Everi Holdings Inc (EVRI) 2008 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Cash Systems first quarter 2008 financial earnings 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 for you to cue up for questions. I would like to remind everyone that this conference is being recorded.

Now I'd like to introduce our speakers for today's conference. Mr. Michael Rumbolz, Chief Executive Officer and Mr. Andrew Cashin, Chief Financial Officer. I will now turn the call over to Mr. Andrew Cashin, Chief Financial Officer. Please go ahead.

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 call actual results to different 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 will undertake no obligation to update any forward-looking statement, that we may make today.

With that said, revenue for the quarter ended March 31, 2008, was 27.1 million compared to 25.2 million for the same period in 2007. The 1.9 million increase or 7.6% increase, is primarily due to an increase in overall transaction volume. Our same store sales were up 4.1% year-over-year.

Our largest customers continue to expand their services, which drives more volume through our systems. The volume of transaction dollars processed through our cash access services during the three months ended March 31, 2008, was 889 million compared to 850 million, during the same period in 2007. The volume increase was primarily driven by our ATM and check-cashing transactions.

Cash advance revenue increased slightly to 12.2 million from 12.1 million in the prior year quarter, while ATM revenue increased 11.7 million from -- to 11.7 from 10.3 million and check cashing revenues increased to 3.1 million from 2.7 million in the prior year quarter. For the quarter, cost of goods sold increased 12.2% to 22.1 million. The increase is due to bad debt expense related to the increased volume of returned checks and our check guarantee business, which began last quarter. While these trends impacted the first quarter, we are pleased to report we saw a stabilization of these trends in the second half of the first quarter and expect continued improvement due to the policies and procedures that were implemented in the first quarter.

We are on track to substantially reduce this bad debt expense in Q2 from approximately 2 million down to between 1 million and 1.5 million, without significantly impacting our top line revenues in this area. Our gross margins during the quarter decreased to 18.3% from 21.7%, 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 first quarter gross margin was $5 million versus $5.5 million in the same quarter a year ago. A decrease of 500,000. Commissions increased by approximately 1.2 million during the three months ended March 31, 2008, to 15.4 million compared to 14.1 million during the same period in 2007, which was directly related to the increased transaction volume at existing locations as services were expanded.

Processing costs remain constant compared to the same period last year despite the 8% increase in revenues reflecting results or switch to internal processing. Armored carrier costs were up slightly. Check cashing costs showed an overall increase of 1.1 million compared to the same period last year. Primarily due to the increase in bad debt reserves as previously discussed. Payroll and related costs increased by 366,000 compared to the same period a year ago.

Professional fees increased by 130,000 due to the additional legal fees. Other general administrative expenses decreased by 392,000 compared to the same period last year. For the quarter of 2008, EBITDA was essentially break even including the higher than normal bad debt expense and 179,000 of non-cash stock compensation. Depreciation and amortization remaining constant.

Interest expense was 1.2 million up slightly due to the increased amount of all cash required to fund our ATMs and interested related to our senior secured convertible notes offset by decrease in interest rates. Interest related to the notes was 459,000 and 748,000 was related to bulk cash. The company also recorded a loss on extinguishment of debt during the three months ended March 31, 2008, in the amount of 2.6 million representing the difference between the carrying value of the first amended and reinstated notes and warrants and the fair market value of the second amended and restated notes and warrants.

We anticipate that our existing capital resources will enable us to continue operations through approximately October 2008. We are taking steps to reduce operating expenses and may consider other measures to control costs. We are aggressively looking for financing in a manner that takes into account limitation contained in the second amended restated notes including prohibitions on incurring senior debt and the note holders right of first offer on most equity financings, which would delay the closing on those equity financings.

Although we are aggressively pursuing additional financing may seek a further amendment to the second amended and reinstated notes, there can be no assurance we will be able to achieve profitable operations, generate sufficient cash from operations, obtain additional funding, modify the second amended and reinstated notes in a beneficial manner or repay the redemption option of the note holders of up to 12.1 million, should they exercise their redemption right. As previously disclosed the board of directors has decided to explore strategic alternatives to maximize shareholder value.

Deutsche Bank, which the company engaged earlier to assist with strategic matters, is serving as the company's financial advisor in this process. There can be no assurances that this process will result in any specific transaction. Now I will turn it over to Mike.

Thank you, Andrew. I would like to touch on several points today. First, despite the significant distractions posed by our review of strategic alternatives and financing considerations, I am pleased to report that our team members continue to deliver new business to our company. We continue to remain focused on driving growth.

In fact, the most significant announcement of 2008 actually occurred subsequent to the quarter end. On April 16 we announced a new multiyear contract with Fantasy Springs Resort Casino, where we will provide casinopc for cash advance services, all-in-1atm services, eCash checking services for check guarantee and fullservice booth operations. This combines our basic financial services with the presence of PowerCash for the first time.

We expect that we will be able to accelerate the move to cashless transactions beyond its already steady growth pattern at Fantasy Springs, by using our employees direct access to the customer base to promote PowerCash to every credit, debit and check cashing customer. We are currently in discussions with two other properties looking to add PowerCash to their casinos and we are consistently encouraged by the continuing positive feedback and ongoing consideration of this product by additional casino operators. During the quarter we also signed a letter of intent to provide PowerCash to American Gaming Groups first casino project.

We also achieved PowerCash compatibility with the Bally technologies new iVIEW display manager, which will open many more opportunities for PowerCash placements in the future. In March, we announced a contract extension with Cickasaw Nation of Oklahoma for Chickasaw Casino and the addition of another Chickasaw casino location, where cash systems will provide its casinopc for cash advance services, eCash checking and full service booth operations.

We also signed contracts to provide our full line of cash access services at the Gold River Casino and The Wildwood Casino. Our largest customer, the Seminole tribe of Florida, is continuing with their addition of class three gaming devices. We also expect that they will continue with additional expansions to their gaming products and we remain optimistic about the potential for increased business as a result of these expanded gaming operations.

Now, before we open it up to questions, I'd like to quickly remind everyone that we cannot comment on or discuss issues surrounding our pursuit of Strategic Alternatives other than those comments we have already made today. We will only be discussing our first quarter financial information. With that, operator, please open up the lines for questions.

Thank you, Mr. Rumbolz. (OPERATOR INSTRUCTIONS) We will take our first question from Joe Hudak with Wachovia Securities.

Good afternoon, gentlemen.

Good afternoon, Joe.

We've got some contract wins in March and April. Where do we stand with any future? I mean, where do we stand with the RFP process and any future? How many?

We have currently eight RFPs out that we have responded to, Joe.

Okay. Great. Also, with all being said, what is Bally's take on the PowerCash? Where are they during this whole process?

Well, they have been working with us very closely on PowerCash. Clearly in the technical phase of our startup at Fantasy Springs, but also in terms of their sales presentations, PowerCash is included as part of their line of power products for their system sales. So they have been very supportive and continue to be very supportive.

Okay. Great. Then finally, with this continuation of bad debt. I mean it really caught it seems like all of us as a curveball last quarter, and obviously you've taken some pretty good steps here to combat it. I mean, what seems to be the biggest challenge here? I mean, why can't it go away a lot quicker? Why is there such a lag in here is what my question is?

As Andrew indicated, I mean the kind of bad debt to hit us in the fourth quarter was unusual in that a large portion of it was accounts closed. People that were simply no longer in what I would call the regular market. These may be people who were also being foreclosed in on their homes. Some of that bled over into the first quarter as we indicated in our fourth quarter call, but once we became aware of the type and location of where these were coming from, we immediately instituted steps to bring it back and to normalize it. I think Andrew indicated in the prepared comments we think we will have it back normalized in the second quarter.

Okay. Great. Just to step back a little bit. I mean, it just seemed in the past conference calls up to last quarter it was never such a major, major issue.

That's correct.

Is that correct or did I miss something?

No, that's correct, but at the same time the economy has gotten worse out there and we felt it in the customers.

Okay. Great. Thanks.

Thanks, Joe.

Thank you. (OPERATOR INSTRUCTIONS) We will go next to Nick Danna with Sterne, Agee.

Good afternoon.

Hi, nick.

Two questions for you. First on the -- I think you shared it but I missed it. The check cashing revenue in the first quarter what was that?

Check cashing revenue. 3.1million versus 2.7 last year.

How did that compare to the fourth quarter?

The fourth quarter.

Do you have that? I was just curious, just directionally if you -- if the check cashing revenue was down in an effort to sort of stem the bad debt or if you were able to keep revenues relatively constant and still manage to cut it about in half relative to the fourth quarter?

It's up from the fourth quarter. We had 2.8 in the fourth quarter.

Okay. So actually more revenue and about less than half of the bad debt.

2.9 in the fourth quarter.

Got it. Okay. And then you talk in the press release about the restated notes and the fact that the conversion price hasn't changed from the last conference call. Can you just speak a little bit more to that because I know there was an option to adjust that price?

The note holders had the option to evaluate based under I think 20 or 25 trading days after the announcement, a volume weighted average price. And they needed to vote or send in their election for that and they needed to get two thirds election for that and only one of the three came in and voted for the vwap . So they didn't get their two thirds election for that for the vwap. So it stayed at the 251 and 249,

As I understand it, that option has now expired?

That's correct.

Okay. Great. That's all I had.

Thanks, Nick.

Thank you. We will go next to Chris Krueger with Northland Securities. Go ahead please.

Good afternoon.

Hi, Chris.

Hey, you might have to repeat a couple of things from your comments. But for the bad debt, the actual bad debt portion of the check cashing expenses, what was that number again?

The bad debt portion was just over 2 million, I believe.

Your total check cashing cost was just over 2 million. Am I reading that correctly?

Yes. 100,000 plus is for check guarantee to third parties.

Okay. All right. So then looking in the second quarter then based on your comments. Seeing that total number come down about 1.2, 1.3 is kind of middle of the road of that range, would you say?

I mean I gave you 1 to 1.5.

Yes, okay.

If you want to model that? We've seen the April and beginning of May trends and feel comfortable that we have tightened that down significantly.

Okay. As far as going through the strategic alternatives and all that kind of stuff, I know you wanted some additional business at Fantasy Springs. But what kind of impact do you think, if any, has this had on just getting there front of potential new accounts?

So far it has not had any impact in getting in fronts of new accounts and we continue to be invited into RFP processes.

Okay. Last question. Any question that a potential beta site for PowerCash could bring in some up front license fees that could help the balance sheet in a meaningful way or do you think that's kind of a long shot at this point in the next six months?

If we keep working on getting PowerCash placed at other locations, Chris.

Again, we continue to expect to get a second and third location here.

And now if there was an existing customer it was going to be kind of a beta site would they still pay the same structure?

Yes.

Okay.

They would.

All I've got. Thanks.

Thanks, Chris.

Thank you. That does conclude today's question and answer question session. I will now turn the call back over to management for any additional or closing remarks.

Well, thank you, operator. Thanks everyone for joining us on the call and we look forward to updating you at our next quarterly conference call. Thanks again.

This concludes today's teleconference. You may now disconnect and have a nice day.