Everi Holdings Inc (EVRI) 2008 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2008 Global Cash Access earnings conference call. At this time, all participants are on a listen-only mode. We will conduct a question and answer session towards the end of the conference. (OPERATOR INSTRUCTIONS).

I would now like to turn the presentation over to your host for today's call, Ms. Lisa Yi, Treasury Manager. Please proceed, ma'am.

Thank you, and welcome everyone to Global Cash Access's second quarter 2008 earnings conference call. Joining me on today's call are Chief Executive Officer, Scott Betts; Chief Financial Officer, George Gresham; and Senior Vice President of Finance, Mark Labay.

On today's call Scott will give an overview of the Company's progress and the outlook for the fiscal year. Then George will provide more details on our financial performance in Q2 as well as provide an update on our outlook for the full year 2008. Following George's comments, we'll be happy to take questions.

A few important items before I turn it over to Scott. First, we posted our earnings release and updated financial statements to our investor website at www.globalcashaccess.com for anyone who still needs access to that information. Also, if during this call we use any non-GAAP financial measures or references, we will put up the appropriate GAAP financial reconciliation to our website, globalcashaccess.com. And last, a replay of today's call will be posted on our website around 3:00 p.m. Pacific time and will remain there for approximately one month.

As we begin, let me remind everyone today's discussion contains forward-looking statements based on the environment as we currently see it, and as such, does include risks and uncertainties. For factors that could cause actual results to differ materially from those described in our forward-looking statements, we refer you to our SEC filings and specifically to the Form 10-K that we filed on March 17th, 2008, and the risk factors set forth therein.

With that, let me now hand it over to Scott.

Thank you, Lisa, and welcome to everyone. I think we would all agree that it has been a tough quarter for the gaming sector as well as the overall economy. The impact on the gaming sector has been particularly pronounced as declines accelerated for most large gaming companies in the second quarter. Destination cities such as Las Vegas and Atlantic City appear disproportionately impacted. Against this back-drop, we are very pleased with our results in the quarter and how well our strategy is taking hold.

Our strategy remains straightforward. One, we're using our strong capital structure and cash flow to acquire strategic assets to fuel overall growth during this downturn. Second, we're investing in systems to both generate cost savings as well as give us capabilities to launch new products and services more effectively. And lastly, we're accelerating our push on new products, focused on those that will help our customers lower their costs, as well as drive more dollars to the gaming floor, and retain their player base.

We have been able to acquire two other cash access providers in last six months at very attractive prices. Specifically, the Certegy Gaming Service integration has been substantially completed. We are right on the project's financial objectives and we are starting to see the positive impact on our overall performance. Despite declines in our base business reflecting segment trends, revenues in the quarter were up 11%.

We closed the acquisition of Cash Systems last Friday, and integration efforts are underway as we speak. Cash Systems will add a bit more than $100 million to our top line on an annualized basis, and over 120 customers to the about 1100 or so we now serve.

Importantly, their customer base is disproportionately concentrated in the few regions experiencing growth. In fact, due to the unique nature and location of Cash Systems customers, their revenue in Q1 of 2008 grew at around 6% year-over-year.

So despite the general downturn in the segment, these two acquisitions should provide growth for GCA over the next year or so. This growth, along with favorable interest rates, are allowing us to continue to make significant investments in operational improvements and to invest in new product initiatives, the other two key pieces of our strategy.

As you can see, in spite of our investments in integration costs, higher than normal legal and professional services costs, as well as investments in several key projects, our debt earnings remain flat verses last year with expectations of growth in the second half as we are able to lower these costs.

Let me take a moment to update you in greater detail on the status of our various initiatives. We are now investing and executing on a clear product strategy focusing on lowering our customer's cost and improving their marketing and data needs. We believe that the combination of our past experience and the acquired intellectual property from Cash Systems will serve as a foundation for our initiatives.

The addition of PowerCash product and its derivatives, our intention of retooling our EDITH product, as well as other identified product additions will give GCA the most complete lineup of self-service and cashless gaming products in the market. Most importantly, we believe that the current tough market conditions provide a unique opportunity to increase the receptivity and interest in these products as our customers face the need to improve their bottom line and become more efficient in their marketing efforts.

On our last call, I spent some time discussing the important investments we are making to improve our data platforms. This project remains on track. While the most immediate results of this initiative will be improved customer service, greater access to management data, and provide cost savings, we believe its long-term strategic value lies in the opportunity to monetize that data.

Given GCA's unique position in the gaming sector, we collect transactional data from the vast majority of all-gaming properties; reported and non-reporting entities alike. We believe being able to provide this business insight into competitive trends, consumer behaviors and marketing data will set us apart from both our current and future competitors, and help our customers differentiate themselves in the marketplace.

By way of a simple example, we could provide a casino operator with customized marketing messages that are placed on display screens on our devices, based on our knowing who this the consumer is and what their cash access habits have been. Today, this is not possible due to the complexity of changing those screens through the manual intervention required to alter software.

The platform investments we're making will allow devices to be managed centrally so messages can be tailored dynamically based on a property's desired incentive programs. We believe this will be very valuable in assisting our casinos to market more effectively to their patrons. While these product offerings are not yet part of our current lineup, over the next few months they will play a critical part in our value proposition alongside the cashless gaming products such as PowerCash.

The point here is that our success long-term will depend on our ability to lead with product innovation that helps our customers succeed. We'll continue to leverage key partnerships like the ones we have with IGT, Bally Technologies, and others to make this happen. We feel it is critical to continue to make the investments to meet our primary objectives of being first to the market and leading with new products in 2009.

On the international front, while we remain cautious on our outlook of these markets, we are very pleased to announce through our close work with the UK Regulatory Authorities, the United Kingdom Gaming Commission has issued a draft interpreted note of the existing regulations. We believe the provision of this draft note will permit us to provide gaming patrons in the UK with the means to access cash in a casino in a manner that is fully compliant with the existing laws.

Although this service will have more restrictive provisions than what existed previously, we are ideally positioned to launch this new service in that country, and we are actively working on that introduction. This will be an important first step to reestablish our UK business lost last year.

I would like to leave you with the following thoughts before I hand it over the George. First, we have a clear strategy that should provide growth and value to our shareholders as we go through these difficult times in the segment and the economy in general.

Our acquisition of Cash Systems will add important diversification to our revenue base, increase our portfolio of protected intellectual properties, and add a group of highly talented associates to our business.

Third, our product road map is becoming clear and the work to build a foundation for those products is well underway. We are thinking about product innovation in the gaming sector every day.

Lastly, we remain a very strong Company financially, with strong capital structure, conservative leverage, and strong, consistent cash flow that allows us to execute our strategy in the face of strong head winds.

With that, let me turn it over to George.

Thanks, Scott. As everybody is probably aware and as I have just been informed, apparently there has been some delay in posting our actual release to the site. That should be corrected shortly.

With that in mind, I'll go through this methodically and we can be thorough in our responses to questions. Our revenue was up in the second quarter of 2008 by about 11% compared to last year's second quarter. All of this increase and then some can be attributed to the integration of the Certegy Gaming Services, or CGS, accounts which contributed around $23.5 million to the quarter.

Absent the acquisition, revenue on our existing base of customers declined about 5%. Like much of the gaming sector, we noted an acceleration of revenue decline in the second quarter compared to the first quarter of 2008. We believe our same-store decline on a year-over-year basis was close to 6%. These declines impacted both the CGS accounts as well as our base accounts.

The other significant factor was the loss of the UK cash access business in the prior year. This business represented about $1.7 million in revenue in the second quarter of 2007.

As Scott mentioned, we are preparing to launch a new Cash Access system in the UK, however, due to the timing of the launch and the more restrictive constraints on the service, we do not expect to see any material impact from this change in the remainder of 2008.

Consistent with the first quarter of 2008, the rates of decline seen in credit card cash advance are more dramatic than those seen in other product sectors as consumers either face greater credit tightening imposed on them by their financial institutions or they self-regulate their spending by accessing their available funds via their debit accounts as a preference over credit.

Our Check Warranty product grew during the quarter by about 45% compared to the prior year quarter due to both the CGS acquisition but also the acquisition of new accounts acquired and added to the platform largely in the last half of 2007. The underlying long-term trend away from checks does not change in our view. Recall that in the prior quarter we reclassified Arriva to Discontinued Operations and as a result reclassified prior and current year revenue to that category on the income statement. Previously those revenues had been included in "Other revenue."

On a sequential quarter basis our revenue increased by about the amount of the revenue contributed from CGS. The base portfolio, although experiencing a higher rate of same-store loss in Q1, absorbed that loss due to the roll-on of acquired customers.

Gross margins came in about where we expected at just lower than 27% given the integration of CGS. Absent CGS, there is no material change in margins in our base business.

Cash Systems, like CGS, had margins lower than our base business and as we integrate that business, you will see margin compression as a result of those account economics. Our Check Warranty and Verification business continues to perform in line with our historical performance and our internal expectations.

Our operating expenses, excluding non-cash equity compensation, depreciation and amortization increased by about $4.5 million from the prior-year quarter. This increase is largely due to the integration of CGS, however, legal expenses continue to be about $500,000 more than the prior year due to the active management of the class action and derivative suits we are confronting. And about $1 million of costs were incurred in the quarter that resulted from the one-time efforts of integrating CGS accounts and costs associated with transitional services provided by Fidelity National Transaction Services, the former parent of CGS.

Also, in the prior year quarter we recognized $1 million benefit related to reclaimed properties that did not recur in 2008. We expect to continue to incur relatively high legal expenses until such time as the various cases are definitively resolved or our retention limits on our insurance policies are consumed. The former outcome is not reasonably possible to predict and the latter is unlikely to occur until late 2008.

Included in operating expenses is non-cash compensation expense of approximately $2.4 million. Depreciation and amortization increased on a year-over-year basis due to the acquisition of CGS, but was relatively flat on a sequential basis as other amortizing assets became fully amortized. Our consideration of the appropriate fair value as assignable to the CGS acquisition continues, and could impact depreciation and amortization in future periods.

Net interest expense decreased due to significantly lower interest rates compared to the prior-year quarter.

Our effective income tax rate was about 38%. As many of you know, CGS is generally not in a tax paying position due to the amortization of intangibles that are tax deductible. This is true in 2008 as it was in 2007.

Our GAAP EPS before discontinued operations of $0.11 is the same as in the prior year quarter. Cash EPS is a non-GAAP metric we use to reflect the fact that GCA generally is not in a tax-paying position even though the Company reports tax-expense for GAAP purposes. We define Cash EPS as net income before discontinued operations plus the tax effected deferred tax intangible amortization divided by the shares.

The Company's pre-tax amortization deduction is $45.7 million per year, and we tax effect that figure at the current quarter's effective tax rate in order to determine the add-back. Cash EPS was $0.17 in the second quarter of 2008, the same as in the prior year.

Due to ongoing analysis associated with the purchase accounting for CGS we have filed an extension request for our Form 10-Q. We will be finalizing and filing our Q shortly.

Let me turn it back to Scott now for an overview of our 2008 guidance and wrap-up.

Thanks, George. We have updated our financial outlook for the year based on the closing of the Cash Systems acquisition in early August. Further insights into segment trends and our continued investment in our key projects. We now expect that in 2008 revenue will range from $682 million to $690 million. EBITDA will range from $92 million to $97 million. And GAAP EPS before discontinued operations will range from $0.39 per share to $0.42 per share.

This guidance is based on the following assumptions. Capital expenditures generally consistent with those in 2007, an effective tax rate for the full year of approximately 40%, fully diluted shares outstanding of $77 million.

The acquisition of Cash Systems Incorporated is expected to contribute $41 to $44 million in revenue in 2008, assuming an accounting effective close date of August 1st, 2008. Further, the acquisition is anticipated to be neutral to slightly accretive to EBITDA during 2008, and to add approximately $7 to $9 million in EBITDA in 2009.

We feel we have positioned the Company well to weather the current market conditions as well as provide opportunities for growth longer term. With that it concludes our prepared remarks, and I would like to open it up for questions now.

(OPERATOR INSTRUCTIONS). Please stand by for your first question. Your first question is from the line of Matthew Roswell of Wachovia. Please proceed.

Yes, good afternoon, gentlemen. Question is on the guidance and I haven't seen the release yet, so I don't know if you go in to that or not. For the Certegy Gaming Systems, did it -- what did you say $23.5 million in the quarter? Can we expect a similar amount for the second half of the year or do you expect that to show some declines?

We haven't -- in our guidance we're not breaking out the individual elements of the businesses. But I would say this about Certegy, we're not anticipating material changes as we move through the year in general to that business unit.

Okay. Trying to get at it from a different way. I think in the first quarter you talked about the core business or the organic growth being kind of negative 3 to 5, second quarter you just did a negative 5. What's sort of implicit in the '08 revenue guidance?

In Q1, we had a year-over-year decline of about 3%. Same-store number would have been just slightly ahead of that. And we obviously saw that decline accelerate in Q2, and the guidance assumes a decline comparable to what we saw in Q2.

To say it another way, we didn't assume any material changes either by way of decline or reversal of that trend in the latter half of the year, and that would be true for Certegy as well as our base business.

Okay. Thank you very much, Scott.

(OPERATOR INSTRUCTIONS). Your next question is from the line of [Halil Catapic] from Goldman Sachs. Please proceed.

Hi, for Cash Systems for the revenue amount which you gave us for 2008, can you give us a breakdown between the products, how we should think about it?

We're not -- we're not breaking that out by product, but you can extract what you can extract from the filed Q for Q1. I know on the face we don't break it out, but we're not providing individual breakout on a product line for that acquisition.

And I think if I heard that correctly, during the first quarter Cash Systems grew 6% on the top line. Have you seen any deceleration in the second quarter? Or acceleration?

I would say that Q2, although those numbers won't be released, was roughly comparable to Q1.

Okay. Thank you.

Your next question is from the line of [James Kayla] of Bank of America Securities. Please proceed.

Hey, guys, how are you doing?

Good.

Good. I'm sure all of this stuff is in the press release, but can you just give an update on what the debt and cash balances are? And if you bought back any stock in the quarter?

We did not repurchase any stock in the quarter. The authorization we had outstanding was fulfilled in Q1. Cash on a GAAP basis is around $80 million. The line -- the revolver was outstanding at Q2 at about $44 million. The rest of the debt balances are consistent with the prior quarter.

I'll comment on cash as I always attempt to do when we think about the Company's liquidity position. There are constraints relative to the GAAP cash. The first relates to the fact that we have very short-term settlement liabilities, so we receive cash. We have very short-term settlement liabilities to fund. That number can be between $30 and $50 million at any given point in time. We have cash that's dedicated to that.

The other issue to keep in mind is that we have about $18 million of cash in non-US jurisdictions, which is useable in those jurisdictions, but we would incur tax associated with the repatriation of those funds. So keep those items in mind.

Okay. Thanks, guys.

Thanks, Jim.

Your next question is from the line of Rachel Matthews of Cardinal Capital Management. Please proceed.

Hi, good afternoon. Just a quick question to clarify your new guidance on the GAAP EPS of 39 to 42. Is that assuming that the Cash Systems is dilutive in the second half of this year?

No.

It's just a change based on the environment that's out there?

That's right.

That's correct, yes.

Yes.

So can you say that Cash Systems is accretive in the second half?

We said that Cash Systems is neutral to modestly accretive on an EBITDA basis.

On an EBITDA, but on an GAAP earnings basis?

I would say any variance is going to be immaterial relative --

Immaterial. Okay, thank you very much.

Yes.

Your next question is from the line of David Parker of Merrill Lynch. Please proceed.

Thank you. Good afternoon. You've -- in the last few months you have acquired two of your top competitors. Can you just talk about the cross-selling opportunities that you have now with these two new companies and this larger customer base? What you are going to be able to do with these going forward?

Sure. I mean, we're obviously looking at that as a key opportunity, both in the short-term and long-term, to both upgrade the current products that are in there to ours, as well as giving us a much broader platform, or much broader base in portfolio customers to cross-sell all of our products. Whether it's Central Credit Check, our marketing services, and later on as we move towards being able to move some of the new product innovations out and as we consolidate the product lineup between GCA and Cash Systems, we'll obviously be looking to cross-sell that into the larger base. So we think it's a significant opportunity for us over the long haul.

You pretty quickly integrated the Certegy business. How long do you anticipate it to take to integrate Cash Systems on to your system and reduce some of the expenses on the platform?

Roughly the same time frame. We've largely completed our integration planning, so we're actively -- we have actively initiated our integration efforts today, so we're working expeditiously through it. We would think that most of the work should be done in about 60 days.

Okay. And in terms of the UK gaming business, you mention that their -- they are now re-establishing the ability to sell into these customers. Is there still demand with those customers? I mean they haven't had it for, I think, the last nine months, maybe the past year almost. Is there still that demand or is it simply you having to sell it at a lower rate, causing you to have the lower expectations going forward, and expecting no material impact in '08?

No, we believe there's going to be some real desire both from our customers and patrons for our services. It's a slightly different system. It's actually a significantly different system than we had before, and we're just being conservative on the '08 numbers to reflect the fact that it is going to take us some time to get in there, and we're working through what it is going to take to reestablish our business and our customer base. But we believe there is definitely demand for this product out there, and has remained so since the business was shut down last September.

Can you go in to more detail on how the systems are different than they were previously?

No, not at this point in time. We'll give you some updates as we move from -- into the next quarter and the one beyond in terms of how we're doing.

And then just the final question. I haven't heard you speak recently in very great detail on the EDITH product, I think you're re-tooling that. Can you just talk about the process with that product and your expectations going forward?

Well, we obviously increased our portfolio, if you will, of cashless gaming products with the acquisition of PowerCash from Cash Systems as well as some derivatives we can produce off of that basic intellectual property.

We are also looking at -- We have learned a lot on EDITH, we think we know some better ways to execute that product in the marketplace. Perhaps not as stand alone kiosk but integrating it in our current ATMs or other devices. And we just think it provides now a logical spot in our product lineup when we look at integrating those two product lines.

The other thing I'll tell you is we do believe pretty significantly that given the marketplace today and the pressures that customers are under, that we'll -- we do have a real opportunity now to increase the receptivity and the need for these kind of products as our customers face a lot of the challenges that they are facing to lower costs, and improve their marketing efforts.

So in the past you have had difficulty getting that certified. Do you think that the regulatory environment has improved as well to allow that to be certified at some point?

We'll continue to go through the same regulatory requirements that we have had to before. We are currently open to install the product in jurisdictions today. So our first focus is just getting the product right and getting the acceptance of the properties in the jurisdictions where we have approval, as well as getting the consumer adoption of the products once they are in the properties. And then we'll continue to roll it out and continue to work through the regulatory issues jurisdiction by jurisdiction.

Great. Thank you.

You bet.

Your next question is from the line of Tien-Tsin Huang of JPMorgan. Please proceed.

Hi. It's [Reggie], actually, filling in for Tien-Tsin. I guess I have three quick questions. Can you comment a little bit on the inter-quarter trends from month to month within your Cash Advance and ATM segments?

You mean like on a sequential basis or periods outside of our reported Qs? Or are you saying like within the Q? What?

Exactly. Within the quarter? One of the things we have heard with some of the other payment processors is a slowdown. Just curious if you guys have seen anything inter-quarter?

We saw -- I guess I would say we saw a lot of variance within the quarter on a year-over-year revenue basis. I wouldn't suggest that that was inconsistent or different than what you would see reported by the gaming properties on a monthly bases, or business analysts like [Santini], or something like that, that reports on a monthly basis. So our trends would be consistent with that.

Okay. Check losses, any change there? Uptick in losses, possibly? Anything?

No, we have seen no erosion in performance. Obviously -- perhaps it's not obvious, but we do manage our acceptance rates given different risk parameters and profiles, which does affect our revenue and profitability. But as far as our risk management associated with portfolio, the losses we have seen have not increased, and so the business has been quite stable relative to the last few months.

Okay. And then I guess the last one. Internationally, is anything in the pipeline in (inaudible) or any updates you can provide there?

Not at this point. We're continuing to focus on the geographies that we have said we would focus on, and we're actively in all of those markets, and we'll update you when there's news to update you.

Okay. Thank you.

Okay? Thanks.

And your next question from the line of David Cohen of Midwood Capital. Please proceed.

Hi, guys. Can you help us just translate the EPS guidance you gave to a Cash EPS?

Yeah. You would take the pre-tax effected amortization is about $45.7 million per year.

Okay.

So you would take that number on a quarterly basis, or one-fourth of the number and tax effect it using our implied tax rate in the guidance, which is 38% per quarter.

Now when we calculate Cash EPS, we ultimately use the actual tax rate. So if the tax rate varies, obviously the output would vary but the 45,700 is a fixed number. In any case, we add that back to net income from continuing operations and divide it by the share count.

Okay. Well, I guess that's -- so if it's 45.7 per year or so, 11.4 per quarter, and tax effected that's 7.1, so it's a sort of -- if I look at first -- I don't know what your second quarter was, but your first quarter was 5.5.

You just multiply it by the tax rate.

I see. Okay. All right. Thanks.

That should give you a number pretty consistent with Q2.

Okay.

I'm showing no further questions at this time.

All right. Well if there's no further questions, thank you for joining us today, and we'll talk to you next quarter. Bye-bye.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect, and have a wonderful day.