Everi Holdings Inc (EVRI) 2008 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter 2008 Global Cash Access earnings conference call. My name is Eric. I'll be your audio coordinator for today. Now, at this time all participants are in a listen-only mode. We'll facilitate the question-and-answer session at the end of the presentation. (OPERATOR INSTRUCTIONS.) I would now like to turn your presentation over to Miss Lisa Yi, Treasury Manager. Please proceed.

Thank you, Eric, and welcome, everyone, to GCA's fourth-quarter 2008 earnings conference call. Joining me on today's call are Chief Executive Officer, Scott Betts, and Chief Financial Officer, George Gresham. On today's call, Scott will give an overview of the Company's progress, and George will provide more details on our financial performance in the fourth quarter. Following these 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.gcainc.com, for anyone who 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 on our website.

And finally, a replay of today's call will be posted on our website around 3 p.m. Pacific Time, and will remain there for approximately two weeks.

As we begin, let me remind everyone that today's discussion contains forward-looking statements based on the environment as we currently see it and, as such, it 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 17, 2008 and the risk factors set forth therein.

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

Thank you. Welcome, everyone and thank you for joining us today. If there is a simple headline for today's call it's this. In the face of a tough 2008, GCA had a very good year. The fourth quarter was a great punctuation on a year where GCA achieved year-over-year growth in spite of a very tough economy, a tough market, and strengthening headwinds in this segment.

In the face of these challenges revenue grew 23% to $176.3 million, EBITDA was up 43% to $23.3 million, cash EPS from continued operations was up $0.10 to $0.19 per share. We feel good about the fact that our plans and the organization that we have put into place are now delivering these type of results.

For the entire year, our results are also quite positive, with revenue up 12% and total cash EPS of $0.66 per share, up $0.11 versus 2007.

As we have guided in our past, the total gross margins did decline notably, but this is due entirely to the known dilution of the acquisition portfolio as well as changes in our operation, such as moving to site-funded kiosks, which device count grew a very healthy 40% this past year. As you all know, moving to site-funded kiosks helps our bottom line profitability, but shows up as a decline in our gross margins.

Q4 was the first quarter to benefit from the full impact of the two successful acquisitions we did earlier this year. We have completed all the integration activities and met all the synergy targets. This reaffirms our strategy of growing through today's tough economy through smart acquisitions. This, along with our continued investment in new products and cost initiatives, we believe will also drive our business through the next year also.

Again this quarter, our customer won/lost ratio continues to be positive. In fact, we signed $3.3 million more in annualized revenue than we lost in the fourth quarter.

To give you some perspective on how we're scaling this business, let's do a quick review of the key cost metrics we talked about in the last call. Recall these metrics are not the ones typically reported, nor are they GAAP metrics, but reflect the actual operating metrics we as a management team monitor daily. The major difference is these comparisons do not include booth operations costs from the added booths from the acquisitions, nor do they include non-cash compensation.

So for perspective, on headcount our base run rate entering 2009 is up a very modest 2% versus 2007. Our projected total operating expenses will be down this year versus 2008, and up only about $7 million from base 2007 pre-acquisition levels. Substantially all of this increase can be accounted for in investments that we are making in new processing platforms and products.

To avoid confusion, this number includes both the nonrecurring conversion costs we outlined in our guidance, as well as the recurring support for the initiative program and, as stated above, excludes booth operating costs.

For context, we've achieved these results while we've added roughly 33% more customers, 47% more devices, we've integrated two new companies and continued investment in talent and support of our product and technology initiatives. The point is here that we have grown the Company significantly across all measures, yet have kept our expenses substantially at the 2007 pre-acquisition run rate levels, with only modest increases to support investments in our future. So we feel quite good about our cost measures and our ability to scale this business.

While cost remains an important focus, we feel just as strongly that this is not the time to stop investing in the future. We are in the enviable position to be able to do both. We believe the economy will remain challenging. Competitors, both existing and new, will compete on the only platform they can, price. So our focus on being the low-cost producer is critical.

But just as critical to winning the price war is to continue to develop the new proprietary products. In 2009 we'll stay focused on both of these initiatives.

While George will cover this area in a little more detail, our cash, capital and debt position remain healthy. We have repaid the entire revolver used for the two acquisitions as of February 1st and continue to generate strong free cash flow.

Before we discuss our 2009 plans, I want to mention two issues on corporate governance and independence. Over the last year we have continued to put in place steps to strengthen the Company's operations and continued to distance ourselves from related-party relationships.

First, you may have recently seen the 8-K released by the Company, disclosing the receipt of written notice from USA Payments claiming termination of our processing agreement. The Company disputes the alleged breaches claimed by USA Payments, as well as their right to terminate the agreement. Needless to say, we are actively engaged in conversations with USA Payments to reach a settlement on this matter.

Over the past several months, in conjunction with our strategic planning process, we have engaged in discussions with other processors to provide services in addition to those provided by USA Payments. Now, with the pending termination of the USA Payments processing agreement, we intend to switch all of our processing to a new processor.

We believe this transition will provide the company with significant opportunity to better meet our goals of improving reliability and providing an integrated, flexible platform for product innovation. We expect to enter into agreement with an alternative processor shortly.

The USAP processing agreement provides clear transition services obligations and we are working to insure this will be a smooth transition with no adverse impacts on our customers.

We think our customers and those on our call should share our confidence that a smooth transition can be accomplished, based on the current management team's deep experience in the processing industry and its ability to handle this complex but relatively normal occurrence of platform conversions. In fact, the team successfully completed two such platform migrations last year with the acquisitions we made.

The second item -- the Board of Directors of the Company has recently adopted a resolution recommending that the Company's stockholders approve an amendment to the Company's certificate of incorporation.

As background on this issue, the Company is subject to a variety of gaming regulations in the jurisdictions in which we operate. These regulatory authorities have broad discretion and can require any Company officer, director or stockholder to be subject to a determination of suitability. Generally, should any of these individuals not be found suitable the Company would not be able to keep or maintain the necessary approvals to conduct their business there, in that jurisdiction or potentially others, while such individuals remain associated with the Company.

Further, many of the Company's contracts with its customers also contain covenants that require the Company to obtain and maintain these regulatory approvals and provide our customers with the right to terminate the contract if we are not able to do so.

As a matter of public record, many of you are aware that the Company's two founders and significant stockholders have recently been denied their application to be found suitable by the Mississippi Gaming Commission in conjunction with their ownership of MCA Processing LLC. While they have filed petition for reconsideration with the Mississippi Gaming Commission and have additionally commenced litigation in the State of Mississippi with respect to the Gaming Commission's actions, it's important to also realize that the Mississippi statutes provide, and the State Supreme Court has upheld, that the denial of an application to be found suitable is not appealable.

It's customary for corporations involved in gaming, like GCA, to include provisions in their charter documents to provide for means by which a corporation can divest the stock of a shareholder that is found unsuitable or otherwise threatens the ability of the company to continue to engage in gaming-related businesses. This protects the company and its stockholders from any adverse effects if a gaming regulator finds a stockholder unsuitable for licensing.

When GCA was organized, such a provision was not provided for in its original charter documents. So we will be including in the agenda for our upcoming annual shareholders' meeting an item for the approval of an amendment to our certificate of incorporation that will provide the Company the right, but not the obligation, to redeem shares of its capital stock from any stockholder that is determined to be unsuitable by a gaming regulatory authority. This will only be used in the event that a suitable resolution is not otherwise found.

The proposed amendment will -- to include this provision is permitted under Delaware corporate law and is a provision very similar to those contained in the charter documents of many gaming equipment providers, manufacturers and, of course, casino operators. The proxy statement that we intend to distribute within the first two weeks of March will contain a complete and detailed discussion of this issue.

In closing on this subject, I think it's important to make a couple of points. First, we have been well ahead of these issues as a matter of course in our plans and strategies. Second, we are confident that our operations and customers will not be negatively affected by any of these events. And we believe the Company is adequately positioned to deal with any eventuality regarding these two issues.

And, lastly, we have a very good relationship with the Mississippi Gaming Commission as well as other gaming regulatory bodies. We expect to be able to reach a suitable resolution if needed in a manner that best meets the needs of the Company and is respectful of our stockholders and our customers.

Let's look forward now. But before I switch to a discussion on the Company's 2009 plans, it's probably worth a few words about our assumption on the segment and other key external drivers to our business. We are assuming that there will be no material recovery in 2009 and are cautiously predicting that the year will be flat to the Q4 '08 run rate, excluding the impact of seasonality.

How that plays out by month we will have to see. However, the first seven weeks of this quarter we have seen our cash advance transaction volumes improving somewhat compared to the fourth quarter. While it's way too early to call Q4 a bottom, we believe the early signs in 2009 are positive and accelerating incremental declines may, in fact, be behind us.

You can see the power of our diversified portfolio in terms of leveling out regional differences. So that gives us some confidence that our base assumptions are sound. Should this change materially through the year, up or down, we will adjust our guidance.

So, our focus for 2009 will be as follows. First, we will continue to leverage our acquisitions to continue to drive growth across the year. Second, we'll continue to leverage all cost opportunities we find. While pricing will remain a key issue in today's markets, we have every commitment to become and remain the low-cost producer.

We'll focus on customer service and value to maximize our contract renewals. Beyond the improvements in reliability and service level we believe a new platform will provide us, we also believe it will allow us to provide customers with better information about their operations, as well as the markets they compete in.

We have also retooled our sales structure to allow more focus on the top 100 customers to insure we have better service levels, quicker response times to resolution of issues, and stay closer to their operations. This approach of enterprise selling to our top customers is long overdue in our business, and we believe GCA is best suited in the industry to do this.

And fourth, we'll continue to invest in the three important projects we have. First, we will complete the automation of our back offices we started in mid-2008. The first phase has already been completed and we are on track to get this done in the coming year. This will enhance our process, make our business analysis easier, and deliver incremental cost savings.

Second, we'll complete the conversion to a new processing platform which we believe will improve our reliability and will encompass proprietary architecture to support product innovation. The preliminary design work and preparation is already completed. We are staffing to handle this and the expected expense impact is known and baked into our guidance for 2009.

And last, we will continue our development of new cashless gaming products, with the intention of bringing them to market by the end of 2009. Since showcasing these at G2E, we have been soliciting input from our customers and have received very positive feedback, both on our approach and our value proposition.

So as we look forward to 2009, and based on the assumptions stated below, we're providing the following guidance for the most critical metrics that we follow. Revenue will grow 4% to 9% for a range of $700 million to $730 million. Cash EPS will be in the range of $0.70 to $0.76 per share, compared with $0.66 in 2008.

So in summary, I think our story is a good one. GCA met significant challenges in 2008 and we grew our business. Many of these challenges will be with us for 2009, as well as some new ones. We recognize these. We've planned for them. And we will remain aggressive and flexible in our approach to the business. We feel we have the right strategies in place and, most importantly, we have the right people working on them. We'll continue to grow the Company in 2009 and beyond.

So, with that, I'll turn it over to George for discussion of some of the finer points.

Thank you, Scott. Our revenue increased in the fourth quarter of 2008 by 23% compared to last year's fourth quarter. This increase was driven by the acquisition of Certegy Gaming Services and Cash Systems. These two acquisitions, on a combined basis, contributed approximately $49 million in revenue to the quarter. These increases were offset by same-store declines of about 11% compared to the fourth quarter of 2007.

The fourth quarter was clearly the most difficult quarter of the year from a same-store perspective. I should clarify that when I make reference to same-store figures, I'm only speaking to the performance of the cash advance and ATM product lines.

Cash advance revenues increased by 8% in the fourth quarter while ATM increased 39%, as we continued to see a migration from credit transactions to ATM transactions. Our check warranty product grew during the quarter by about 33% compared to the prior-year quarter due to the acquisition.

Other revenue increased by $2.2 million compared to the prior-year fourth quarter. This increase is primarily due to the introduction of a research service offered to our customers. This service allows our customers to recapture funds otherwise lost to them over the years, and GCA is uniquely positioned to provide this service.

However, the recoverable funds available to our clients are finite and therefore this service line will contribute a relatively small amount of revenue on a go-forward basis.

Recall that in the first quarter we classified 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.

Gross margin came in about where we expected. However we did see an increase in check warranty losses as we migrated Cash Systems' check portfolio to our underwriting platform and went through the process of refining the underwriting models.

During the fourth quarter of 2008, our operating expenses, excluding depreciation and amortization, decreased 11% year over year. This decrease is primarily due to the unusually high equity compensation expense in the prior year. In the fourth quarter of 2007 non-cash equity compensation expense was $9.8 million compared to $2.4 million in the fourth quarter of 2008.

The increase in operating expenses excluding depreciation and amortization and non-cash equity compensation expense was $4.5 million. The increase in operating expenses is primarily due to the integration of CGS and Cash Systems, as the expenses associated with these acquisitions were not included in the prior-year period. While the operations of the acquired companies were substantially integrated by the beginning of the fourth quarter, we continued to incur costs associated with integration conversions, travel, transition services and certain employment relationships were maintained throughout the quarter in order to insure a smooth transition for our customers.

We also continued to incur high external legal fees related to the various issues Scott covered in his discussion.

We ended the year with 605 full-time-equivalent employees, of which 362 were dedicated to booth operations. This compares with 657 total full-time-equivalent employees, including 394 in booth operations at the end of the last quarter, September 30th, 2008.

Excluding site-funded devices, the average number of ATMs under management during the fourth quarter of 2008 was approximately 1,617. This is up from the fourth quarter of 2007 by about 40%.

ATM operating costs per month per device, our primary management metric related to these costs, has decreased in the fourth quarter of 2008 compared to the third quarter of 2008. This decrease is due to increased scale and process and cost optimization.

More broadly speaking, operating expenses have increased as expected, due to the acquisitions of CGS and Cash Systems. We have completed the integrations and expect quarterly operating expenses to start to reflect the ongoing benefits of a fully integrated organization, including renegotiated vendor contracts.

EBITDA increased 43% to $23.2 million compared to the fourth quarter of 2007. Adjusted EBITDA, EBITDA less the impact of non-cash equity compensation expense, was modestly down from the prior year.

Depreciation and amortization increased on a year-over-year basis due to the acquisition of CGS and Cash Systems.

During the fourth quarter of 2008 as compared to the fourth quarter of 2007, our average outstanding debt increased by approximately $17 million to about $281 million. The average outstanding balance on the Vault Cash Agreement also increased to approximately $345 million compared to $293 million in the prior-year quarter.

This increase in overall average interest-bearing obligations was offset by decreases in interest rates, resulting in a lower net interest expense in this quarter compared to the prior-year quarter.

Our effective income tax rate for the fourth quarter was about 62% and was about 46% for the year. As many of you know, GCA is generally not in a taxpaying position due to the amortization of intangibles that are tax deductible. This is true in 2008 as it was in 2007.

The income tax expense for the quarter was higher than we anticipated by approximately $2 million, primarily due to the expiration of previously issued equity grants. The difference from our expectations resulted in about a $0.03 decrease in EPS from continuing operations relative to our expectations.

For purposes of calculating the income tax provision, the expense associated with these expirations cannot be reflected until such time as the forfeitures actually occur.

Book expenses related to these options were recognized in 2007. The incremental income tax expense related to all equity forfeitures during 2008 was approximately $3.8 million, or approximately $0.05 per share from continuing operations on a pro forma basis for the year.

Our GAAP EPS before discontinued operations was $0.06 versus $0.04 in the fourth quarter of last year. Cash EPS is a non-GAAP metric we use to reflect the fact that GCA generally is not in a taxpaying position even though the Company reports tax expense for GAAP purposes. We define cash EPS as net income before discontinued operations, plus tax-affected deferred tax intangible amortization divided by the share count.

You might recall that during last quarter's call I discussed how the Company's total deferred tax amortization in a given year is $52.3 million. And this is also disclosed in our third-quarter Form 10-Q. Historically, the Company had not recognized the full benefit of the deferred tax amortization in the calculation of cash EPS, as the Company's pretax income has historically not reached the level of the full deduction.

2008 is the first year that the Company has approached the amount of the deduction, having reported pretax income of $50.8 million. As a result, the Company's pretax amortization deduction for the purpose of this calculation was $16.5 million per year. This represents the difference between the pretax income reported of $50.8 million and those amounts of pretax benefits recognized in prior 2008 quarters related to this benefit of $34.3 million. This amount is tax affected, or multiplied, at the current quarter's effective tax rate in order to determine the add-back.

Cash EPS was $0.19 in the fourth quarter of 2008, up $0.09, or 109%, compared to the prior year. Perhaps the most simple way to look at this is that in 2008 we added back 100% of the income tax expense recognized for book purposes. And we will do so in the future up to a pretax income of $52.3 million. Cash EPS has not been adjusted for depreciation, amortization, or other tax attributes such as NOLs that may serve to shelter income in the future.

While I spent a fair amount of time discussing our capital structure during our last call, I think it is worth the time to go through that again in some detail. Let me start by saying GCA generates ample free cash flow sufficient to run day-to-day operations and is not dependent on the credit markets to fund operational activities on any given day.

Additionally, given the maturities of our various credit facilities, we have no need to go to market to either expand or adjust our facilities in the near future. We are in compliance with our various debt covenants, and expect to remain so.

At December 31, 2008, we had $266 million of debt outstanding, including $15 million outstanding on our $100 million revolver. This revolver terminates in November of 2011. It is a syndicated facility led by Bank of America. It has 12 participants, with participations ranging from 2.5% to 12.5%. This facility provides for overdraft protection should any particular participant become unable to meet its obligations to us.

We also have a term loan outstanding at December 31, 2008, in the amount of $98 million. This loan amortizes $1 million in principal per year, and is due November 2011.

Lastly, we have a non-amortizing senior-subordinated note outstanding of $152.7 million, which are due March 2012. Both the revolver and the term loan are tied to 30-day LIBOR, while the senior-subordinated notes carry an 8.75% fixed rate.

As you would expect, we have a number of financial covenants within our debt agreements, the most relevant of which for this discussion is our leverage ratio requirement. While there are a number of subtleties to the calculation of this covenant, for simplicity's sake you can consider the calculation to roughly be equivalent to our outstanding debt, divided by EBITDA, adjusted to remove non-cash equity compensation.

As of December 31, 2008 we were required to maintain a leverage ratio of 3.25 times of adjusted EBITDA or less, and our actual leverage ratio was approximately 2.5 times. The leverage ratio covenant is scheduled to step down to 3 times adjusted EBITDA on March 31, 2009 in accordance with the terms of the existing agreement. I would also note that as of the date of this call, we have fully paid down the remaining outstanding balance of the revolver.

Additionally, we maintain a $410 million facility with Bank of America, whereby they provide cash funding for ATMs that we manage. As I mentioned, approximately $345 million was outstanding on average during the fourth quarter of 2008. This is an off-balance-sheet facility, as the underlying cash that is being used to fund ATMs is not the property of GCA. Repayment of this facility comes specifically from the cash deployed in the equipment, not from the general cash flows of GCA. The pricing of this facility is also tied to 30-day LIBOR.

We ended the quarter with approximately $77 million in cash on hand on a GAAP basis. As I have in past quarters, I will point out that a substantial majority of this cash is in booth operations, dedicated to settlement operations, or non-US jurisdictions and not available for immediate use.

Before I open it up for questions, let me provide some additional information related to the 2009 guidance. As Scott discussed, revenue will grow 4% to 9%, for a range of $700 million to $730 million and cash EPS is expected to fall between $0.70 and $0.76 per share. Additionally, we expect EBITDA to be between $95 million and $101 million and earnings per share from continuing operations to be between $0.44 and $0.50 per share.

Assumptions included in these estimates include expense investments in product and processing platforms of between $2 million and $4 million; average 30-day LIBOR of 1.3% in effect during the period and average outstanding balances subject to LIBOR, including amounts outstanding under the Company's Treasury Services Agreement, of $430 million; an effective tax rate for the full year of approximately 38%; cash outlays for capital expenditures are expected to approximate those amounts disbursed in 2008; and diluted shares outstanding of approximately 77 million.

So, that concludes our prepared remarks. And I'd like to now open it up for questions.

Thank you. (OPERATOR INSTRUCTIONS.) Tien-Tsin Huang, JPMorgan.

Hey, guys, it's actually Reggie filling in for Tien-Tsin. I guess first question, would you talk a little bit about, I guess, your renewal pipeline for '09 and maybe the RFP pipeline? And I know you're not going to give any specific names, but just how much of your business is up for renewal? And then, again, like as you look out competitively, what do you see out there as far as potential new wins?

Well, I think in general our statement here remains similar to what we've said in the past. Any given year we have about a third of our contracts that come up for renewal. That's fairly evenly spread.

We do have contracts that are large, important contracts for us this year. We've started those conversations with our customers. At this point in time we feel very good about our ability to close those contracts. Nothing's guaranteed in this business, but we feel very good about where we stand right now.

Certainly. And then I guess on the RFP side, I guess '09 relative to kind of '08, how do you -- how would you size the opportunity? Or how do you think about the opportunity?

I think -- baked into our plans this year as you think about the overall guidance, our won/loss ratio's pretty much in line with what we've seen in the past. And, again, you can -- every quarter we've signed more business than we've lost. So I would expect that to continue.

Okay. That's helpful. Let's see -- same store sales you guys said it was down 11%. Could you talk a little bit about the trends that you're seeing intra -- inter-quarter on a monthly basis? I mean, is that kind of stabilizing there or -- ?

Q4, if you look at Q4 and break it apart, you would have seen October and December, they were both very poor months. November was actually a fairly strong month relative to those two. So relative to prior quarters of course Q4 was down from Q3.

And as Scott suggested in his comments, subsequent to December 31st we have seen at least what appears to be a stabilization with some of the non-destination-based geographies performing somewhat better than they did in Q4 in particular. And so at least insofar as seven weeks counts for much, we haven't not seen an incremental decline in same-store performance subsequent to year end.

Got you. And if I could sneak one more question in, just kind of anecdotally, as you think about the cash advance business -- I think we asked about this in the last call as well -- I mean, are you seeing higher rejection rates or, I guess, smaller average tickets for the cash advance, credit card cash advances specifically?

Yes. The acceptance rates, or the acceptance percentages, have declined, particularly in credit card cash advance and debit card cash advance. They're fairly stable in ATM. But those declines are not particularly significant. They're very low single-digit percentages.

The most significant dynamic that you see underlying the data is lower average face transactions on credit card transactions, which have dropped from close to $600 on average a year ago to the low $500 this year. And that particular portfolio is -- the revenue's recognized based on a percentage of face. That's the most significant dynamic. And then you also see volume movement from credit card to ATM.

Right. That makes sense. All right.

I think those will probably be generally the same trends you're seeing in the overall payments industry right now.

Definitely. Yes, yes. Okay. I'll jump back in the queue.

Chris Mammone, Deutsche Bank.

Thanks. I guess I just want to maybe touch more on -- I think, Scott, you mentioned a couple of times during your prepared remarks the term "price war." I'm under the impression that the acquisitions that you made this year really sort of addressed again some of the, for lack of a better word, irresponsible pricers in the market. So, I guess, could you just give us more color on what the current pricing environment looks like and why you emphasized that?

I don't know that -- I didn't mean to overly emphasize it. I think we are in an environment and we're in a business that has always been competitive. It continues to be competitive. We're not without competitors. And given the situation in the market and the situation our customers find us in, we absolutely understand how important it is to be the low-cost producer, to allow us to continue to win and continue to grow this business as we experience some downward pressure on pricing.

So the point that I wanted to emphasize there, and perhaps I didn't, was the importance for us to be the low-cost producer, not that there's been any material difference in the competitiveness of this category, which has and remains competitive.

Okay. That helps. And then I guess I just, given the state of affairs in the gaming market and the downturn that's sort of gripped the market, I guess in your view does that perhaps potentially make it any easier for some of your new products which I think you said could come out before year end here, some of the new cashless gaming products? Do you think that for the products that have to be approved by the various regulators, does the environment being where it is, do you think that that might actually help the approval process for you guys?

Well, I would describe it in two ways. One is really -- first and foremost our objective in developing new products is to find ways to bring increased value to our customers. Okay? And certainly in an environment that we're in today, where many of our customers and many of the casinos are finding themselves in tougher markets, anything that has the potential to lower their costs, increase their customer acquisitions and increase play on the floor obviously has high value to us. So that's the first thing I would say.

And we are receiving and getting that feedback from our customers as we've started to talk about these products, at least at the top levels, and as we got some feedback at G2E. So yes, I think the customer acceptance and I think the market acceptance of these products definitely will be enhanced by the current market situations we're in.

On the regulatory standpoint, I think we first and foremost learned an awful lot about the regulatory environment and how to manage through that versus perhaps what we've done in the past with EDITH or TODD. So I think that -- I'm most encouraged by that.

I'm encouraged by the fact that we're working in conjunction with the regulatory bodies as we develop these products. They will still have the concerns that they will have, but they're also very interested in making sure they do the right thing, not only from a regulatory standpoint and for the gaming patrons, but also for our customers. So to that extent, there may be some secondary impact on it. But we look at it in those two distinct ways.

Okay. And then maybe just a final question on the topic of the new Board resolution. I guess, is the worst case scenario there that you would, if this situation is not addressed, you would have to shut down operations in that jurisdiction? And could you just give us a sense for a timeline that that jurisdiction has given you to address the situation?

I think the way we would characterize it is we think we've got, and are doing, the right things to be able to address this situation however it unfolds. Okay? At this point in time it's important that we continue to work with the individuals. We're working with the regulatory jurisdictions and, of course, we're doing the right thing for the Company in terms of what we're going to do with our amendment to our articles of incorporation.

Given those, we've got what we need to protect our business and to protect our customers moving forward.

And you said there would be a document out in a couple of weeks with more detail on this?

Yes, that will all be in our proxy for the annual shareholders' meeting, and that will be out in the next couple of weeks.

Okay. I'll get back into queue. Thanks.

David Cohen, Midwood Capital.

Hey, guys, good quarter.

Thank you.

In terms of just simple math, looking at your kind of run rate cash operating expenses, is, which -- and I'm taking the stock-based comp entirely out of the operating expense line, that gets me to under $20 million. Is that a decent run rate or are there significant enough fourth-quarter adjustments that actually make that seem lower than it's likely to be?

Yes, I mean I -- we're going to stay away from trying to parse line by line. What we tried to do was give you a sense of what assumptions we're making on the revenue side and then across the range of that revenue you can take it down to EPS. It's pretty straightforward.

The one point, the couple points that we added to our guidance relative to prior quarters, one being some incremental information associated with some expenses we've included in 2009 that we wouldn't normally see relating to the switch in processors. So that's the $2 million to $4 million. We should think of that as expenses that would be incurred in '09 but would not be recurring beyond that period of time.

The other information we've added is some assumptions about LIBOR and debt balances, just because it has such a significant impact on our financial results in any given period. But apart from that I think we want to try to stay away from giving guidance on every line in the P&L.

Okay. And I think you said there were $49 million of revenue from the two acquisitions. That was the fourth quarter, is that correct?

That was the fourth quarter number. That is right.

And what would be the full-year number?

I haven't disclosed that number. But I think -- we gave Q3; I don't think we gave Q2. But I mean you can annualize the number you've got pretty much. And we had Cash Systems from the beginning of August and Certegy from the beginning of March. It's going to get you pretty close.

And given that those weren't in there for the full year, what kind of full year, or incremental full year '09 revenue contribution are you anticipating to come from those?

Again, you can get in the ballpark by just figuring out those numbers on a monthly basis. We pick up three months from Certegy into '09 and we pick up seven months from Cash Systems into '09. And when you start working through all this, you'll see that we have a same-store decline assumption in our numbers, which would be like negative middle single digits. And we assume that across not only the legacy portfolio, but also the acquired portfolio.

Okay. So even the acquired portfolio might see some downturn in 2009?

Yes, well, I mean, yes, March of 2008 revenues that would have been picked up in an acquisition -- or I'm sorry, April of 2008 -- yes, we would make an assumption about April of 2009 based on our overall portfolio performance.

Okay, great. Thanks, guys.

Anurag Rana, KeyBanc Capital Markets.

Good morning, everyone. Congratulations on a good quarter.

Thank you.

George, as we look at the deferred tax amortization related to acquired goodwill, how should we sort of look at it over the next four quarters? What's the kind of run rate we should assume?

Yes, so the deduction -- the full amount of the deduction that's available in the tax [books], it's $52.3 million per year. So in 2008 we fell just shy of that number. So we reflected in 2008 the benefit of that deduction up to our pretax income of $50.8 million. So we will remain in a sheltered position up to $52.3 million. So if we report, by way of example, $62 million of pretax income in 2009, we would pay taxes, we'd have a cash tax obligation on that $10 million delta.

The purpose of the cash EPS calculation, you would take basically for the year 50.8 -- or, I'm sorry, $52.3 million times the tax rate that I gave you, 38%. You'd add that back to net income from continuing ops and divide it by shares.

Okay. So essentially I can match it to the tax rate, I'm assuming, up to $52 million?

That's correct.

Okay. That's very easy. Good. Thank you. And if you look at operating margins this quarter, they were about 10.5%, down about 100 basis points sequentially. Now, as we look for next year it -- obviously it looks from your guidance that you're assuming a little bit higher margins than that. When should we start to see the gross margin line improve? What quarter should we assume that going forward?

Gross margin or operating margin?

Yes, gross margin and then in the end operating margin, obviously.

Yes, your 10% was the EBIT margin, I think. And as I talked about in my comments, Q4 continued to carry some costs associated with the acquisitions. We think that as we sit here today, most of those costs are behind us. And we should start to see relatively normalized OpEx results starting as early as Q1.

If there's a switch in processor, we'll start to pick up those expenses. Those will be split between cost of sales and OpEx. We'll start to pick those up in Q2 and they'll run through Q3 and then drop off in Q4.

And then as you would expect, I hope you would expect, given the state of the processing industry, we think we should be able to obtain fairly favorable pricing, given the number of transactions we manage in a given year in the industry, and hopefully better than what we currently incur.

Great. Thank you.

James Kayler, Banc of America Securities.

Hey, guys, just two questions. Do you have the RP capacity in the bank facility offhand?

I'm sorry?

I think it's about [$5] million.

Could you repeat your question?

The restricted payment capacity in the --

About $70 million as of December 31st.

Oh, it's $70 million. Okay. (multiple speakers) And in terms of just the mechanics of how the stock, if you had to retire the stock, how does that work? What's the pricing mechanism?

That will be discussed fully in the proxy when it comes out. But we would direct all the listeners to other publicly traded gaming companies. They typically have provisions such as this in their charters and, as you would expect, provisions should operate comparable to those that we might suggest to our shareholders.

(Multiple speakers) similar language?

Yes. Absolutely. Yes, we'll mirror those.

Or the language in the offering memorandum for the bonds?

Right.

All right. Thanks, guys.

Tim Willi, Avondale Partners.

Thanks. Good afternoon. Two questions -- I was just wondering if you could give an update on anything in the international markets? There have been various headlines about some of the big casinos in Macau. But I'm just curious, any additional developments on your end strategically, or in terms of like just near-term business prospects?

Yes, I'll just make a couple of comments on that I guess in -- we had some other things we wanted to talk about here.

But in general the international market is mirroring that of the US. Having said that what I really mean is that by geography it varies quite significantly. Okay? In fact, if you take Macau, there certainly has been a lot of discussion around visitation, rate of growth dropping and properties being moved out in terms of their scheduled completion dates and so forth.

However, we are up significantly in Macau year over year, in the range of about plus 50%. Okay? So we continue to do well. We continue to grow with the growth of general gaming on the floors there, which is where our business is. And we're closely tracking where people are coming on putting their new properties up and bringing them on line, but that's at one end of it. At the other end of it we have other geographies that are substantially below 100% in terms of their growth year over year based on economies and what you can expect country by country.

The other thing I'll tell you is we did say we were just -- would be starting in the fourth quarter a pilot program in the UK. That program has started. It is very, very early on and really too early for us to tell, but we have successfully got that product into the marketplace and we are now in limited test in a number of casinos there.

Okay. Great. And then just another question around debt and cash. It looks like if you take the EBITDA and pull out a projected sort of interest expense given your tax status you probably have I guess roughly $80 million, give or take, at your disposal, George. It looks like in your assumed debt levels for the year there's not any kind of real pay-down, sort of back of the envelope from where you seem to be right now.

So I guess I'm sort of curious, given what's going on potentially with Mississippi and capital stock, are you more inclined to build cash until that is resolved? Or do you believe there will be capacity for pay-down of the term over the course of the year at obviously more than $1 million?

Yes, your observation is correct. The guidance does not assume any significant capital transactions, whether they be equity or debt. We do have this project we're working on, as Scott discussed. And as that gets resolved I think we'll be better prepared to talk to everybody about our likely use of free cash.

Okay. And then just last question, if I could, and I'll hop off. But I guess given all of the dislocation in, I guess let's just say the Las Vegas gaming market et cetera, in terms of your ability to strengthen the bench, whether it be sales, marketing, product development, support, whatever -- is there anything that's just begun to happen there where you feel like you've got opportunities to take the level of the staff up a notch or two because of what's going on with that local economy?

You mean because of --

Are you talking about the ability to hire talent maybe out in the marketplace? Is that what you're talking about?

Yes.

We certainly are looking at the possibility of adding a few positions to the business as we move forward, particularly around some of the technology initiatives that we have. And you're right, it is at this point in time a relatively target rich environment from the ability to hire outside.

We have made also a modest amount of changes, but important changes in our organization, particularly in finance and in some of the other parts of the organization over the past year. And we have been substantially able to close and fill all those gaps because of the availability of people in the marketplace here locally.

Great. Thank you very much.

And actually been very pleased with those hires, too, I might say.

Great. Thank you.

(OPERATOR INSTRUCTIONS.) David [Hargreaves]; Sterne, Agee & Leach, Inc..

Hi. I just wanted to confirm this. When you talk about the expectations for revenue, you said that things in the first quarter don't look worse than the fourth quarter. Which I think you said same store is down something like 11%, but going forward in 2009 you're seeing mid-single digits. So you're expecting to see -- you're budgeting some improvement in the general conditions, is that correct, for the coming year?

On a relative basis to '08 what we are expecting is that if you said Q4 of '08 was down 11%, the assumption is that towards the end of the year things don't get incrementally worse, okay, than what they were in Q4 compared to Q7.

So across the entire portfolio for the year, and I don't want to get too much into any particular quarter, yes, there is assumed to be an incremental same-store decline that is less than the same-store decline seen in 2008. The actual overall average same-store decline number for the full year in 2008 was around 5% or 6%. Okay? And so the assumption used in the guidance is something slightly less than that.

I see. And are you able to comment right now on where you think your market share is? I think you guys used to be somewhere around 60%. Do you have a sense for sort of where you are today?

It's difficult to say, but I -- we believe we're in the 80%, 85% range.

When Scott makes a comment like that he's talking about cash advance. In our checks services business we would not have that share of market, so it depends somewhat on product.

But in your most important segments it's high.

And that is in the US. That doesn't include international.

Okay. Relative to the internal review you guys had a while ago, are there any lingering issues from that or is that completely closed out at this point?

It's closed out. Yes, I mean, there's residual customer payments to be made from the issue that related to commissions in the prior year, but those are de minimus. But no ongoing activities associated with that.

Okay. And in terms of the alternate suppliers you're seeking from this USA Processing situation, how big is the field of suppliers that you have to pick from?

There are -- there were several qualified suppliers that we could use. The market would include companies like First Data, Metavante, Fidelity National, TSYS. There's a number of very large high scale companies that provide similar services.

Excellent. And now, I need to ask if we can get some sort of idea as to what the potential cash outlay is relative to buying out the founders if you had -- if you're found that you have to? (multiple speakers)

It's all public that they own individually about 11.8% of the outstanding equity apiece.

So we're talking about a really big number?

Well, you know, that's the number of shares, right?

Now, while the exact mechanics I said we're waiting on, but is this something that would be based on a current valuation or based on some historical level?

I would just refer you to our previous comments.

Okay. And -- great. When you talk about -- oh, yes, okay. One of your big marketing ploys -- ploys, tactics -- used to be that you increased the circulation of cash on a gaming floor by 30%. And I'm wondering sort of what sort of the hooks are that you use today when you're selling your products, your cash-providing products?

Well, I think there's several. We still have proprietary technology in terms of our 3-to-1 rollover functionality on our ATMs, which helps and automatically rolls a person over who may have exceeded their limits on an ATM card to move into point of sale debit or on to credit card cash advance. That does allow us to put more money out on the floor.

We also have integrated services not only across credit card cash advance, debit, and ATMs, but also in terms of booths and check cashing and verification and warranty services.

So I think the inherent value proposition in this business still remains the same, which is cash access to the floor and the reliability of those processes and services are absolutely critical to our customers. It's really their lifeblood of their business, so that's really what we remain focused on. And that's really what we're building our new products off of also.

But you've got a good ROI proposition to offer to people.

Yes.

And are there any --

Very good.

Sorry?

I said a very good ROI.

Do you have any sort of models where you're able to say, We tend to -- somebody who switches to our services tends to be able to save percentages or --

You know we don't -- I don't -- yes, we have our value proposition that is well known to our sales folks and here internally. And we obviously use that in our -- as we sell to new as well as re-signing current customers. I don't know how much and I'm really not going to get into any more detail than that.

Are there any states or new jurisdictions you're watching that may present opportunities for you in the coming year?

Yes, there have been several things that have been voted on over the last year that are obviously interesting to us. Any time that there's any kind of expansion of gaming, whether that's expansion of things like the limits that were changed in Colorado in the recent voting there, or the opening up of potential new casinos in new geographies, Maryland and so forth, will always be helpful to us. It expands the market and that expands our business.

Anything that hasn't been official yet that's on your radar screen? Ohio looking likely, Kentucky looking likely?

You know, that's really not -- your guess would be as good as ours. We continually look at and watch carefully both the public opinion as well as the votes that have to happen for the adoption for those types of gaming in different places. And, again, from our standpoint the more places that open themselves up to gaming is good for our business.

Thanks very much.

Ladies and gentlemen, this concludes our Q&A session and our presentation. You may now disconnect. Have a good day. Thank you for your participation.