hudak, Wachovia.

Most of my questions have been asked, but how many of the RFPs that you have out there are current customers? What was that number?

On the RFPs?

Yes, the nine RFPs that you said you had out?

I don't believe any of those are current customers, Joe. I haven't got the list with me, but I reviewed it yesterday and I don't believe there's any of our existing customers in that.

Okay. Everything else has been asked. Thanks, guys.

(OPERATOR INSTRUCTIONS). Eric Wold, Merriman.

One quick question and one, a longer question. Do you -- I know it's usually in the Q, but do you happen to have, Andrew, the volume of transactions processed -- that total number in Q3?

No, I don't and I don't think we really have given that in the past. I don't have that in front of me.

Okay, so that will be in the Q? It's the one that's normally in the Q and the MD&A.

Yes. I just don't have it in front of me.

Okay. Then, you talk about the number of machines that Powercash will go on at Fantasy Springs kind of initially and then kind of roll out. With, considering that and the other casinos you are talking to that are expressing interest in it or maybe just kind of well beyond that, what do you envision as kind of the average number of machines a casino would want to start with and then potentially eventually get to in maybe the first six or 12 months after launch?

It kind depends on the property, Eric. But once casinos have seen it up and running in another casino on the entire floor, then I would think that they would probably either do an entire property-wide launch or start with much bigger segments of their floor, say in the hundreds of machines initially and then weakly adding hundreds more.

Because part of the reason for rolling this 20 to a couple of hundred and then ultimately clear across the floor is this is the first installation. So we want to be cautious. The property wants to be cautious. None of us want to get the product out and have any hiccups. So we're doing this carefully and methodically. But once the product has been accepted and proven its reliability, then there's no reason that another property wouldn't say bring it in, let's turn it on, on every machine.

Okay. Fair enough. Thank you.

Rick [Rough], Private Investor.

Good afternoon. I know I owe you a calculator and I'm going to get some more for the analysts there so they can get the numbers right here in the future. So anyways, listening to the GCA call the other day, their CEO says that they are going after the Native American casinos going forward. And the question I would have here is, does our sales force have all the tools and the talent to move forward? And also, what is the game plan with our sales force versus Bally's sales force? Are we going to be stepping on each other or how is that going to work?

We're already coordinated with the Bally sales force, Rick, and we'll continue to coordinate with them doing joint presentations where it's appropriate and letting each other know of individual presentations.

But that's only (multiple speakers) for Powercash?

But I think I need to get you some glasses because if you look at the transcript of the comments from our competitor, they didn't say they were going after Native American. They indicated that they hoped to put the Edith product into Native American casinos because it was denied in Nevada.

Right, at Foxwoods.

No. They said Foxwoods would be one that they're looking to install it in. What they said was that they're looking to spread that into the Native Americans, not that they were going after Native American accounts.

Right. Right. So you must have listened to the call?

Yes. And read a transcript of it.

And also they said that they lost three accounts. Was that correct?

I believe they said they lost --

And they said one was worth 5 to $6 million and two were worth $100,000. And one was in Washington state. Were any of those our pickups?

Yes.

I can't --

Washington State.

Was that the $100,000 or was that the 5 to $6 million?

Rick, we don't really get into detailing which of the accounts came from whom. I don't want to get started down that path.

Okay. Two other questions here. When beta testing is going to be up and running for our Company here, is there going to be any revenues generated from beta testing?

Yes, every transaction will have revenues associated with it, and then we will start booking our revenues for the software license and the maintenance agreement.

And also, are we going to need to spend any more cash on upcoming infrastructure for the Company? Are we pretty well done with that?

Pretty well done. If you're talking about internal.

Yes.

Computer systems, that type of stuff?

No. (multiple speakers)

Last question is if I'm going to walk into Fantasy Springs, and I'm a new customer, how does the process take me to sign up with the new process?

You will go to either the casino cage or the player's club booth and ask to -- if you are an existing customer, you'll ask to upgrade your player club program to include Powercash. If you are a new customer, you'll ask for a player club application form and a cashclub or Powercash form so you can sign up for the features. It will take us probably eight minutes to process the transaction. Most of that will be you deciding which accounts you want to sign up for the program and getting your pin number. And from that point forward, you are capable of using the account.

How many player's club members do they have? Do you know?

Yes, we do, but we're not going to share that.

Okay, thank you.

You're welcome.

And it appears there are no further questions at this time. Mr. Cashin, I would like to turn the conference back over to you for any additional or closing remarks.

I usually close and even with a bad voice. Thanks, everybody, for being on the call today and we look forward to updating you, and again, hoping to see many of you at G2E.