Everi Holdings Inc (EVRI) 2014 Q2 法說會逐字稿

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

This conference call is being recorded today, Tuesday, August 5, 2014. And now I would 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 Second 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 sections 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's 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 gaming regulatory, card associations 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 forth therein.

With that, I am pleased to introduce our President and Chief Executive Officer, Ram Chary.

Thank you, Todd. Good afternoon, everyone, and thank you for joining us today to discuss our Second Quarter 2014 Financial Results. As a Company, we continue to transition to a solutions approach in the market. We are delighted that this shift has been embraced by our clients and prospects.

Two recent top-ten client commitments validate our pivot to a solutions strategy model. First, we have expanded and extended our relationship with Station Casinos. Over the next five years, we will provide them with a comprehensive solution set to include not only our cash access services, but also our integrated kiosk and compliance software solutions. We are excited to have the opportunity to now showcase our capabilities across their entire casino footprint.

Second, we also recently expanded and extended our relationship with Penn National Gaming to provide a similar comprehensive and long-term solution. We will deploy our total suite of cash-to-the-floor solutions across Penn's full portfolio of properties, and will install our integrated kiosk in Penn's new Hollywood Gaming at Mahoning Valley Racecourse, which is scheduled to open later this year. We have also secured the cash-to-the-floor business in all future Penn property locations, and we'll deploy additional integrated kiosks under the extended agreement.

In the coming weeks, we expect to announce yet another long-term commitment with a top-ten client, again, to deploy our comprehensive suite. These recent signings are clear signals that our clients view us as meaningful, strategic partners.

As a payments partner, exclusive to gaming, we are conscious of the accelerated consolidation in the gaming supplier space. While we execute diligently against our established capital allocation approach, we continue to seek opportunistic acquisitions of all sizes that are gaming relevant and broaden the value proposition for our clients.

Even though the solutions transition is taking shape better than we had anticipated, it will take time. We will continue to forego benefit from one-time product sales in order to establish a more reliable and profitable foundation for our future.

This predictability will allow us to make more targeted, long-term investment decisions, to match the long-term commitments from our customers.

Unfortunately, we are faced with the consequences of some of our 2013 sales, which did not reflect our higher-value pricing. This is particularly evident in our second-quarter results. Furthermore, we, like all gaming-related organizations, faced especially negative regional volume trends in the month of June. All of this contributed to a second quarter that is not consistent with our go-forward business outlook.

Randy will now discuss our second quarter in greater deal.

Thank you, Ram. Good afternoon, everyone. I will start with our two primary non-GAAP performance indicators, cash EPS, and adjusted EBITDA. Cash EPS is defined as net income, plus equity compensation, deferred income tax, and amortization expenses, divided by diluted shares outstanding.

Cash EPS was $0.20 on weighted average diluted shares of 67.1 million for Q2 2014, as compared to $0.21 on weighted average diluted shares of 67 million for Q2 2013.

Cash EPS was $0.42 on weighted average diluted shares of 67.2 million for year-to-date 2014, as compared to $0.40 on weighted average diluted shares of 67.4 million for year-to-date 2013.

Adjusted EBITDA is defined as earnings before interest, taxes, depreciation, amortization and stock compensation expenses. Adjusted EBITDA was $17.7 million for Q2 2014, as compared to $19.1 million for Q2 2013. Adjusted EBITDA was $37 million for year-to-date 2014, as compared to $37.1 million for year-to-date 2013.

Now for our segment information. Cash advance revenues, operating income and operating margin were $57.6 million, $15.7 million, and 27% for Q2 2014, and were $119.6 million, $33.8 million and 28% for year-to-date 2014.

This represented a 1% revenue increase in the quarter, and a 3% increase in the six month period, primarily due to an increase in the aggregate dollar amount processed. The loss of the Caesar's contract negatively impacted both the quarter and year-to-date cash advance revenues by approximately $4 million. Excluding the effects of the Caesar's contract, cash advance revenues would have increased by approximately $4.3 million, and $7.7 million or 8% and 7%, respectively, for Q2 2014 and year-to-date 2014 as compared to the prior periods.

The operating margins have remained relatively consistent with the prior periods.

ATM revenues, operating income, and operating margin were $69.7 million, $6.1 million and 9% for Q2 2014, and were $143 million, $12.3 million and 9% for year-to-date 2014. This represented a 4% revenue decrease in both the quarter and the six-month period, primarily due to the loss of the Caesar's contract, and lower transaction volume at our same-store locations, partially offset by new customers.

The Caesar's contract accounted for approximately $7.3 million of the ATM revenue decline in both the quarter and the six-month period. Excluding the effects of the Caesar's contract, ATM revenues would have increased by approximately $4 million and $2.1 million, or 5% and 1% respectively, for Q2 2014 and year-to-date 2014, as compared to the prior periods.

ATM operating margins also remained relatively consistent with the prior periods.

Check services revenues, operating income and operating margin were $5.4 million, $2.8 million and 52% for Q2 2014, and were $10.6 million, $5.7 million and 53% for year-to-date 2014. This represents a 3% revenue decrease in the quarter, and a 7% decrease for the six-month period, primarily due to a decrease in transaction volume and lost business.

Check services operating income decreased by $0.6 million for Q2 2014, and $1.1 million for year-to-date 2014, primarily due to the decline in revenues and in an increase in warranty costs as a percentage of revenues.

Our other segment, which consists primarily of kiosk sales, kiosk parts and services, central credit operations, and NEWave compliance audit and data services, reported revenues, operating income, and operating margin of $12.3 million, $4.5 million, and 37% for Q2 2014, and $22.2 million, $8.5 million and 38% for year-to-date 2014.

Other revenues decreased by 7% in the quarter, primarily due to a decline in kiosk sales, parts and service revenue, and an increase in solution-integrated kiosk sales, which generate no up-front revenue, but the cost of the kiosk is included in the cost of revenues for the cash advance and ATM segments over the term of the contracts; partially offset by the revenue from our NEWave compliance audit and data services offerings.

Other revenues increased by 10% on a year-to-date basis, due to higher kiosk sales and the results from our NEWave products and services.

Other operating income decreased by $1.9 million in the quarter, and $1.3 million during the six-month period, primarily due to lower margins on kiosk sales. Overall operating margins were also negatively impacted in both periods, due to the lower margins from the kiosk sales.

Corporate operating expenses increased by $1.5 million, or 8% for Q2 2014, and $3 million or 9% for the six months ended June 30, 2014 as compared to the same periods in 2013, primarily due to higher non-cash stock compensation expenses related to our 2014 equity awards, and the vesting of certain equity grants for terminated executives.

A few other Company metrics to note, same-store cash-to-the-floor, our best indicator of industry trends, increased approximately 2% for Q2 2014, as compared to Q2 2013 due to both credit and debit card transactions at the cash access segment. Combined credit and debit cash-to-the-floor was up 8% for Q2 2014.

ATM same-store cash-to-the-floor and transaction volume decreased by less than 1% and approximately 3%, respectively for Q2 2014 as compared to Q2 2013.

From a balance sheet perspective, cash and cash equivalents were $162 million as of June 30, 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 $96 million at the end of the quarter, and our leverage ratio was approximately 1.3 times.

Capital expenditures were $7.5 million for the six months ended June 30, 2014, which was consistent with the prior-year period of $7.2 million.

We purchased approximately 0.5 million shares of our common stock for $3.7 million in Q2 2014, and have repurchased an additional 0.4 million shares for $3.5 million from July 1 through August 1, under our share repurchase program.

Since its inception through last Friday, we have repurchased 3.8 million shares of our common stock for $28 million, with $12 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.

Finally, the Company's full-year 2014 guidance of cash EPS between $0.87 and $0.91 on diluted shares of approximately 67.1 million, and adjusted EBITDA between $76 million and $79 million remains unchanged. We also expect 2014 capital expenditures to be within a range of $15 million to $18 million.

That concludes 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) George Sutton, Craig-Hallum

Thank you. Congratulations on the expansions with the multiple casino properties. I'm curious if you could give us an update of how those negotiations have been going from a margin perspective. I know the suite offering is obviously intended to try to build up your margin opportunity, particularly relative to some of the deals you signed in 2013.

George, they've been going very well. I mean from my perspective, historically and especially in recent months, in recent years, as a Company we've not done a good job in differentiating ourselves, differentiating our capabilities and receiving the corresponding margin benefit.

So to the extent that we're doing that now, they're going very well.

You?and when we look at the expense levels for Q2, I'm curious how much potential costs remain that you can remove from the system as a result of the Caesars's loss? Is that included, all in included in Q2 or would more of that show up in Q3?

I don't think there'll be a lot of additional expenses to take up. There will still be some savings in Q3 and Q4 relating to some of the administrative expenses associated with maintenance and so forth. But I think your run rate will be?I don't think it will be much different than Q2. I think the cutoff was pretty abrupt. And therefore, a lot of that was seen in the quarter.

And then lastly from me, when you announced the suite sale, one of the things you mentioned was there really weren't a lot of renewals coming up. So I'm curious. Have these newer renewals and expansions?have they been proactive in your part in terms of the negotiations?

They have been proactive on our part, but as you can see, they're very well received by our clients, and considering the value the clients receive in the short term and the long term, and the ability for us to invest in them for the long term, the overall value proposition has been very attractive to them.

Understand. Okay. Thanks, guys.

Ben Claremon, Cove Street Capital

It's Jeff Bronchick and Ben. How are you?

Great, how are you guys?

Good. Can you just help us with the?one of the thoughts in regards to quote, passing, or not affectively bidding or whatever?competitively bidding on the Caesar's is like why bother with somebody who is not going to subscribe to the solution rather than a product and the reality is it's fairly profitable anyway.

How does that, sort of what you've talked about, jive with the year-over-year decline?it seems like it was lot more profitable than maybe we had thought. Can you explain how that statement fits in with today's numbers?

Yes, we don't draw that conclusion at all, and that isn't a fact. I wouldn't say it's a lot more profitable than you or we had anticipated. There were some specific drivers that led to our second-quarter results, one we mentioned where previously committed one-off product sales that had committed pricing that were executed on by contractual commitment in the second quarter. So that was part of it.

Part of it was broader volume declines as we discussed. But relative to Caesar's in particular, I don't know that we have experienced very much, if any, profit decline associated with it.

Got it. And we've seen a number of whatever?the gambling rags, whatever, they have noted sort of a mini pick-up in Vegas traffic and hotel room occupancy, et cetera, et cetera. Are you seeing, in your opinion, [and of that of the floor], and it does not look like it. Maybe comment on some?generally on that.

Yes, our Las Vegas volumes are consistent with all of those dynamics you describe. We've seen some nice pick-up and we're seeing healthy volumes. For us, from a US perspective, our regional footprint represents the majority of our business. And as I mentioned, our regional volumes are not what our Las Vegas volumes have been in recent months.

Thank you.

(Operator Instructions). And there are no further questions at this time. Mr. Valli, I'll turn things back to you for closing remarks.

Thank you, Kelly Ann, and thank you everyone, for joining our Second Quarter 2014 Earnings Conference Call. Have a wonderful afternoon.

Again, that will conclude today's conference. Thank you all for joining us.