Everi Holdings Inc (EVRI) 2014 Q1 法說會逐字稿

Hello, everyone. Thank you for standing by, and welcome to the Global Cash Access Holdings Incorporated First Quarter 2014 Earnings Conference Call. (Operator Instructions).

This conference call is being recorded today, Tuesday, May 6th, 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 First Quarter 2014 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 reconciliation on our website. Third, a replay of today' call will be posted on our website after 5pm 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, the overall growth of the gaming industry, if any; our ability to replace revenue associated with terminated contracts; margin degradation from contract renewals; our ability to introduce new products and services; our ability to execute on mergers, acquisitions and/or strategic alliances; our ability to integrate and operate such acquisitions consistent with our forecast; gaming establishment and patron preferences; national and international economic conditions; changes in our gaming regulatory card association and statutory requirements; regulatory and licensing difficulties; competitive pressures; operational limitations; gaming market contraction; changes to tax laws; uncertainty of litigation outcomes; interest rate fluctuations; inaccuracies in underlying operating assumptions; unanticipated expenses or capital needs; technological obsolescence; and employee turnover.

And fifth, 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 the risk factors set for 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 first quarter 2014 financial results. In my first 100 days with the Company, I have been impressed by the feedback that we have received from our clients. They consistently view us as a strategic partner who helps them to compete in the gaming marketplace.

As we move forward, we will continue to shift our focus to providing them full solutions, as opposed to individual products. That transition begins with our integrated kiosk. Rather than focus on short-term hardware sales, we will offer kiosks as part of an overall cash-to-the-floor solution.

As innovations like QuikTicket, TableXchange and CashClub make their way from beta to market, we will integrate them into broader multiyear solution offerings that are consistent with our position as a long-term strategic partner for our clients.

Our gaming footprint is unique. To that end, any material investment by our Company needs to be gaming relevant. While our recent acquisition of [NEWave] is small, it is consistent with our objective of increasing the value to our gaming client base. Even though we will continue to pursue other gaming-relevant opportunities, our overall capital allocation approach will remain the same. We will continue to buy back shares and pay down debt, in addition to making capital investments in our business.

Network security is one specific area where we have and we'll continue to make investments in 2014. Our segment of the payments industry is clearly not immune to security threats. Correspondingly, we fully intend to maintain our best-in-class leadership position.

As we proceed through this year, our financial results will better reflect our market-leading position. We recently renewed agreements to provide integrated solution offerings to several key long-term customers, such as the Seminole Tribe of Florida and Pinnacle Entertainment, to include their recently acquired Ameristar properties. These renewed and expanded customer relationships, together with expected new business signings, will help to bolster our top line. At the same time, overall efficiency initiatives and incrementally improved new business margins will help us to be more profitable.

Randy will now review our first quarter and provide insight on our updated full-year guidance.

Thank you, Ram. Good afternoon, everyone. Let's start by reviewing our two primary non-GAAP performance indicators cash EPS and adjusted EBITDA. 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 $0.22 for the first quarter of 2014, up $0.03 compared to the prior-year first quarter of $0.19.

Weighted average diluted shares were 67.4 million for Q1 2014, and 67.9 million for Q1 2013. Adjusted EBITDA, which excludes non-cash stock compensation expense, was $19.4 million for the first quarter of 2014, an improvement of $1.5 million or 8% over the adjusted EBITDA of $17.9 million for the prior-year first quarter.

Now for our segment information; cash advance revenues, operating income and operating margin were $62 million, $18.1 million and 29% for the first quarter of 2014. Cash advance revenues increased by $3.3 million or 6%, as compared to the same period in the prior year, primarily due to an increase in the aggregate dollar amount processed.

Cash advance operating income increased by $2.4 million or 15%. This increase includes the refund of a goods and services tax related to prior-year commissions paid to Canadian casinos. Excluding the refund, the cash advance operating margin would have been 25.9% which is consistent with Q3 and Q4 2013. The cash advance operating margin has remained relatively consistent over the last three quarters.

ATM revenues, operating income and operating margin were $73.3 million, $6.3 million and 9% for the first quarter of 2014. ATM revenues decreased by $1.9 million or 3%, as compared to the same period in the prior year. The decrease in revenue was primarily the result of lower transaction volumes at our same-store locations, combined with lost business. Our loss of the Mohegan Sun business occurred at the end of Q1 2013.

ATM operating income decreased by $0.7 million or 10% as compared to the same period in the prior year, primarily due to margin compression on new and renewed business and transaction volume decreases.

Check services revenues, operating income and operating margin were $5.3 million, $2.9 million, and 55% for the first quarter of 2014. Check services revenues decreased by $0.6 million or 10%, as compared to the same period in the prior year, primarily due to a decline in same-store transaction volume.

Check services operating income decreased by $0.5 million, or 15% as compared to the same period in the prior year, primarily due to the decline in related revenues.

Other revenues, operating income and operating margin were $9.9 million, $4 million and 40% for the first quarter of 2014. Our other segment includes the results of kiosk sales, kiosk parts and services, and central credit operations, among other ancillary results.

Other revenue increased by $3 million or 43%, and other operating income increased by $0.6 million or 18% as compared to the same period in the prior year, primarily due to higher kiosk sales. Other operating margin percentage decreased by 9%, due to a combination of lower margins on kiosk sales in Q1 2014 as compared to Q1 of 2013, and the impact of the overall kiosk business margins that are below the margins of the other components within this segment.

Corporate operating expenses increased by $1.6 million, or 10%, to $18.2 million for the first quarter 2014, as compared to the prior-year first quarter, primarily due to higher non-cash stock compensation expenses related to equity grants awarded to our CEO, and the vesting of certain equity grants for terminated executives, as well as increased depreciation expense associated with our investments in technology, and the move to our new corporate office in 2013.

A few of the Company metrics to note- same-store cash to the floor, our best indicator of industry trends, increased approximately 1% for the first quarter of 2014 as compared to the same period in the prior year, primarily due to both credit and debit card transactions in the cash access segment. Combined credit and debit cash to the floor was up 7% for Q1 2014.

ATM same-store cash to the floor and transaction volume decreased by 1% and 4% respectively, for the first quarter 2014 as compared to the first quarter of 2013.

Now for the balance sheet; cash and cash equivalents were $194.6 million as of March 31st, 2014. Please note that our daily cash balance fluctuates significantly due to our large settlement receivables and settlement liabilities, and the ultimate timing of when the cash is received from the patron's issuing bank and when we reimburse our casino customer.

Borrowings were $100 million at the end of the first quarter of 2014, and our leverage ratio was approximately 1.4 times.

Capital expenditures were $3 million for the first quarter 2014, which was consistent with the prior year.

We repurchased approximately 0.3 million shares of our common stock for $2.5 million in Q1 2014 and have repurchased an additional 0.4 million shares for $2.5 million since April 1st, under our share repurchase program. Since its inception through today, we have repurchased 3.2 million shares of our common stock, for $23.2 million, with 16.8 million remaining for future stock repurchases under the program.

We completed the share repurchases with cash on hand, and we intend to continue to use cash on hand for share repurchases.

As Ram discussed in his opening remarks, we completed the acquisition of NEWave in April with cash on hand. NEWave is a supplier of appliance and efficiency software to the gaming industry.

Now for our annual guidance; we are increasing our full-year 2014 guidance. We expect cash EPS will be between $0.87 and $0.91 on diluted shares of approximately 67.1 million, up from prior guidance of between $0.82 and $0.87 on the same number of diluted shares.

We expect adjusted EBITDA to be between $76 million and $79 million, up from prior guidance of between $73 million and $76 million.

This updated outlook is based primarily on the combination of the following assumptions- modest improvement in the Company's overall operating margins, and modest growth in the domestic gaming industry and operating income from our cash advance segment. We also expect 2014 capital expenditures to be within a range of $15 million to $18 million.

To conclude this portion of the call, now, back to Ram.

Thank you, Randy. We will now turn the call back to the operator for questions.

(Operator Instructions). David Bain, Sterne and Agee

Yes, thanks. Hey guys, can you give us a little bit more on NEWave? I apologize. I'm on the move, so don't fill a lot of detail, but if you could provide maybe in terms of size of acquisition, strategic fit, if it's accretive or impactful to guidance; maybe just a bit more on the strategy as well.

David, how are you? It's (inaudible).

Good. How are you?

Great. NEWave is a software provider that gives capability to our clients inside the cage to better manage AML and tax filing requirements. It's a relatively small business. All in, it's about $14 million to us, which we funded, as Randy mentioned, through cash on hand.

It's consistent with our gaming relevant acquisition approach in that clearly it's gaming relevant because it helps our casino operators inside the cage be more efficient with things that they're required to do. So your question as to whether or not it's accretive, we have an integration plan identified and in place. And we have to execute against that plan through the remainder of the year.

But to the extent we do so, we expect it to be accretive.

OK, great. Ok, so that may answer part of my second question, but as it relates to guidance, you note a couple different things. One is that margins will go higher. I'm wondering if that's—a portion of that's the Caesars contract, credit card cash advance mix, or other factors such as this acquisition. And then in terms of your outlook for the domestic gaming industry. If you could speak to anything that led you to the assumption where we're going to see it relatively flat I guess. Is it easing comps? Is it something you're hearing from customers on pent-up demand after weather issues? Any trends on May? Anything there would be helpful as well.

Relative to our increased guidance, we're very focused on continuing to run a more efficient Company. So we have some broader cost initiatives underway that will help us and translate into a better financial performance.

As I've mentioned before, we're also very focused on our core cash access business, not just improving the margins that we have today, but as we pursue renewals and new business, pursuing business that would be more profitable to us, given our composite margin. So those are the things that are really driving the guidance.

The modest growth in the domestic gaming industry, we believe it won't be flat and it'll at least grow, even if that's only 1% on a year-over-year basis. But we think that that growth consistent with our internal initiatives, will allow us to be more profitable as we go through the year.

OK. That's all right. I don't usually do three questions, but if I could just ask, because it's part of this new bundling strategy, as to the progress of some of the new products like the QuikTickets; maybe how many customers have it on beta at this point. Any data points in terms of coin-in improvements for customers or usage by customers or their customers?

Well, as I mentioned in my opening remarks, and it applies to QuikTicket, TableXchange and our CashClub offering; we are shifting to combine those into a more meaningful solution sale that will allow our capabilities to be fully showcased within our customer's footprint. And so we're starting to move away from talking discretely about individual products. Those are all on a timeline to time-out in the next several months in terms of how they're going to be offered in our solutions.

But we're moving away from discretely identifying and describing individual products as they relate to our overall solutions.

OK. Thank you very much.

(Operator Instructions) George Sutton, Craig-Hallum Capital Group

Hey guys, it's Jason on for George. Thanks for taking my questions. I'm just wondering, Ram, if you could clarify. In your prepared remarks you talked about these individual moving to a suite sale, and I'm wondering if that still pertains to the kiosk business, if you'll still sell that individually or if that is also moving to a suite sale.

In my remarks I described the integrated kiosk as being the beginning of that shift. So we are definitely integrating the kiosk as a standalone into a broader solution sale. We're selling that solution in total. Our recent renewals and our expected new business signings that we have in the pipeline, I think will reflect that.

Again, as I mentioned, that will get us away from a short-term hardware sale into a more sustainable longer-term revenue flow against that solution.

OK. Thank you. And then just wondering if you can provide any updates to pricing, what you're seeing, if there's any change to your previous commentary, and then your expectations for pricing as you move into these suite sales.

Yes, as a market leader, I have mentioned before that we shouldn't be as susceptible as we have been to the commoditization of our solutions, in that we have differentiated solutions that should provide differentiated value to our clients, and therefore command a premium in the market.

And as we move to solution sales, we are uniquely positioned relative to any possible competitor from providing an integrated solution that no one else can provide. And I think that will translate into inherent value for our clients, and that value for our clients will translate into better results for us. So we are taking the initiative to be proactive about how we describe and ultimately sell our solutions. And I think that will help relative to some of the historical pressures we've been a victim of, frankly, relative to pricing pressure.

OK, perfect. And then just last from me, you did talk about the NEWave acquisition, and I'm just wondering if you can maybe provide any thoughts into other areas of the market that you could pursue some M&A opportunities.

Again, as I described in my opening remarks, whatever we do, we'll be gaining relevance. So I have taken the time, as you would expect, to talk to our major clients and really tried to listen in terms of what's important to them both operationally and strategically in terms of running their businesses.

And I have, as you might expect, talked to them about some of the ideas that we have internally in terms of expanding our business through our position. And those ideas, at least conceptually, have been received very well in that they resonate with our gaming clients, which would tell you that whatever we do, would be gaming relevant.

And I keep describing the term gaming relevant, because I don't want to be binary in terms of viewing things as being gaming-specific or payment-specific, but instead things that would be relevant to our gaming base. Clearly we're a payments company. But if we pursue things that are outside of our current payments offerings, they still need to be relevant to our gaming customer.

So you'll see us continue, whether it's larger or smaller, whatever the timeframe may be, we're going to be opportunistic, but we're going to pursue an M&A approach that's gaming relevant.

OK. Thanks for the detail and congrats on the quarter.

(Operator Instructions). And I'm showing no further questions at this time. I'd like to turn the call back over to management for closing remarks.

We have no further remarks. Thank you, everyone.

Ladies and gentlemen, this concludes the Global Cash Access Holdings Incorporated First Quarter 2014 Earnings Conference Call. Thank you for you participation. You may now disconnect.