Everi Holdings Inc (EVRI) 2007 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Cash Systems fourth quarter 2007 earnings conference call. 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 on how you can queue up for questions. (OPERATOR INSTRUCTIONS). Additionally, I would like to remind everyone that this conference is being recorded.

At this time, I would like to introduce our speakers for today's conference, Mr. Mike Rumbolz, Chief Executive Officer, and Mr. Andrew Cashin, Chief Financial Officer. It is now my pleasure 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 will] 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 fourth quarter of 2007, revenues reached $26.1 million, a 4% increase over the $25.1 million in the fourth quarter of 2006. For the full year, revenues were $104.9 million versus $95.7 million in the prior year, an improvement of almost 10%. We made a reclass adjustment to revenue and commissions expense in the prior three quarters with no P&L impact. This was due to a gross-up at the revenue and commissions expense line items at two locations during the year. In Q1, we reduced revenue and commissions by $369,000; Q2 by $456,000; and Q3 by $844,000.

We went live in mid-November at Fantasy Springs with PowerCash. However, we did not turn on the check cashing function at the gaming device until Q1 of 2008, and have deferred revenue recognition of the software license fees and maintenance fees until Q1.

For the quarter, cost of goods sold increased 32% to $23.8 million from $18 million in the prior year's same period. The significant increase is due to recording of bad debt expense of $4.1 million in the quarter related to the increased volume of returned checks in our check guarantee business. Unfortunately, we saw a material change in returned checks in the fourth quarter. Many of you have probably seen recent trends in consumer credit. We think this spike represents what is happening in the broader consumer credit environment.

Banks and consumer finance companies across the board are seeing increases in their delinquency and default rates. Cash Systems has not been immune to these factors. Because of these trends, we have begun implementing improved credit issuance policies and check collection procedures.

Our gross margins during the quarter decreased to 9% from 28% in the fourth quarter of 2006, primarily due to the bad debt expense I just mentioned. As a reminder, gross margin is defined as revenue less commissions, processing costs, check cashing costs, and armored car services. For the full year, gross margin was $19 million versus $19.9 million in the prior year; a decrease of $900,000 or 5%. We ended the year without any impact from PowerCash revenues or gross margin.

Commissions as a percentage of revenues increased 2 points to 57.2% versus 55.3% in the prior year. Processing costs were down relative to revenue, coming in at 17.3% versus 18.9% in the prior year. Armored carrier costs were up slightly. Check cashing costs were up $2.6 million over prior year, due to the increased bad debt expense. For the full year, payroll expense, professional fees and other G&A expenses were down 2 points from prior year as a percentage of revenue. Year-over-year, these expenses together were up $70,000.

For the quarter, EBITDA was negative $3.3 million. Included in that loss is the $4.1 million bad debt expense; $450,000 write-down of an intangible asset; and $180,000 of non-cash stock compensation. For the year, EBITDA was a negative $2.3 million, which includes $5.4 million of bad debt expense; $1.1 million of check guarantee fees paid to a third party; and non-cash stock comp expense of $855,000.

Depreciation and amortization increased to $919,000, which reflects an increase in our depreciable base from capital additions. Interest expense was $1,320,000. Of that, $883,000 was related to our [ball] cash and $437,000 related to our debt. When it became apparent that we were not going to meet our debt covenants for the quarter due to the bad debt expense and impairment, we approached our noteholders to amend the notes. So today, we announce that the Company reached an agreement with its noteholders to amend the notes and related agreements, of which I'd like to detail for you.

The amendment includes a 10% increase in an aggregate principal amount of the notes to $24.2 million from $22 million; a decrease in the conversion price to $2.51 and warrant strike price to $2.49, which may be further reduced by the noteholders based on 120% of the volume weighted average trading price of the Company stock for the next 20 trading days and an increase in the aggregate principal amount of the notes that the noteholders may require the Company to redeem as of October 10, 2008, to $12.1 million from $8 million.

The amendments eliminate revenue and EBITDA covenants for all of 2008. From a balance sheet prospective, we finished the year with approximately $17.2 million in cash; capital expenditures for 2007 were $2 million. Based on today's announcement regarding the review of strategic alternatives, we will not be offering guidance at the current time and will be filing a 12b-25 extension and will be filing our 10-K within the 15-day extension period.

Now I will turn it over to Mike.

Thank you, Andrew. I'd like to touch on several points today. First, as you saw in our press release, our Board of Directors has decided to explore strategic alternatives to maximize shareholder value. Deutsche Bank, which the Company engaged earlier this year to assist with strategic matters, will serve as the Company's financial advisor in this process. I want to emphasize that we are exploring all potential options, including the combination, sale, or merger of the Company with another entity; the raising of new capital; a recapitalization; and other strategic transactions, including the possible sale of some the Company's business segments.

Although an evaluation process has been underway, including discussions with various parties, the Company has not set any timeframe for conclusion of this process. There can also be no assurances that the process will result in any specific transaction. We do not intend to disclose developments regarding the exploration of strategic alternatives unless and until the Board of Directors approves a definitive option or transaction. Importantly, we believe the amended terms of the notes announced today provide us with the financial flexibility to complete our strategic review.

From a business standpoint, we have continued to achieve several key milestones. In November, PowerCash received approval from GLI and went live at Fantasy Springs Casino. As many of you know, PowerCash is the first product of our joint venture with Bally Technology and Scotch Twist.

In February, we announced that PowerCash was compatible with Bally Technologies' iVIEW display manager. Bally's iVIEW DM allows gaming operators to create picture and picture capability on the iVIEW display, the main game display, the second game display or any game display that is associated with the device. This is a significant benefit to gaming operators because they will not have to make any modifications to their existing games or purchase new games in order to implement this technology across all manufacturer's gaming devices.

In addition, Bally's technology allows operators to implement new systems, features and technology easier and quicker, including, importantly, our own PowerCash product. We believe PowerCash is a truly unique product that will transform the way patrons access their cash on the casino floor. In the past, the process of placing new and innovative technology on casino floors has always been subject to the timing of the casino operators in upgrading the features and the functionality of their gaming devices. Several casinos that we have identified as early adopters of this technology have had to delay their decisions due to circumstances that are unique to their operations.

While the process of placing PowerCash in additional casino locations is taking longer than we originally estimated, we remain firmly convinced of this product's potential. We are encouraged in this belief by the continuing positive feedback and ongoing consideration of this product by additional casino operators.

In Fantasy Springs, we're seeing early signs of what PowerCash can do. With our PowerCash machines, dollar volumes per transaction are increasing month over month. We continue to sign up new customers and we continue to work with the casino to penetrate their customer database. As we have communicated in the past, the original plan was to require all Fantasy Springs player Club Cards to be exchanged, thereby giving us the opportunity to introduce PowerCash to all of the player club members in a compressed timeframe. Unfortunately, this player's club card exchange has been delayed. As a result, the number of customers signing up to use PowerCash has not been as rapid as we had projected.

However, the technology is working tremendously, and we remain very positive on the overall opportunity that PowerCash represents. We have been working closely with the property to develop additional marketing efforts that we believe will drive greater customer uptake of this product.

We continue to make progress on other fronts as well. In the fourth quarter, we announced an expanded contract with San Manuel Indian Bingo and Casino to include our eCash checking services and the contract renewal of the Treasure Island resort and casino. So we are getting good same-store uptake of our additional services from our new contract renewals.

In January, we announced a new multi-year contract with the Wildwood Casino, where Cash Systems will provide our full line of cash access services, including all-in-one ATMs, casino PC, and eCash checking. And subsequent to this contract, we announced the signing of a letter of intent to provide our PowerCash product to the American Gaming Group, LLC's first casino project at the Wildwood Casino.

In February, we announced a new multi-year contract with Gold River Casino, where Cash Systems will provide our full line of cash access services. And today, we announced an extension of the multi-year contract with Choctaw Nation of Oklahoma for its Choctaw casinos and the addition of another Choctaw Casino location, where Cash System will provide our casino PC, eCash checking, and a full service booth operation.

We were awarded not only an extension to the current agreement, but the addition of the Choctaw Casino in Pocola. We are pleased that we continue to strengthen our relationship with this important multi-casino customer, while introducing our full line of products designed specifically to complement their gaming environment.

Now, before we open it up to questions, I'd like to quickly remind everyone we cannot comment on or discuss issues surrounding our pursuit of strategic alternatives. We will only discuss fourth quarter and fiscal 2007 financial information and our new amendments to the notes.

With that, operator, please open the lines for questions.

(OPERATOR INSTRUCTIONS). Chris Krueger, Northland Securities.

First, I just need a few points clarified. From early in the call, I was rapidly taking notes. On the decreased sales and commission expenses from the first three quarters, I heard the three numbers -- $369,000; $456,000; and $844,000. Are we simply taking that away from both sales and in the commission expense line?

Correct.

Okay, so it's net [none of that], okay. And then right after that, the license fees from Fantasy Springs. I didn't quite catch that. That would be recognized in the first quarter?

Yes.

And what would be the dollar amount of that in the first quarter, roughly?

Well, you're talking about the license fees that we sold the property -- roughly $500,000. Plus the annual maintenance fee, 28% of that, another $100,000 over the 12 months.

Oh, okay. So, [a fourth card] 25% of that --?

It would be a full quarter. So, we didn't have a full quarter.

Okay. Roughly that's the rate per quarter then.

Yes.

As far as these returned checks, did that all occur during the fourth quarter? Or is it some other stuff that's occurred throughout the year or what's the understanding of that again?

We saw a little rise in the second half of the year, but effectively the majority of them, we had a huge spike in the fourth quarter. And we really had to sit down and evaluate our reserve. It wasn't getting better with time, these receivable. And so we had to write these down. And there again, our returned checks almost tripled from our first quarter. I should say 2.5 times what it was in our first quarter. And that's we had $5 million of returned checks in there and ended up taking almost a $3 million write-down on that in the quarter alone; plus the normal bad debt expense we would have normally taken.

Yes. And that's always a portion of that every quarter in that line item, right?

Yes, exactly. But this was probably about $3 million more -- [$3 million plus].

$3 million more than a normal quarter, okay. Then the non-cash impairment related to the contract that you don't think will be renewed, is that in the other G&A line?

It is right now. When we finalize with the auditors there, I'm hoping to move it down. But right now it's in the SG&A or other G&A line item.

And I guess on your pipeline of potential new customers for primarily PowerCash but even just the regular business, any kind of further insight you can give us there, if there is a certain number of RFPs that are up or contracts that are out there that we can look for? Or is it going to be more of the same that we've seen the last few quarters?

Well, I mean, we have about six active RFPs that are out on the street right now. There are a few that we've responded to that haven't made decisions yet. So it's about what we've seen in the last couple of quarters.

And then with the PowerCash, I know there's not really RFPs out for that --

Right.

-- but any kind of inkling as to -- of casinos that are getting serious?

We have casinos that are getting serious about this. As I said in the prepared remarks, it comes down to the timing for the casino operators. And while we believe that we will be turning a percentage of those into contracts, the timing of those contracts are entirely up to the casino operator and when it fits best into their strategic moves for the year of '08. So we can't -- I mean, it's one of the reasons that you heard; we're not giving guidance. I mean, we can't predict when they're going to turn in signed contracts.

Okay. Just my last question -- just did the consumer environment besides the debt type of liquidity issue type stuff, what are you seeing? Are the locals markets kind of down at the moment in the fourth quarter and into this year? What can you comment on there?

Well, we've seen sort of -- I think what anybody who's followed the industry has seen, there are pockets around the country of jurisdictions that have had poor to negative results in their quarters. What we're seeing in the first quarter is pretty much what we saw in the fourth quarter with those jurisdictions. But there isn't -- at this point, there doesn't seem to be a nationwide trend that we can point to. It really comes down to jurisdiction by jurisdiction.

I mean, the one thing I can tell you is that those kinds of market forces on casino operations provides us additional opportunities. Because while casino operators look at same-store sale growth as opposed to new jurisdiction growth, they have to look for more efficiencies in their operations. And as they look for those efficiencies, they'll be looking for products like PowerCash that can provide them the ability to accept same-store revenues and even decreases in those revenues, but keep their bottom lines the same or growing.

Okay. That's all I've got for now. I'll just get back in if I have more. Thank you.

Eric Wold, Merriman Curhan Ford.

Wanted to go back to a number of questions. It looks like you also restated the '06 quarters. I don't want to get too granular, but do you happen to have what the reduction of revenue and commissions were in the '06 quarters?

$300,000.

Per quarter?

No. Just -- I believe at year-end. We just did it [about at] year-end.

Okay, perfect. And then following up, I guess, on the last comment that Mike just made about the operators looking at PowerCash or things like PowerCash in this economy. In your conversations with them, has the economy or concerns about the economy or concerns about spending levels or gaming levels, has that come into play in either a slowdown in negotiations on PowerCash or [whether]? Are they actually getting (multiple speakers) --?

Yes, I mean, clearly that's been a focus of a lot of our conversations. But it hasn't been the reason for any decision-making process to have been slowed down. In fact, that's been the driver to get customers to look to adopt more quickly. Because as they look at potentially declining topline revenues, they need to look for more efficient ways of getting customers the ability to access various accounts while they're in those casinos.

So yes, those discussions have been built around that, but they've been built around the efficiencies and the additional value-add in a slow economy that products like PowerCash. And in particular, in our case, PowerCash can bring to a casino operation.

Okay. And then looking at the fourth quarter, can you give us a sense that if you were to take out any contract -- any of the new contracts from '07, kind of what the same casino, same customer year-over-year growth or his decline was in Q4?

Andrew is looking at his notes. I don't know that we're prepared on the call to do that, Eric. I mean, that would require us to back out some stuff. We saw growth in the first part of the year in the same-store sales.

But I mean, if you saw Q3 to Q4, I think there was only a 5% dip?

Correct.

Yes, Q3 to Q4, 5% dip, which I think last year was a little similar in there. Again, we normally have a spike in Q3 a little bit in the midwest. And then depending on whether or not you have any new contracts coming up or online is what we normally would end up not making a valley there with the fourth quarter.

Okay. And then kind of going into the PowerCash, your revenue recognition, you mentioned that so starting in Q1, you will be taking the 12 month ratably recognized fees out of the upfront and the $100,000. Are you also -- have you also started recognizing the $1.50 or $0.50 transaction fee coming through the joint venture?

Yes, we did. But [it's] very little before year-end. But yes, we have.

Okay. And I know it's going to be a very small number, but just accounting-wise, have you guys determined whether you will be taking that $1.50 or just the $0.50 on the top line?

Everything says we should do it at $0.50 now.

Okay, perfect. Thank you, guys.

Joe Hudak, Wachovia Securities.

Chris already answered a lot up my questions -- asked. My major question is, is with the amendments to the notes, at what point -- as these are going to be probably resetting almost every quarter -- at what point do we become mission-critical?

I don't think I understand what you mean by resetting. I mean (multiple speakers) --

Well, I mean, they just reset.

And we have no covenant or EBITDA requirements for the rest of the year.

Okay. So this will be the number then for the remainder of this year?

That's correct.

Okay. So, could you give us a little color then on how comfortable you feel with this? Was this attainable to meet these covenants they have set forth?

Again, there are no covenants in 2008. The covenants have been removed. So there will be no issue in meeting any covenant requirements during 2008.

Okay, I got you. All right. (inaudible) Okay.

Williams Trading, David Williams.

Can you give me a guesstimate on what your 2007 Sarbanes-Oxley costs were?

Oh. You've got Andrew reaching.

It doesn't have to be exact.

Yes. No, he's reaching for some other documents.

I don't know. I mean, if you -- but if I just go to year-to-date professional fees and it was $1.2 million for the year versus $2.1 million last year in there. So, most of that professional fees is wrapped around of us being a public company.

Right. And as a private company, those expenses would go away?

Those would go away.

And if your noteholders were to roll into equity as a private company, you'd be an EBITDA positive company?

Well, I mean, I think you can -- yes. You can do the math, certainly.

Significantly, at these prices, correct?

Yes.

It's a potential.

Yes.

Okay. I'll call you guys off-line to get the name and number for your banker. Thanks, guys.

(OPERATOR INSTRUCTIONS). Terry Babe, ThinkEquity Partners.

Thanks for taking my question. Are you seeing any change in your customer base or decision times as it relates to the recently announced Global Cash and Certegy merger?

You know that -- we really haven't seen anybody out there who is in the RFP process that has slowed that down as a result of the announcement.

Okay, thanks. And any change to your thinking in your near long-term EBITDA margin targets?

No.

No, it's all on the uptake on the PowerCash and getting more contracts signed up and installed and out and rolling. Not at all.

Okay. And then I may have missed this, but as it relates to the bad debt expense, did you comment on how that trended during Q1 and if you're seeing any acceleration or deceleration?

We didn't mentioned Q1. However, we do know that it has trailed over into Q1 with returned checks.

Okay. And can you comment on whether it's at the same pace or if the pace has changed?

It's on a similar case, although we have reimplemented other procedures in that area.

Okay. And can you provide the revenue mix for the quarter?

For revenue, credit and debit combined was about 48%; ATM, 41%; check services, the 11% difference there.

Okay, thanks.

And gentlemen, there are no further questions at this point.

Well, thank you, everyone, for joining us. And we look forward to keeping you updated as we move forward in our progress. Thank you.

That does conclude today's conference. We thank everyone for their participation. Have a great rest of your day.