Everi Holdings Inc (EVRI) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen, thank you for standing by. Welcome to the Global Cash Access Holdings Incorporated 2013 fourth quarter and full-year earnings conference call.

(Operator Instructions)

This conference call is being recorded today Tuesday, March 11, 2014.

And I would now like to turn the conference over to Todd Valli, Vice President of Corporate Finance and Investor Relations. Please go ahead, sir.

Thank you and welcome, everyone, to our fourth quarter and full-year 2013 earnings conference call.

Joining me on today's call is President and Chief Executive Officer, Ram Chary; and Chief Financial Officer, Randy Taylor. Before turning the conference over to Ram, please note the following.

First we have posted our earnings release to the investor relations section of our Corporate website at www.gcainc.com. Second, if we use any non-GAAP financial measures for references, we will provide the appropriate GAAP financial reconciliations on our website. Third, a replay of today's call will be posted on our website after 5:00 PM Pacific Time.

Fourth, please note 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, without limitation, statements regarding market and segment trends, conditions impacting our business and the overall gaming industry for 2014 and future periods, the anticipated impact of less favorable pricing terms associated with customer contract renewals in 2014, the anticipated impact of certain customers not renewing their contracts, flat below industry growth, limited domestic casino openings in 2014.

Projected increases in our kiosk sales and services business in 2014, continued investment with respect to the Company's technology infrastructure and personnel, our product pipeline and ability to introduce new products and services, and our projections and guidance regarding cash EPS, adjusted EBITDA and other financial metrics. And fifth, for factors that could cause actual results to differ materially than those described in our forward-looking statements, we refer you to our SEC filings and the risk factors set forth therein.

With that, I am pleased to introduce our President and CEO, Ram Chary.

Thank you, Todd.

Good afternoon, everyone, and thank you for joining us today to discuss our fourth quarter and full-year 2013 financial results. I was drawn to GCA because I have a great passion for the retail payment space and I believe that my background uniquely matches our go-forward opportunities.

In my short time here, I've been most impressed by the depth of talent that we have in our organization. We have an ideal balance of gaming and payments backgrounds, and I truly believe our recent leadership appointments create a unified team that will fuel the Company's growth. I am personally very committed to building deep client relationships, and I'm fortunate to be joining a team that has proven to have the deepest in the industry.

Our dominant market position provides for an enviable foundation from which we will be able to grow. In any investment we make, we will always be mindful of our gaming core to ensure that over time our gaming clients ultimately benefit from our expanded capabilities. We also believe that as an innovator in our space, we will be able to capitalize on global opportunities.

Obviously all of these signs of optimism must lead to results. To that end, I'll turn it over to Randy to review fourth-quarter financial results and provide 2014 fiscal guidance.

And I will be remiss if I didn't congratulate Randy on his new responsibilities; I'm looking forward to working with you.

Thanks, Ram, and good afternoon, everyone.

Let's start by reviewing our two primary non-GAAP performance indicators, cash EPS and adjusted EBITDA as compared to our full-year guidance. Our cash EPS, which is defined as net income plus equity compensation expense, deferred income tax expense and amortization expense divided by diluted shares outstanding, was $0.78 for the year, consistent with our guidance of between $0.74 and $0.83.

Weighted average diluted shares for the full year totaled 67.1 million which is spot on with our guidance. Adjusted EBITDA, which excludes non-cash stock compensation expense of $71.2 million for the year, again consistent with our guidance of between $70 million and $74 million. For the quarter, our cash EPS was $0.19 on 67.4 million diluted shares and adjusted EBITDA was $17.1 million.

Now for fourth-quarter segment information. On a segment basis, Cash Advance revenues, operating income operating margin were $56.8 million, $14.5 million and 26% for the fourth quarter. Cash Advance revenues increased by 3% compared to the same period last year primarily due to growth in some of our international markets. Cash Advance property income decreased by $0.9 million, or 6% primarily due to margin compression on new ([and reduced] business.

ATM segment revenues, operating income and operating margin were $66.2 million, $6 million and 9% for the fourth quarter. Revenue decreased by $3.6 million, or 5% as compared to the same period last year. The decrease in revenue was primarily a result of lower transaction volume at our same-store locations combined with previously disclosed lost business. ATM operating margins decreased by 50 basis points as a result of margin compression on new and renewed business and transaction volume decreases.

Check Services segment revenues, operating income and operating margin were $4.8 million, $2.5 million and 52% for the fourth quarter. Check Services revenue decreased by 16% primarily due to fewer transactions which included lost business and overall decline in same-store transaction volume. Margin percentage for Q4 was consistent with the same period last year.

Our Other segment revenues, operating income and operating margin were $12.6 million, $5.7 million and 45% for the fourth quarter of 2013. Of note, our Other segment includes the results of kiosk sales, kiosk parts and services and Central Credit operations among other ancillary results. Other revenues increased by $6.9 million, or 121% primarily due to higher kiosk sales. Other segment operating income increased by $2.8 million, or 97%, again due to higher kiosk sales. Other segment operating margin percentage decrease by 6%.

The kiosk business has margins that are below that of the other components of the segment. As kiosk sales have grown proportionally faster than that rest of the segment, the overall impact and the margin percentage for this segment is a net decline compared to the same period in the prior year.

Corporate operating expenses decreased by $0.8 million, or 4% to $17.4 million for the quarter due to lower non-cash stock compensation expense. A few other Company metrics to note, same-store cash to floor, our best indicator of the industry trends, showed overall growth increasing approximately 2.5% for both Q4 and the full-year 2013 and compared to same periods last year.

This same-store cash to floor was driven by both credit and debit card transactions of the Cash Access segment. Combined credit and debit transaction volume was up 4.8% and 4.1% for Q4 and the full-year respectively. ATM same-store cash to floor was basically flat at less that 1% growth for both Q4 and the full year. Same-store transaction volume was down 2.9% and 3.2% for Q4 and the full year respectively.

Looking briefly at the balance sheet. As of December 31, 2013, cash and cash equivalents was $114.3 million. Please note that our daily cash balance fluctuates significantly due to our large settlement receivables and settlement liabilities and the ultimate timing of when those cash received from the patient's issuing bank and when we reimburse our casino customer. As of December 31, 2013 our total borrowings outstanding were $103 million and our leverage ratio was approximately 1.5 times.

Our total capital expenditures were $15.1 million for the full year 2013, of which $14 million was spent and $1.1 million was accrued but not yet paid as of January 31. These capital expenditures were consistent with our previously provided estimates of between $14 million and $16 million.

The full year of 2013, we repurchased approximately 2.6 million shares of our common stock for approximately $18.2 million under the 40 million maximum share repurchase program approved in late 2012. The average price per share repurchased in 2013 was $7.10.

Now for the 2014 guidance. Full year ending December 31, 2014 we estimate that cash earnings per share will be between $0.82 and $0.87 on diluted shares of approximately 67.1 billion. Adjusted EBITDA will be between $73 million and $76 million. Estimated outlook is based primarily upon the combination of the following assumptions.

Growth in our kiosk sales and service business in 2014, flat to low growth in the domestic gaming industry, the anticipated impact of less favorable pricing terms associated with our customer contract renewal in 2013 and 2014 and reduced interest paid on our credit facility. We also expect 2014 capital expenditures to be within a range of $15 million to $18 million.

That concludes my portion of call and now I will turn the call back to Ram.

Thank you, Randy. With that, let me turn the call back over to the Operator for questions.

(Operator Instructions)

David Bain, Sterne, Agee.

Ram, have you done any customer collaborations at this point to hear concerns or otherwise that may cause you to make up technology or other changes to the core business?

The answer to your question is yes. I've reached out to several of our clients and been fortunate enough to have several meetings, have gotten great feedback relative to our capabilities and our position in the market. No real points of concern, although we've got a lot on our plates to execute against, but we're fortunate to be in our position.

Okay. And then you also spoke briefly about capital allocation in terms of strategic acquisitions, maybe if we can get a little more detail from an accretion basis if you're looking for those things to be additive within 12 months, or are you looking for more tuck-in, something more transformative, anything like that? And then are you satisfied with the current buyback policy in place right now?

Well as far as the buyback policy goes, clearly both Randy and I inherited the current share repurchase program, so that's something we're evaluating going forward. Relative to your broader question on capital allocation, we're going to be opportunistic. A lot of that is market driven and opportunity driven and we're going to keep our eyes on the market and see how potential opportunities might fit into our strategy and we will adjust accordingly. But in the few short weeks I've been here, I think it'd be premature to specifically identify an acquisition.

Okay and then one more, if I could.

Can we get a little bit of specifics on the QuickTicket product? As far as we know, is in one California casino. Can you discuss any further proliferation, any data points such as prior acceptance, more coining on the floor since the installs and then any potential tweaks to the product?

This is Randy.

I think what we can't say is that we've identified another location that it will be going live in. I think we're still working through some of the bugs with it and still working through the product itself, but it's not at a point where it's going to be released to all our products. So right now we're just really in two locations, I don't think we really have a lot of data we can share at this point in time.

Okay. Thank you.

George Sutton, Craig Hallam.

Hello, guys, good afternoon, it's Jason on for George. Ram, wondering if you can talk broader about any pivoting of the strategy that you would expect? I know David had more of a focus, or sorry, more of a background in the gaming industry. Your background is more so payments. And talk about anything that you've learned or any plans that you have in the month or so that you've been there.

I suggested in my opening remarks, the fact we have a very dominant position in the gaming space is something that I've embraced, will continue to embrace with the Company and we're not going to get away from that core. So when we think about potential acquisitions or acquiring capabilities, if you will, they will be in directions that ultimately help us in the gaming marketplace.

So we're going to do things consistent with gaming. We go outside of gaming I would hope and intend for us to be able to bring those things back into our gaming footprint. So, by contrast I think previously the Company had a very gaming centric view, I view us to be in the gaming market, but we're clearly a payments Company.

Okay. And then you mentioned in the press release about pricing pressures, and wondering if you can give an update if you've seen changes there or if it's mostly in line with the commentary that we've had in the past about pricing pressures? And any expectations as far as 2014, if you expect further changes or just to be flat line from the last few months?

I think the description we previously provided is in line with where we see the market today. I would maybe state the obvious by saying the larger the client commitment and the larger the volume that we're dealing with sometimes we experience some more compression than with some of the smaller ones. And so as you connect the dots through some of our renewals and key opportunities going forward, you might be able to draw that conclusion. But otherwise I think it's very consistent with what we've told you.

Okay, thanks. And then last for me, when you were running through the numbers, or I guess when Randy was running through the numbers, I think it was Cash Advance you had said there was more -- there was some growth there from international markets. And wondering if you can talk about specifically what you're doing in internationally and what the plan is going forward?

Well to date, our international focus has been very targeted to a few specific regions, the UK, Canada in particular, we've had great success. We clearly dominate the market in the UK, and I think our results show that.

I think we'll continue to be very targeted and opportunistic in terms of how we try to expand that focus going forward. But where we've been, we've been very successful.

Any opportunities in Asia? I know we've talked about in the past maybe pursuing that market, wondering your thoughts.

Well without going into a ton of detail, the Macao market clearly as a gaming market is very large, very significant, the largest in the world. It's a place we have played and will continue to need to play. There are certain dynamics in that market that are very, very different, that are meaningfully different than the US market. So as you peel those back, our opportunity is not as large an audience as you would think, but still a place we need to be, we intend to be and we're making meaningful investments to have a presence there.

Great, thank you.

Jeff Bronchick, Cove Street Capital.

General question, so in the -- obviously it's very early days, but maybe some general comments on what you know today about this Company versus what you thought you know when you came in. And more of a general, as you start formulating longer term strategy, maybe some updated comments on that. And then the second issue would be maybe some help or some of your thoughts on your methodology for people and the team and some of the changes you've made recently, and what you see as things you may need in the future.

Yes, I tried to highlight a couple key ones in my opening remarks, but I'll go back through them. In the few weeks I've been here, different from maybe my impressions. One, very, very impressed with the depth of talent we have at the Company and I think there are a lot of great, smart, capable people here. And that's very encouraging for me because it's a great base to build off of.

And two, I've been surprised that our market dominance and how deep our client relationships are. Again that's a great foundation to build off of. And it's not that I thought it was poor previously, but it seems to be much more substantial than I had thought. So those are great surprises and positive surprises as I entered the role.

Relative to how I think through people, it starts from the Board and the Board's recruitment of me that they wanted to take a different approach relative to being more aggressive about growth and growth opportunities. And fundamentally I just needed a team around me who embraced that shift in focus. So I think I have a team around me, or I should say I strongly believe I have a team around me that embraces that go forward, understand how we're going to do some things different from the past and understand how we're here to grow our business and expand our share.

A lot of people think because we have dominant share it can't be expanded. But in the last few years it's eroded and I intend to bring that back. So the team around me I think embraces that. It's a team that I think will fuel our growth, and it's a collaborative team, which is really essential to being successful.

And at this point, last part, so when you're talking about the share repurchase plan you inherited, obviously this Company did not have a share repurchase plan, it's that a mop up option plan. Is your sense that the big opportunity is to grow in our adjacencies and therefore that is a preferred method of capital allocation, or as you're suggesting that I inherited this plan and it's ridiculous, we're really going to do something about share repurchase?

I think when you talk about paying down debt and repurchasing shares, however you describe the plan, you're talking about meaningful actions any company and organization can take but not necessarily ideal relative to real investments whether they be internal or through acquisitions. So I was suggesting that we're really going to take a hard look at those internal and acquisitive steps and alternatives relative to what we've been doing.

Okay. Thank you.

Matthew Kempler, Sidoti & Company.

I want to circle back to the commentary on pricing. I wanted to clarify, is this commentary similar to what had made by GCA in the past or is the Company seeing negotiations getting tough or are competitors more willing to go more aggressive on pricing?

No, it's similar.

Okay. And then in the guidance we made the comment obviously it's a challenging business environment, we're looking for flattish industry growth. Outside of the kiosks then, can you elaborate in any particular areas that you might be focused on or the Company is focused on to drive growth without waiting for an industry recovery?

Yes, again it may be premature to get into specifics from my perspective, but I think the kiosk rollout will serve as an enabler for us to get more products and more capability into our gaming footprint. But I think relative to being specific about products, it might be a little bit premature for me to talk about that. But yes I believe we will be able to grow in our existing footprint.

Okay. And then circling back to the commentary about the potential for GC to move beyond gaming or a payments processing Company at the core. Are there other markets that are particularly well-suited for GCA's approach or is this more about looking at underserved markets that you're [yearning to find]?

I think when you look at our capabilities, our capabilities all center around cash access and handling of cash. So there are places in the macro economy that lend themselves to that more easily than others. And I think at a high level and a broad level, those are the places we would have a natural adjacency that potentially could bring something relative back in the gaming for us.

Okay. Thank you.

(Operator Instructions)

David Bain, Sterne, Agee.

I had two follow ups. One relates back to that guidance question.

Are you including any growth for the new product proliferation or any noticeable ramp in the lottery? And then (inaudible) month of the year, it's been tough on the regional gaming side on the same-store basis especially obviously much weather-related stuff has been going on. But any thoughts behind the flat to slightly up language in the guidance would be helpful if what's what customers are telling you, what we are seeing in the data looking at consensus reports or things like that, how you get to that?

From a lottery standpoint, there's really nothing material in this guidance, it's still very in infancy stage, so there's not any material numbers in the guidance. As far as the impact as (inaudible) talked about the impact on the East Coast with weather, with (inaudible) couple months in yet, but I haven't seen anything really material in our numbers to have any impact there. So I don't know if that answers your question, but that would be the two areas we haven't seen anything dramatic at this point.

Okay. And then one last one. Ram, have you seen any or heard of anyone in the organization fielding questions from customers at all on the recent Executive changes? I know competitors in this segment of gaming especially like to shake the tree a bit, anything they may be saying that you've had to clarify with customers?

No we haven't. I think they're all aware of the changes, but nobody's really made any comment one way or the other.

Okay. Great, thank you.

From our perspective it's been a non event.

Okay, thank you.

At this time there are no further questions in queue. I'd like to turn the call back over to Management for closing remarks.

I appreciate everyone joining us this afternoon. Randy and I are excited to have this be the first of what we expect to be many calls going forward and appreciate your attendance. Thank you.

Thank you.

Thank you, ladies and gentlemen, that does conclude our conference for today. Again we'd like to thank you for your participation and you may now disconnect.