Everi Holdings Inc (EVRI) 2014 Q3 法說會逐字稿

Hello, everyone. Thank you for standing by. And welcome to the Global Cash Access Holdings Incorporated Corporate Conference Call. (Operator Instructions)

This conference call is being recorded today, Tuesday, November 4, 2014. And now I would like to turn the conference over to Mr. Todd Valli, Vice President of Corporate Finance and Investor Relations. Please go ahead, sir.

Thank you. And welcome, everyone, to our conference call. Joining me today is President and Chief Executive Officer, Mr. Ram V. Chary; and Executive Vice President and Chief Financial Officer, Mr. Randy L. Taylor.

Please note that some of the comments to be made during this call contain forward-looking statements and assumptions that are subject to risks and uncertainties, including but not limited to, those contained in our SEC filings.

These event could cause actual results to differ materially from those described in our forward-looking statements, and as such we would like to caution against undue reliance on these forward-looking statements. And they should not be considered an indication of future performance.

For additional information, please refer to our press release and our other filings with the SEC, including our most recent annual report on Form 10-K, and our subsequent reports filed with the SEC, all of which are posted within the IR section of our corporate website.

In addition, some of the comments made on this call may refer to certain measures such as cash earnings per share and adjusted EBITDA, which are not in accordance with GAAP. We reference these non-GAAP measures to enhance investor understanding of the underlying trends in our business, and to provide better comparability between periods in different years.

For a full reconciliation of these non-GAAP measures to GAAP results, please see our earnings press release, and related 8-K, both of which are available within the Investor Relations section of our corporate website.

Finally, this call is being webcast, which may also be accessed within the Investor Relations section of our corporate website. And a replay of the call will be archived. With that, I am pleased to introduce our President and Chief Executive Officer, Mr. Ram V. Chary.

Thank you, Todd. Good afternoon, everyone, and thank you for joining us today to discuss our Third Quarter 2014 Financial Results. I would like to take a few minutes to review the quarter, and then provide an update on our pending acquisition of Multimedia Games.

The third quarter accelerated momentum in our comprehensive solutions approach. Our previously announced five-year agreement with Foxwoods emphasizes our role as a strategic partner for the Mashantucket Pequot Nation. Again, in the coming weeks, we will announce yet another multiyear comprehensive extension with one of our top clients.

While this casino operator has historical been a cash access services client, their switch to our integrated kiosks throughout their footprint will further underscore the value of our full portfolio.

On our last quarterly call, I referenced our role as a payments partner exclusive to gaming. I also suggested that we conscious of the accelerated consolidation in the gaming supplier space. I noted that we would continue to seek opportunistic acquisitions of all sizes that are gaming relevant, and broaden the value proposition for our clients.

Clearly, our pending acquisition of Multimedia Games fits our strategy perfectly. It will allow us to leverage our extensive licensing and far-reaching relationships in the gaming space to rapidly promote Multimedia's product in the market, which have long enjoyed a reputation to be unique and innovative, consistent with the company's Austin, Texas roots.

Our conviction to pursue this combination centers around one theme, both companies deliver industry-leading differentiated solutions to the gaming floor. Most notable, our transaction is unique in its complementary nature, and we are excited to translate this into a broader value proposition for our clients.

The newly stable and predictable outcomes for our longer-term client extensions will allow us to make correspondingly long-term capital decisions. In our new, combined organization, this will allow us to continue deep investments in innovation. While others in this space attempt to execute on broad business consolidations and limit spending, we will be uniquely positioned to offer creativity in a way that will be unrivaled.

We've passed several important milestones related to the closing of our acquisition. First, we received Hart-Scott-Rodino early termination. Second, our colleagues at Multimedia Games have filed their definitive proxy, and scheduled their shareholders vote. Third, we expect to be on the near-term calendars for all the jurisdictions requiring approval.

While we have stated that a deal will take 4 to 7 months to close, we anticipate that closing will occur in late December or early 2015. As you know, we have obtained fully committed financing for this transaction. Based on our progress, we expect to launch the financing later this month.

In reviewing our second quarter results, we highlighted some weaknesses that, in our view, did not reflect our go-forward outlook. As Randy reviews our third quarter results in greater detail, you will see that in fact, our view was accurate.

Thank you, Ram. Good afternoon, everyone. Our Q3 2014 cash EPS increased $0.04 per share or 21% to $0.23 on weighted average diluted shares of 66.7 million, as compared to $0.19 on weighted average diluted shares of 66.6 million for Q3 2013.

We define cash EPS as net income, plus deferred income tax, amortization, stock compensation and Multimedia Games acquisition-related expenses, divided by diluted shares outstanding.

Adjusted EBITDA increased $2.1 million, or 12%, to $19.1 million for Q3 2014, as compared to $17 million for Q3 2013. We define adjusted EBITDA as earnings before interest, taxes, depreciation, amortization, stock compensation, and Multimedia Game acquisition-related expenses.

On a segment basis, cash advance revenues and operating income was $57.5 million, and $15.2 million for Q3 2014, compared to $58.3 million and $15.2 million for the same period in 2013. Excluding the loss of the Caesar's contract, which represented approximately $4.3 million in revenue, cash advance revenues would have increased by approximately 7%, primarily due to new business. The Company was able to maintain its operating income at a level equal to the prior period, inclusive of the loss of the Caesar's contract.

ATM revenues and operating income were $70.2 million and $6.5 million for Q3 2014, compared to $71.6 million and $6.1 million for Q3 2013. Excluding the loss of the Caesar's contract, which represented approximately $7.6 million in revenue, ATM revenues would have increased by approximately 10%, primarily due to new business. Again, the Company was able to maintain its operating income consistent with the prior year, even after taking into consideration the loss of the Caesar's contract.

Check services revenues and operating income were $5.5 million and $2.6 million for Q3 2014, compared to $5.4 million and $3.1 million for Q3 2013. Check services operating income decreased primarily due to an increase in warranty costs as a percentage of revenues.

Our other segment, which consists primarily of fully-integrated kiosk sales, kiosks parts and services, central credit operations, and our compliance, audit and data solutions, recorded revenues and operating income $12.3 million and $6.3 million for Q3 2014, compared to $10.8 million and $4.4 million for Q3 2013. Other revenues increased in the quarter primarily due to our compliance audit and data solutions offerings.

Other operating income also increased in the quarter primarily due to our compliance, audit and data solution operations as well as higher margins on our fully-integrated kiosk sales.

Corporate operating expenses increased by $2.4 million, or 14% for Q3 2014, as compared to the same period last year. This increase was primarily due to higher non-cash stock compensation expenses related to our 2014 equity awards, higher amortization expense due to the acquisition of NEWave in April 2014, and approximately $1 million in Multimedia Games acquisition-related expenses.

Other cash transaction metrics to note, same store cash to floor, our best indicator of industry trends, increased approximately 3% for Q3 2014 as compared to the same period last year. This was primarily due to debit card transactions of the cash access segment. Combined credit and debit cash to floor increased by approximately 6% for Q3 2014, while ATM cash to floor increased by approximately 2%.

As for the balance sheet, cash and cash equivalents were $106.5 million as of September 30, 2014. Please note that are 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 $95.7 million at the end of the quarter, and our leverage ratio was approximately 1.3 times. Capital expenditures were $11 million for the nine months ended September 30, 2014. We expect full-year capital expenditures to be between $16 million and $17 million.

We repurchased approximately 0.7 million shares of our common stock for $5.5 million in Q3 2014 under our share repurchase program. And since its inception, we have repurchased 4 million shares of common stock for approximately $30 million, with about $10 million remaining for future stock repurchases under the program. The current authorization of our stock repurchases expires in December 2014. Due to our pending acquisition of Multimedia Games, we do not intend to buy back any additional shares through the end of the repurchase program.

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.

With that, I would like to turn the call back to the operator for questions.

(Operator Instructions) Chris Brendler, Stifel

Sorry, I was on mute. Can you hear me now?

We can.

Hi. Sorry about that. Good afternoon. Just a couple questions. Let's start with the overall gaming environment in the third quarter. Was it materially different or better or worse or the same in the second quarter, and any change in outlook there?

I would say it wasn't materially different than the environment we've been in throughout the last several quarters. We had an unexpectedly weak second quarter, especially the month of June, and it was slightly better than that. But for the most part, the broader market is fairly flat.

Okay. And on the contract, the unnamed contract that you mentioned, I just want to get a general sense. Are you seeing any of these contracts where you've seen lost business due to a more price-based competition coming back to you? Is that the case here?

That is not the case here. And so far, we have not seen any of that business come back, and that a lot of those price-based losses occurred in the last couple of years. And so those contracts are still in force, and we'll have to get through a renew cycle on the other end to be able to get some of that business back. This was not one of those. This is an existing cash access client, as I described, did not have our full service, did not have our kiosk, really want our kiosk, and were motivated to do a full solution with us to include all of that.

Okay. And typically are contracts five years here? So the ones you lost a couple years ago will probably be a little more of a wait?

Well in the space, contracts are typically three years, and especially when they go to a competitor, other than DCA. They tend to be three years. We've had an unusual amount of success this year in extending our three-year contracts to five. But typically you find three-year deals in this space. That's been our history, and that's still consistent with what our competitors experience. So when I say the last couple of years have to run off, in 2016 in particular, some of that business will come back up.

All right. Okay, great. I just have one more final question and then get back in queue. The MGAM management, any progress or update on how much, how their retention efforts are going?

Well, as I've said several times, the core of the asset that we're acquiring is the creative game development folks in Austin, and that's from the management and executive level all the way down to an individual contributor. From the time that we approached the acquisition, we've been very mindful of retaining that entire employee set. And we're well on our way to do that.

Relative to other members of the executive team, as you would expect, and some of the corporate functions, we have two companies, and we only need one leader. So those will go their natural course. But relative to the-- the real value and the asset requirement are the more significant value. We're well on our way to retaining all of those folks.

Great. Thanks, Ram.

George Sutton with Craig-Hallum

Thank you, Ram. A couple questions around the suite offering. As we now have done several of these, could we talk about what the revenue lift and what the margin lift starts to look like as you go forward with these?

And then I assume, a very key component to this for you when you're doing these deals is the predictive factor, particularly given the MGAM opportunity.

George, this is Randy. I guess, I still think it's kind of early in the process, as we've started these solution sales. So we really haven't factored in the total lift. But we do expect the margin to improve, but it's early. I mean this has really just started second and third quarter. So we haven't really outlined what that lift would be.

Can I ask it in a different way then? In terms of -- you're obviously taking in some cases, clients who've only had partial solutions. Now they're getting full solutions. They're getting it typically on their entire footprint, versus just part of their footprint. I would assume on average, you're seeing a nice revenue lift from these transactions.

I think individual in each transaction relative to the client's previous revenue total, we are getting an increase in revenue. To Randy's point, it's early as we've been transitioning to the solutions approach. And it's early relative to the percent of our overall client base that would experience that lift. So it's hard to predict, and we haven't seen the full benefits of that. But I think over the course of time, your underlying premise would be true, is that we get revenue and profit lift from that.

Okay. Relative to the MGAM transaction, you've moved up the dates a bit. Can you give us a sense of what has moved that forward? Is it predominantly the MGAM shareholder vote being set, and then the calendaring of the state meetings?

Well, I think those are both relevant, as I outlined in our opening remarks. There are several milestones we need to [eclipse] to get the transaction closed. And we've been fortunate in that that timeline has been on the more optimistic side. And we've gotten through it more quickly. So there are several factors, really the termination of Hart-Scott-Rodino is one. Getting their proxy filed is another. Getting their shareholder vote scheduled is another. And then as you described, getting on the dockets for the gaming jurisdictions is another. And we're not necessarily through those relative to getting approval, but we've got identified dates where we think we'll get in front of them.

Okay, perfectly. Thanks, guys.

(Operator Instructions) David Bain, Sterne, Agee

Great. Thank you. Guys, I know this was touched on, but just to keep it simple for me, I think your top-line growth when you extract Caesar's was better than almost any other domestic gaming company in 3Q. Can you break down where that growth came from in terms of new contract versus organic growth or augmented pricing due to the suite strategy?

This is Randy. I don't have it broken down completely that way. But clearly what we had was we had new business that was picked up. In the cash access side, as we I talked about, the cash to the floor has increased. So cash access has got both same-store growth and new business added to it year over year.

On the ATM side, again it's new business, and it's not really transaction-- we get paid on transaction basis. So ATM was really probably more flat. But on the cash access side, which I think did a little better, it's a combination of those two. And then finally obviously the solution sales we talked about. That's still holding our revenue up and increasing our revenue. But we haven't broken it down. It's early to see that impact.

Okay. And then we saw kind of an interesting start from one of your soon-to-be competitors in terms of bond deal. Does that change your view on the market- timing, pricing? Or do you have any other thoughts on that heading on the road here soon?

Well a few points, David. This is Ram. Now one, our deal is a very different deal than other deals in the space, as I referred to earlier. It's a set of complementary capabilities that are coming together. We don't have redundancies. Our synergy number as a percentage of our total is relatively small. We're not doing a lot of cutting. We're not looking for a lot of redundancies, and driving to a big synergy number.

So we've got a very growth-oriented combination in place here. So first of all, we have a very different deal. And second, relative to the market timing, we intend to go out later this month, everything else equal, and as you would expect we're watching the debt markets pretty carefully on a daily basis, just to make sure we're going out in a favorable climate. But right now, we think that will be the case.

Okay, great. And then just one last one if I could, just Ram, if we could get your biggest takeaway from the G2E gaming show as it relates to kind of the supplier market environment, and maybe MGAM's products specifically relative to others that you saw.

Well, again, as I referred to earlier, the Multimedia suite is one that really is characterized by innovation and differentiation. And we're very, very pleased to get that in combination with what we already offer our clients. Relative to your question about G2E, I think you could see that. You could see that in their booth, compared to especially a lot of the other larger suppliers. And we think they showed well, and they always do. And I think that we'll continue to be more differentiated because we're going to be focused on innovation and ways others aren't going to have the opportunity to.

Okay. Great. Thank you.

Ladies and gentlemen, we do thank you for your questions. If there are no further questions at this time, I would like to turn the conference back over Mr. Valli for closing remarks.

Thank you, everyone, for joining this conference call. We appreciate your participation in today's session, and we hope you have a wonderful afternoon.

And ladies and gentlemen, that does conclude today's conference. We do thank you for your participation. You may now disconnect. Have a great rest of your day.