Everi Holdings Inc (EVRI) 2010 Q3 法說會逐字稿

Good day, everyone and welcome to the Global Cash Access Holdings Incorporated third quarter 2010 earnings conference call. (Operator instructions) This conference is being recorded today, Wednesday November 3, 2010. I would now like to turn the conference over to Ms. Jana Brown, Assistant Controller. Please go ahead, ma'am.

Thank you Alicia and welcome everyone to GCA's third quarter 2010 earnings conference call. Joining me on today's conference call is Chief Executive Officer, Scott Betts and Chief Financial Officer, Marybeth Higgins. On today's call, Scott will give an overview on the Company's progress and then Marybeth will provide a brief update on our financial performance in the third quarter. Following these comments we will be happy to take questions.

A few important items before I turn it over to Scott. First, we have posted our earnings release and updated financial statements to our Investors website at www.GCAInc.com, for anyone who needs access to that information. Also during this call if we use any non-GAAP financial measures for references, we will put up the appropriate GAAP financial reconciliation on our website. Finally, a replay of today's call will be posted on our website around 5.00 PM 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 are subject to a number of risks and uncertainties. These include statements regarding market conditions, consumer habits, projected revenue, projected earnings, expiration and renewal of existing business, addition of new business, product upgrades and new products, cost-saving measures, possible uses of free cash flow including debt retirement and share buyback.

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 have filed on March 15, 2010 and in our Form 10-Q that we intend to file with the SEC in the next few days, and the risk factors set forth therein.

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

Thank you Jana and thank you everyone for joining our call today. By this time you've all read the earning release and have seen our results for Q3, which frankly were below expectations we had set earlier this year. We continue to face a tough market condition and believe the short-term picture may remain challenged for our industry through 2011. I know this is a painful theme we seem to face each quarter, but it certainly is a reality we live in.

As you know, our results mirror those of the industry so first I want to review what we see in terms of same-store sales and segment trends. Remember, our portfolio is driven by the entire industry, including reported as well as well as non-reported jurisdictions. Segment trends are by far the biggest driver to our sequential decline in our results and the biggest issue we continue to face. We see continued erosion in our same-store numbers with no firm sign we have yet hit the bottom and certainly no signs of a broad recovery yet. However, the rate of decline has certainly slowed significantly.

Let me put some numbers around this. For perspective, same-store declines in 2009 were 11.1% and 11.5% for dollars dispensed to the floor in service fees, the two key drivers to our business. Year-to-date in 2010, the rate of decline has slowed to minus 7.1% and 7.7% respectively or about two-thirds of the rate of decline we saw in 2009. Somewhat more encouraging for Q3 of this year, they are minus 3.5% and minus 4.4%, about half of the year-to-date number and only a third of the rate of 2009. So we are seeing some same-store declines lessen appreciably, but they're not stopping. While we believe this is certainly a good sign, we also believe that stabilization, at least by my definition, is still several quarters away, with recovery sometime after that. I believe that most of our customers are seeing and reporting the same thing.

The second biggest driver to our sequential results is the mix shift we are experiencing from credit to debit and ATM. Again, we see the trend starting to taper off, but not abate. With the macro economy as it is, tightened consumer credit and what we see as a general consumer behavior pattern away from credit cards, we expect this lag in the general recovery causing us to move out our view of any strong recovery in the credit card volumes being probably about a year away at this point.

So far as numbers go, credit card cash dollar declines were about 24.9% in 2009 and 16.9% year-to-date.

So now on to the things that we can control. We continue to feel very good about our pipeline of contract renewals. As you know, we have a practice of not commenting on individual contracts until they are completed, however, we believe we are making very positive progress with all of our current 2010 renewals, though not always at the price we would like. There is no doubt that the competitive environment is very strong and our customers, given their own economic situations are working hard to drive pricing down.

Obviously Harrah's will roll off at the end of this year, but we believe we will have stability among a significant portion of our top 20 customers. In fact, we believe by the end of the year we will have only four of our top 20 or so accounts needing to be resigned in 2011. We recognize that there will be some pressure on gross margins but the retained volume should position us nicely for the future.

We also remain focused on delivering the cost savings goals for the coming year. We are in the process of developing and implementing our plans to achieve them. We realize the need to continue to rightsize our expense line while not totally jeopardizing our future developments for the short-term. We have no reason to move off of our general target of $5 million in reductions for next year, which we had previously indicated on our August earnings call.

We have repurchased about 2 million shares in the past period and intend to use our free cash to opportunistically retire debt as we move forward through the next several quarters. We remain committed to our strategy of pursuing innovative products. We continue to sign CSI or share casino intelligence contract, interest remains high but the tough budget situations at many of our customers is drawing out the timing on contract signing a bit more than we had originally expected. We believe we'll see more customers enter into CSI contracts as customers set their 2011 budgets.

We're also in the process of rolling out our operated QCP cage system product to our customers as we speak. This is an important upgrade to our core product stat and I think reflects the capability of our internal development organization as it is clearly starting to deliver results. While we're still in the early stages of ownership of Western Money Systems, I cannot understate how pleased I am at the integration of these products into our existing product set.

We have already developed several new kiosk features and functionalities we intend to debut in G2E in two weeks and we believe we are already seeing the power of a single source supplier providing consolidated offerings, suite management and reporting, while improving what has historically been a difficult two vendor relationship for our customers. These products provide a very strategic tie in to our customers' floor and our ability to drive innovation. It also gives us a valuable tool in the price value equation for our customers. We feel the pipeline on equipment sales for the next year is strong.

We are still on track to beta test QuickTicket but we'll probably not start these tests until early first quarter of 2011. Frankly we feel it's best to complete our conversion to a new bank sponsor as well as clear the holiday season which you all know has been a historical freeze period for the payments industry. Basically we'll ensure we and our sponsors can fully focus on the execution of these tasks.

Net, we see the next year continuing to be a challenging one. Having said that, we are also very positive on the long-term opportunities for the company. We continue to have strong free cash flow that allows us to do the things we need to for the long-term an while recovery in the segment, customer spending on new products and the return of consumer credit continues to take longer than we all would like, it will return. And when they do return, we feel we will have a rightsized company, we'll have developed the best product portfolio, we'll have significantly reduced our debt and operating on a more efficient and flexible platform that will scale very nicely as we recover.

So like many companies in this industry, GCA continues to be a short-term/long-term story. We will continue to face significant headwinds in the market for the foreseeable future, but we continue to position ourselves and do everything we can to grow over the long-haul.

I'll now turn the call over to Marybeth with some more specifics on our financial results.

Thank you Scott. Good afternoon everyone. First I wanted to give a brief introduction and overview of my professional background. I joined GCA on September 14th as Chief Financial Officer. I came to GTA with more than 25 years in the Las Vegas market and for the past 10 years I served as the Chief Financial Officer of Herbst Gaming, which is a multijurisdictional gaming company with 15 casino properties as well as being one of the largest slot route operators in Nevada. I'm certainly happy to be here and I look forward to meeting all of you over the next few months.

With that said, let's move on to our third quarter results. Reflecting segment trends, revenue decreased 7.4% compared with last year's third quarter and about 4.4% on a same-store basis. Similar to prior quarters, the entire same-store decline was driven by the declining credit card usage. Same-store figures for cash advance revenue declined by 12.9%. ATMs increased by 1.5% and debit increased by 1.1%. We also saw a year-over-year and sequential quarter increase in our average cash dispensed per transaction. On a year-over-year basis, total cash advance revenue was down about 13.2%, driven by the decrease in credit.

ATM revenue decreased 2.2% in the third quarter of 2010, $79.7 million due largely to the decrease in year-over-year transactions of about 4.6%. While revenue per ATM transaction was up modestly due to slightly higher average surcharges assessed per transaction.

Our check warranty product continued to decline during the quarter by about 31.9% compared to the prior year's results and is the result of a decrease in the number of check service transactions due to booth closures, compounded by the decrease in check service revenue per transaction.

Our gross margin for the third quarter was 23.7%, down from the third quarter of 2009 and flat as compared to the second quarter of 2010. Exclusive of depreciation and amortization, operating expenses were up 0.8% to $18.7 million from the prior year.

In the third quarter of 2010 non-cash equity compensation expense was $2.1 million. We ended the quarter with just about 413 fulltime equivalent employees compared to 466 at the end of the second quarter of 2009. We had approximately 2900 floor devices processing on our networks as of September 30th. This includes 1144 redemption devices and the remainder largely consisting of ATMs. This compares to 2900 floor devices at the end of the second quarter, of which 1140 were redemption devices.

At this point I would like to take a minute to provide you with a brief explanation of a change in the manner in which we will be computing cash EPS going forward. Although cash EPS is not a GAAP measure of financial performance and should not be considered a substitute for GAAP net income, we compute cash EPS for you in order to enhance your visibility into our business, your understanding of the underlying trends of our business and to provide for better comparability between periods.

We previously computed cash EPS by adding back to our income the tax benefit of the amortized portion of the deferred tax asset for that period. Historically the tax benefit of the amortized portion of our deferred tax asset was less than the amount of our tax provision. We computed cash EPS for Q1 and Q2 under the assumption that this would have also been the case in 2010 as well.

However, given the initial shortfall in earnings that we saw in Q2 and the continued decline in Q3, as well as our projection for the segment trends to continue through the end of this year, we now believe that our tax provision for this year are likely to be less than the tax benefit of the amortized portion of our deferred tax asset. So we will compute cash EPS for Q3 in the remainder of this year and we have recomputed cash EPS for Q1 and Q2 by adding back to our income our tax provision.

We have also refined the calculation by using a statutory tax rate for the full year of 36.36% as opposed to the estimated effective tax rate of 38% upon which our prior computations were based. In order to provide comparability between periods, our earnings press release also provided the recomputation of cash EPS for the corresponding 2009 period using this refined methodology.

Let me explicitly state what may be obvious to some. First, the refined recomputation of this non-GAAP measure has no impact on any previously reported GAAP measures such as net income or earnings per share. Second, the use of the statutory tax rate is solely for the purposes of computing this non-GAAP measure and has no impact on the company's actual tax liability or any previously filed tax returns. And finally, any unused portion of the deferred tax asset will turn into net operating losses and be rolled forward for future use over the next 20 years, so the value to the company of the deferred tax asset is not impaired by any present limitations on our ability to use it.

Our cash EPS was $0.14 per share compared to $0.17 in the third quarter of last year. Our GAAP EPS before discontinuing operations was $0.07 per share for the third quarter of 2010. Year-to-date cash EPS is $0.44 compared to $0.54 for the same period in 2009. GAAP EPS for the nine months ended September 30, 2010 was $0.26 and $0.35 for the same period in 2009.

GCA used $7.9 million of cash flow from operations during the third quarter of 2010. Cash available to use in the business is approximately $43 million as of September 30th. Debt at September 30th was $224 million and we remain in compliance with all of our debt covenants and our leverage ratio is approximately 2.6 times trailing adjusted EBITDA as of September 30th.

Based on the results through September 30, 2010 the company is now forecasting continued declines for the remainder of 2010 and for this reason the company is lowering its annual guidance for GAAP EPS to between $0.33 and $0.36 and cash EPS to between $0.53 and $0.56. This guidance reflects the following assumptions. Our effective tax rate for the full year of approximately 41%; our cash outlays for capital expenditures remaining between $7 and $9 million; and the fully diluted shares outstanding for the full year of approximately 67.5 million to 68.5 million shares. The loss of the Harrah's contract effective mid December of 2010 and the opportunistic repayment of $15 to $30 million in debt in the fourth quarter of 2010.

And with that, I'd like to turn it back to the operator and open it up for questions.

(Operator instructions) Our first question is from David Bain with Sterne, Agee.

On contract renewals in general, how long past expiration have they gone in the past or is it always just fluid or is there some point that for XYZ deal or package the operator needs to resign by a certain date?

David, it's all over the map. We obviously have provisions in most contracts to go month for month is the actual elapsed date passes. We also typically have a fairly robust discussion on other products while we're doing this. Now we have Western Money and some other things that people assess, so the process can be anywhere from being signed ahead of the date and renewed and sometimes renew at midterm in a contract because of a change, to it going on for a month or two after the contract date.

Okay, so some may be extended a little bit longer also because of your new product line and maybe some bundling opportunities there?

Yes. It's all part of a productive process we have with our customers as we go through the final negotiations.

Okay. Then can you just give us a high level review of what may be different at this year's G2E versus last in terms of your product offering?

We're going to have some of the products that you saw last year. I think you'll see a more robust version of the CSI product, that includes some increased functionality, you'll certainly see the rollout in the real live QCP Express that we talked about going in the market last year, so you're going to see sort of the fruition of those. Obviously Western Money will be fully integrated into what we're offering at this point in time and we'll also have an area where we're going to be previewing some new products around redemption kiosks and some of the integration of functionality between our current system and the Western Money devices as well as some other cash management opportunities. So there will be some new things that we'll also be showing this year at G2E we're quite excited about.

Great. And just last one from me. In terms of the beta sites for QuickTickets, curious if you've identified those for early next year and maybe you can review how that rollout may ramp, how many locations, what data points, milestones we need to look for?

I'm a new products guy. I've been pushing this for a long time so frankly we just sort of ran out of time with what's frankly just a freeze in the payments industry at this time of year but yes, we do have at least one and probably two customers in Nevada that would like to beta test this and we have identified one in California that we think we'll do that with who are obviously already existing Western Money customers because it makes moving over to that platform possible.

I think the way I foresee it is certainly these beta tests will go into the customer. Yes, we want to test and make sure everything works from a systems standpoint. Frankly, the scrutiny it's already gotten, I'm less concerned with that although it's something we need to do. But also to start testing out and making sure we have the customer side piece of this right. Are the words on the screen flows right? Do people understand it? Are our marketing materials right? Those types of things. So my expectation is that would be a two or three month -- maybe call it three-month test and then we would start rolling it out to other locations.

Your next question is from Todd Eilers with Roth Capital Partners.

A couple of questions, maybe I missed it; I apologize if I did. But with respect to your guidance for Q4, does that assume stabilization in the mix between cash advance and ATM? And the also, with respect to guidance you mentioned the $5 million cost reduction plan; how much of that might be implemented in Q4, just to kind of get a sense of maybe the impact there?

Let me take that quickly, I think from a general standpoint. On the cost savings target, I would look at that as simply trying to get everybody to think about 2011 properly. We're always looking at cost, obviously on a day to day basis but we had talked about putting a plan in place to offset some of the loss of Harrah's and I just wanted to reconfirm what we had guided people to last time. I wouldn't be looking at that specifically in Q4, although we continue to manage our costs as tight as we can from quarter to quarter.

And your first question, can you repeat that again. I'm sorry.

The mix between cash advance and ATM in your business? It looks like we're still seeing a migration away from cash advance to ATM transactions; do you anticipate that trend to continue in the fourth quarter I guess?

The short answer to that would be, yes. The long answer is a more complicated math problem because if you can just think about what we said in our comments here, not only yes, we are seeing frankly quite a significant decline in the rate of decline in total cash access to the floor and you'll see ATM transactions where basically flat or up a little and debit transactions are basically flat to up a little, so everything is being driven by the credit side of it. So, from my standpoint and we still think there's some decline left in the market, you would then have to conclude that we still think that credit card is going to continue to decline. We just haven't seen that abate enough.

Said another way, when we finally come back and say that has stabilized out and flattened out, I'm sure we'll see credit year-over-year come close -- it would have to get down in the single digits, if you run the math for that to actually stabilize. And we believe that we're going to continue to see some decline as we move through the fourth quarter and into 2011.

That makes sense. Then last question, just in your remarks, Scott it sounds like, you know, in the past you've always mentioned that pricing pressure from competitors out there has always been there but it sounds like in your comments that that maybe has gotten even a little bit more aggressive recently. Is that a fair statement or am I misconstruing what you said?

No, I think you picked up on my comments quite appropriately.

Your next question is from Tim Willi with Wells Fargo.

On the check business, could we go back through some of the factors that resulted in a pretty dramatic drop-off or acceleration in that decline of revenue sequentially? It caught me a little bit by surprise; I just want to make sure I'm not missing something. In particular it looks like your revenue yield versus the dollar volumes that were getting processed was off pretty sharply. I don't know if there was just something that's seasonal or was there a contract renewal in there that impacted that, but that seems to be probably about as big a driver as anything around that business as far as I can tell.

Scott Betts; The biggest change that's happened is one of our very large customers has moved from a booth operation to putting that in their own cage and that changes the economics of the check business significantly for us.

So if we think about how to sort of forecast the "revenue yield" on that volume, is the simple math of about 215 basis points, 220 basis points that we saw this quarter, is that more representative of what we'll have going forward?

I'm going to get back to you on that one. I just don't have the figures in front of me and I think that's a pretty granular question to be honest with you, for Marybeth at this point in time, so why don't we get back to you Tim on that. Okay? But the big driver and it's a onetime issue so what you're seeing today is sort of what ought to move forward but it has a significant difference in our economics. Basically we're outsourcing the cage for someone in terms of what we get there. It may not necessarily be that different from a total bottom line because we also have the expense drop-off of running the case, but that gets recorded in another place. So, why don't you let us take that question back and Marybeth and I can answer that later.

Okay. Could we just maybe run through a couple of the same-store metrics that Marybeth gave in the narrative around the -- there were a lot of them there which I think we all appreciate but the ones that I had trouble writing down and scribbling quickly enough were around sort of credit/debit, ATM? I think you quoted some sort of same-store metrics around the various access points, if you will.

On the same-store on ATM for the quarter was actually up 1.5%. The credit was down 12.9% and debit was up 1.1%.

I guess from my perspective one of the key reasons investors are attracted to GCA is the strong cash flow generation of the company, even here in the downturn. But with revenues expected to continue falling off, can you give us a sense of what kind of floor you might see and where free cash flow you think can continue to be generated over the next several quarters?

I think honestly any forecast or any granularity around 2011, we historically do that in the fourth quarter. We're obviously in the process of doing our planning for 2011 by department and so forth, as well as some indication we've given you here on the phone of what we think we can do on the expense side of it. That's probably as deep as we can get on that right now.

The only thing I would add to it is that just even combined year-to-date 2010 with the results that you're seeing, we're still covering interest at about five times. The free cash flow this company generates is still fairly significant. So I think that even with the current results in the period that we're in, a remarkable free cash flow from somewhat different industry.

And we do have the intention of using that to reduce debt as we move forward which also helps as you move forward.

Okay, but as you're looking at your preliminary plans, do you foresee yourself coming into any challenges with any of your existing covenants as you move through 2011 and then where are you in looking at refinancing your debt?

The first answer to the first question is, no. On the second piece of that, obviously we're part of putting together our plans for 2011 and trying to get -- seeing what happened in Q3 and how we might project that as getting our five-year forecast together, that process is being worked with in the context of getting refinanced. We're also determining what our mix is and so forth and honestly giving Marybeth a little bit of time to kind of get up to speed on the business. But that process is moving forward.

Okay. And then the primary impact on the decline in same-store sales that you've been saying is industry falloff, can you give us any kind of reality check in terms of does GCA have its own aggregate estimate of what industry casino same-store sales have been declining by?

Yes, I think the metrics that I gave you are pretty close, I mean if you look particularly at dollars to the floor, okay, now I don't know in the turbulence of today's marketplace whether we've had -- this is sort of a disclosure here I guess. But whether we can still tell you the percentage of the amount wagered in account as a percentage of our cash dispense has held constant or not; there's just too much stuff going on. But if you go back to the numbers that I outlined in my comments, and I'll just go back to make sure I say them in the same manner so I don't have a senior moment here. But, in Q3 cash dispensed to the floor is down 3.3%. Year-to-date that number was 7.1% and it was 11.1% in 2009.

I think those would track pretty consistently and again, this is really really sort of rough running tabulation in my mind. But as I read through all of our customers that do earnings releases and so forth and you strip out conversations about RevPAR and whether or not their buffet is up or down or whatever and you really kind of look at slot numbers and those types of things, I think you'll find that we track pretty closely to what the industry does. And again, that's with our total portfolio; public, private companies, reported jurisdictions as well as non-reported jurisdictions.

So the bad news is there is certainly still decline and the good news is this is the first time we've really seen us significantly get down into the lower single digits, which again is encouraging but we don't -- for me stabilization is the lack of variation and we're still seeing a lot of variability both month to month as well as quarter to quarter.

Okay that was helpful. Then finally, the Central Credit and other revenue segment has been showing decent sequential growth. Is this one-off programs or are these new products like CSI that are taking hold and driving up the revenue line?

Both. Central Credit is obviously an ongoing product that has extremely high penetration in the marketplace and continues to be a stable revenue stream. While sometimes it's a bit different quarter to quarter, we continue to do a nice job on our casino marketing services. That's obviously event driven; a little more episodic in terms of when a customer wants to run those events but interestingly that has not dried up in the last year. We have a group of customers who see this as an opportunity to gain share and use those services. And that line is also where you're seeing the initial parts of CSI and where you'll see that in the coming year, the CSI contracts will flow through that line also.

(Operator instructions) Your next question is from Ed Antoian with Chartwell, Inc.

I have two questions. One, could you just kind of -- when the Harrah's contract ends obviously the revenues go away. To what extent have you been able to kind of pull cost out of the system ahead of time or is there a bunch of cost that comes out after? Is there kind of a lead and a lag to cost? The other question I wanted to ask is a little more specific on Stations. When they went through bankruptcy what's the status of your contract with them as a result of the bankruptcy?

Let me answer those two questions in the order that you asked them. There's not significant cost that falls off for Harrah's prior to them rolling off. We still service the equipment; we still want to make sure we service their customers and our customers at the same level, so as far as anything happening prior to the conversion, there's not much. We don't want to degrade the services as we go through here. So after the conversion there's obviously some very direct costs that stop, whether it's maintenance of the ATMs, filling the ATMs, vault cash, all of those types of things obviously end immediately. And then we get to the harder work of figuring out what potentially has to get rightsized in our organization as we move through that and that's the work I alluded to that's going on during the planning period right now. But there is a chunk of that cost that rolls off with the cessation of service.

Stations if a customer of ours and remains a customer of ours and there's nothing that we would comment on specifically about their situation or impact or potential impacts that may happen as they come out of bankruptcy.

Your next question is from Andrew Berg with Post Advisory Group.

Good news and I know you don't really like to comment on specific customers but with respect to MGM there's been rumors floating around about what may happen with that and I'm just curious, does all of MGM's business fall under one global contract or are there separate pieces where you may keep one piece but you may lose another piece?

I would answer the question in sort of the way I think it should be asked. First of all, not only do I not like talking about it, I won't talk about contracts until they're signed, just as a matter of course. We continue to work and have a very positive relationship with MGM. What we have said in the past is that typically for a customer of ours we have multiple contracts with a customer. This is really more of a legal detail than anything else. Credit/Debit is usually a contract redemption kiosk can be a contract, ATMs is a separate contract, because they all have different business components to them. What we have said is in MGM's case they're a little bit unique in that they are not all coterminous.

There are no further questions at this time. Ladies and gentlemen, this concludes the Global Cash Access Holdings third quarter 2010 earnings conference call. You may now disconnect.