Everi Holdings Inc (EVRI) 2015 Q1 法說會逐字稿

Hello. Everyone. Thank you for standing by, and welcome to the Global Cash Access Holdings Inc. 2015 first quarter earnings conference call. (Operator Instructions). 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 to the call. Joining me today is President and Chief Executive Officer, Ram V. Chary; and Executive Vice President and Chief Financial Officer, Randy L. Taylor.

Before we begin, I would like to remind you that the Safe Harbor disclaimer in our public documents covers this call and our webcast and that some of the comments to be made contain forward-looking statements and assumptions that are subject to risks and uncertainties including, but not limited to, those contained in our SEC filings all of which are posted within the Investor Relation section of our corporate website.

These events 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, which speak only as of today. They should not be considered an indication of future performance. We do not intend and assume no obligation to update any forward-looking statement.

In addition, this call may refer to certain non-GAAP measures such as adjusted EBITDA and cash earnings per share. 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 IR section of our corporate website.

Finally, this call is being webcast, which may be also 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 President and Chief Executive Officer, Ram V. Chary.

Thank you, Todd. Good afternoon everyone and thank you for joining us on today's call. I will provide an update on our integration activities and the key initiatives we've undertaken since completing the acquisition the Multimedia in late 2014. After which, Randy will then discuss our 2015 first quarter in more detail.

I want to start by noting that we believe our first quarter operating results were a solid representation of how the remainder of 2015 is expected to evolve. The quarterly sequential revenue growth achieved by our game segment is in line with our improvement expectations and our payment results reflect the continued success we are having in growing this segment. It is significant to note that the rapid progress we have made with the Multimedia integration is only partially reflected in our first quarter results, and we have a solid plan in place that we anticipate will accelerate the benefits we expect to achieve going forward.

While the integration of Multimedia is still early, nearly five months in to the integration we see clear signs that the value proposition and anticipated cross market synergies are being realized. In the market place customers are noting that we have created a differentiated value proposition through this combination of games and payments. The feedback we are receiving provides us with the added confidence that our ability to leverage a portfolio of slot gaming entertainment, payments and compliance solution is being favorably viewed by our customers and we believe is creating an avenue for growth in both our games and payment segment.

In terms of our integration progress we have implemented approximately $18.1 million of our targeted year one cost annualized cost savings initiative and we remain on track to achieve the $24 million in targeted year one annualized cost savings. We are benefited from a shared services arrangement across our sales, marketing, finance, legal and human resource function. And later this year we expect to realize benefits from the combination of our game and kiosks manufacturing operation as well as our service team.

In addition to our efficiency focused approach for integration, we are fully dedicated to bringing our cultures together and unlock revenue opportunities that represent the core of our transformational combination. As I mentioned on the Q4 2014 call, a significant priority for us was to organize our operations into two distinct business segment; games and payments. For the most part each of the sales functions would initially focus on their individual offerings and that by 2016 we believe our sale teams will be working with customers on all of our portfolio solutions. With that being said, in just the first few months our combined efforts have lead to a growing number of interactions with customers that include a sales representative from both our game and our payment segments. And the feedback on this approach has been very positive.

Looking at our games segment, the culture of our Austin based operation is very unique among gaming equipment suppliers, and it has to date enabled that group to create games that are innovative and not dependant on a lot of the [me2] type of game development that we believe has existed in the industry for some time. I believe this distinct culture has played a significant role in the growth of games business as evidenced by the number of products that are now on casino floors. Our goal is to continue to foster this culture, and in fact we have plans to increase our game development capacity from 8 development teams to 16 teams over the next 18 months. As a part of our effort we will continue to focus on both class two and class three game development.

We believe that we will be able to leverage our significant compliance and regulatory expertise and infrastructure to bring more new games to market in a shorter time frame and that ability is certainly one of the key attributes of the acquisition rational. Of course, another key attribute is our ability to leverage a significantly larger number of customers that our payments business has built over a much longer period of time.

It is important to mention that we maintain our full year 2015 estimated outlook for adjusted EBITDA of between $218 million and $228 million, and we are very pleased with the first quarter results as they support our annual guidance expectation. I will remind you that our 2015 outlook included expectations for double-digit growth in our games segment and single-digit growth in our payment segment.

Our Company continues to benefit from significant recurring revenue which contributed approximately 90% of our Q1 2015 total revenues. In terms of the guidance we provided for our games segment we anticipate the larger portion of our expected revenue growth for the year will be comprised of games sales. We are prioritizing the allocation of free cash flow to paying down debt, and I expect we will continue to make consistent progress on this front throughout the year.

With that, let me turn the call over to Randy to review our first quarter 2015 results.

Thank you, Ram, and good afternoon everyone. My discussion of the financial results will focus on the combined operations of our game and payments business line. Of note our 2015 games segment result included the first full quarter contribution following the closing of the acquisition last December. 2015 first quarter total revenues were $207.5 million comprised of $55.1 million in revenues from our games segment and $152.4 million in revenues from our payment segment. This represented an increase of 1% on year-over-year basis in our payments business. Excluding the effects of a Caesars Entertainment contract that we elected not to renew which represented approximately $10.8 million in additional revenues if the prior year quarter total payments revenues would have increased by approximately 9% for the three months ended March 31, 2015. For comparison purposes while the $55.1 million in games revenue was approximately a 6% decrease when compared to the same period in the prior year on a sequential basis games revenue in the first quarter 2015 decreased by approximately $7 million when compared to it full calendar fourth quarter 2014.

Adjusted EBITDA increased $31.2 million to $50.6 million from $19.4 million in the same period last year primarily due to the acquisition of Multimedia in December of last year. On a year-over-year basis adjusted EBITDA for the games segment was $30.6 million compared to $32.0 million a year ago. And adjusted EBITDA for the payment segment was $20 million compared to $19.4 million in the prior year period. On a sequential basis the games segment adjusted EBITDA improved by $7.8 million when compared to the full calendar fourth quarter 2014. We define adjusted EBITDA as earnings before interest, taxes, depreciation, amortization, noncash stock compensation, accretion of construct rights, acquisition costs and other costs related to the merger and purchase accounting adjustments less onetime legal settlement proceeds received by the Company in January 2015.

Our first quarter 2015 cash EPS was $0.22 per share on 66.5 million weighted average diluted shares compared to $0.22 on 67.4 million weighted average diluted shares in Q1 2014. We define cash EPS as net income plus deferred income tax, amortization, non-cash stock compensation, appreciation of contract rights, acquisition and other costs related to the merger, purchase accounting adjustments plus the benefits from one-time legal settlement proceeds received by the Company in January 2015.

For our games segment gaming operations are revenue increase approximately 7% year-over-year to $40.3 million which represented the highest ever quality performance. This reflected a 420 unit increase in the install base which included 444 additional units in our higher yielding premium participation games. The year-over-year installed base comparison also reflected the temporary removal of 123 units at a customer's facility beginning last October to accommodate a renovation at the facility. On a quarterly sequential basis while the install base decline by 115 units, we did grow the install base of our higher yielded premium participation games by 73 units. At quarter end this year install base was comprised of 7,876 units in Oklahoma and 5,296 units outside of Oklahoma. The mix of our install base was 6,697 class two units and 6,475 class three units. Our average daily win per unit in Q1 2015 was $29.68.

Revenues from electronic games sales decline $5.3 million year-over-year to $14.6 million in the first quarter of 2015. We sold 820 units in Q1 2015 at an average sales price of $16,498 as compared to 1,094 units sold in Q1 2014 at an average sale price of $16,721. Prior year quarter included the sale of 303 units that were previously in our installed base while in the first quarter of 2015 we only sold 25 such units. Excluding sales from our installed base we sold a similar number of units in both periods. On a quarterly sequential basis unit sales are up 285 units on a slightly higher average sales price. TournEvent sales comprised 24% of unit sales in March 2015 quarter compared to 34% of unit sales in the March 2014 quarter.

Overall adjusted EBITDA margin for the game segment was 55.6% for Q1 2015 compared to 55% for Q1 2014 driven primarily by lower operating expenses in the current period. Adjusted EBITDA margin for the full quarter ended December 31, 2014, was 47.5% driven primarily by higher operating expenses in the quarter. Our payment segment revenues increased for the quarter primarily due to our anti-money laundering and tax compliance software offering. Overall adjusted EBITDA margin for the payment segment was 13.1% for Q1 2015 compared to 12.9% for Q1 2014 driven primarily by higher margins in the other revenue due to the contribution from our compliance and efficiency software offering and improved margins from our fully integrated kiosks sales as compared to the prior year period. In addition the adjusted EBITDA margin for Q1 2014 included a reduction in cash advance direct expenses of approximately $2 million due to the refund of a goods and services tax in Canada for commissions (Inaudible) to Canadian casinos. Adjusted EBITDA margins for the full quarter ended December 31, 2014, was 13.8% driven primarily by an increase in other revenue when compared to Q1 2015.

Two other cash transaction metrics to note include same store cash-to-floor our best indicator of industry trends was up 6.7% as compared to the same period in Q1 2014. ATM volume increased for the second consecutive quarter following nearly three years of no such growth. Correspondingly both debit and credit card transaction also increased in the quarter. Combined credit and debit cash-to-floor increased by approximately 5% for Q1 2015 while ATM cash-to-floor increased by approximately 7.4%.

Operating expenses of $15.8 million in Q1 2015 included a $14.4 million benefit from onetime legal settlement proceeds and $1.5 million of acquisition and other costs related to the purchase of Multimedia. Excluding the acquisition and other costs related to the merger and the benefit from onetime legal settlement proceeds, operating expenses were $28.7 million for the first quarter 2015 inclusive of $9.7 million in operating expense for our games segment which compared to operating expenses of $20 million in the prior year quarter. The increase in depreciation and amortization expense in the quarter compared with prior year period is primarily due to the Multimedia acquisition.

Moving on to the balance sheet. Cash and cash equivalents were $145 million at March 31, 2015. To clarify 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 patrons issuing bank and when we reimburse our casino customers. Our long-term debt was $1.183 billion at the end of the quarter reflecting our borrowings to complete the Multimedia acquisition. We repaid $15 million on our then outstanding senior secured note and $2.5 million on our term loan. The Company was also in compliance with debt convents as of March 31, 2015. In April we refinanced remaining $335 million of our senior secured note at a private placement there by reducing the interest rate from 7.75% to 7.25%, which we expect will save approximately $1.7 million in annual interest charges.

Capital expenditures were $13.9 million for the quarter ended March 31, 2015, inclusive of $11.1 million in CapEx for our games segment of which approximately $5.4 million was associated with game refreshes and related maintenance cost for our installed base. We expect full year capital expenditures of between $60 million and $70 million which would include capitalize software costs and contract rights. We also expect full year depreciation and amortization expense of between $130 million and $135 million although this particular estimate could change significantly depending on the Company's final allocation of the Multimedia purchase price to certain depreciable and amortizable assets as well as non-amortizable goodwill. Regarding our integration activities, as Ram indicated, we remain on track to achieve our targeted annual run rate of $24 million in cost synergies by the end of the calendar year. As of March 31, 2015, we have achieved approximately $18.1 million in annualized savings. Looking forward we will continue to focus on reducing our outstanding debt.

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

Thank you. (Operator Instructions). And we move first to David Bain with Sterne, Agee.

Great, thank you. I guess first guys can I understand the sale the (Inaudible) units in the quarter? Was that something up on lease or was that somehow strategic and is that something we should expect in coming reports?

David, are you just saying the amounts we provided? I guess I just wanted to provide that there were a significant amount of install base that were sold last year. So they in some cases will have a slighter lower margin depending on how long they had been out there. But there was a significant sale in Q1 of last year. So I probably may or may not continue to report it. It just was significant compared to last year to this year 303 to 25 is all I wanted to point out.

Was there 25 in this quarter? I'm sorry.

There was only 25 in this quarter.

Okay, fantastic. My bad. Okay. Also in the games division I saw the win per unit was down year-over-year, but it was up nice sequentially. Can you speak to any mix issues or other variances why that would be off? It looks like premium game (Inaudible) were up nicely still trying to reconcile that.

I would say at this time David, I don't know that I have a real answer for you. I just don't have a specific. It wasn't down significantly compared to last year I think it was 20 some cents. But as we continue to put more install base out there all I can say is I'm not sure that I can tell you specifically where that came from it is just the actual numbers that got pulled together.

Okay. And then final one, it seems like a big part of the 10% increase in the games revenue is based on the conceptual merger thought process, and I guess I'm wondering you noted many interactions GCA sales perhaps and folks that buy actual game devices. Is there an incident where GSA is the incumbent payment provider and MGAM is maybe not a game provider where an order has been place or there is a visible order pipeline building.

David, there is definitely a pipeline building. We haven't yet closed one of those cross market opportunities if you will. For the most part as I describe our payment clients base is significantly greater than our games client base as it sits today, so most of those opportunities will be selling games to legacy payment clients. Having closed one yet we do have a significant and growing pipeline. M expectation is that in this quarter we'll have our first example and as go throughout the year I think you'll see more of those examples.

Okay, great. Thank you.

Thank you our next question comes from George Sutton with Craig-Hallum.

Thank you. Ram, just to follow-up on that last question. You had mentioned in your prepared comments there are clear signs of the value proposition and cross marketing synergies are being realized. Were you referring specifically to the pipeline?

Yes, absolutely. That and the fact that we have quite a bit of inbound interest from our client base both segments about the other segment. So the client base seems to want to discuss our unique value proposition that combines both of those unique verticals that we have relative to any other supplier. Again those conservations ultimately have to translate in to results, but our pipeline would suggest those results are coming.

I heard it as fairly significant that you are looking to increase the number of product development teams on the gaming side from 8 to 16. Can you give us a little more detail there and the thought behind that?

Well, we believe that given competitive landscape especially as we focus on North American there will be many points as much as 10% to 15% percentage points of market share available for us to take and that is only going to come if we scale and if we grow and if provide new and better product functionality both in hardware and software terms in the game space. In order to realize that we have to invest, we have to grow. I think we are unique in the space as we're the only larger supplier of any scale talking about growth and it is going to take essentially doubling our stud content capacity to make those products and those capabilities available to our client base so that's what we intend to do over the next year and a half.

Okay. You mentioned last quarter that you had one large payment customer who was not yet moving to a suite multi year renewal but was sort of on a try it before you buy it methodology. Could you give us an update on that specifically?

They are still assessing. It has not concluded yet from their perspective. They're still assessing. Again because the shift to our payment solutions is a significant shift and one that our clients have adjust to and we're respectfully of that. So we are allowing them the time. And they are just taking more time than most to assess it, to get used to it and to see what it means for their business going forward. It is still ongoing. I would expect to have resolution this quarter but it could go on beyond that. But my expectation is we would have a decision by them this quarter.

Okay. Lastly if I could, you continue to see cash-to-floor at higher than market rates. Could you just discuss the reasons behind that as you see it?

George, it is Randy. I don't know that I -- we see two things Clearly we're seeing on a same store basis that we are doing on the ATM we are seeing more transactions. I don't know if that is partly the regional market coming back a little bit or there is more people coming out to play on the ATM transactions and even on the cash advance we are seeing an uptick in the number -- I think that is more of the dollar amount on the cash advance transaction. I don't know that I have a specific answer for you other than it really helped us to offset the Caesars loss in this quarter which now will be through. But I don't know if I can point you to is there recovery. It is just hard to say. All I can say is the first quarter from a transaction stand point on a same store was very positive as well as some of the new business we picked up last year that lapped in the first quarter.

Perfect. Thanks guys.

Thank you. (Operator Instructions). Our next question comes from John Davis with Stifel.

Good afternoon guys. Quickly, Ram, could you give us an update on retention efforts MGAM hopefully this is the last time we have to talk about this but any update there would be great.

We're done, and this has been ongoing over the last few months again since we only closed the transaction in late 2014. From my perspective we're done. We have successfully retained through formal agreement or otherwise everybody relative to the development organization at Multimedia the studio content teams. Everybody related to the sales and relationship part of the organization which wasn't very large to begin with. And we have done that on both side not just on the game side. So for the most part we're done. Our unwanted attrition has been very low and now we're looking to grow as I describe before so our focus has shifted from retention to hiring.

Great. And then also maybe, Randy, could you touch on the quarterly cadence of guidance, and should we see acceleration throughout the year as you ramp up MGAM and payments lap Caesars, just kind of help us think about quarterly cadence as we go forward through 2015.

I'll jump in on that as you know we don't provide quarterly guidance really on any metric. We provide full year adjusted EBITDA guidance, and we believe that we're tracking toward the full year guidance that we gave. I mean it is kind of difficult to parse that out although we're very pleased with the sequential acceleration we saw from calendar fourth quarter to our calendar first quarter and believe that that trajectory will continue in a way that will make our guidance achievable.

Okay. Fair enough. And then on TournEvent sales I think you guys said it came down to 24% this quarter down from 34%. Do you expect that to stay there or potentially as you get new licenses and new jurisdictions that TournEvent could re-accelerate as people that couldn't get it before can now get it? Any commentary there would be helpful.

I believe from our perspective for a lot of good reasons the legacy Multimedia team did have a slowing in terms of TournEvent penetration. A good data point to focus on is less than one-third of our combined client base has TournEvent while they were approaching 55% of their client base. So we have green field opportunity to continue to sell TournEvent in to the space. And then we are also continuing to penetrate existing TournEvent clients with more boxes. For the most part their client base was limited to banks of about eight. We are pushing that even in existing clients to 16, 20 or more. So two different ways that we are going to accelerate the growth of TournEvent from what it has been most recently because I do believe to some extent they had lost steam there.

Okay. And then on the participation footprint I know it is down quarter-over-quarter but is that something you expect to grow this year? I know we have 123 machines coming back online in third quarter. Any kind of commentary on growth outlook for participation footprint.

I expect that when we look at our full year 2015 and compare it to 2014 full year we will have grown. As Randy mentioned earlier, some of those dynamics by week, by month or even by quarter shift around and that there is some natural shifting that goes with it. I think you have to have a more holistic perspective and measure it on a year-over-year basis and we believe year-over-year we'll grow.

Okay, great. And then finally, Randy, just a housekeeping question on the $20 million of amortization as excluded from cash EPS this quarter, is that a pretty good run rate for the rest of the year as we try to figure out adjusted EPS?

Yes, I don't think your amortization will change dramatically. It should be in that kind of a run rate. It is pretty much set. It may in future quarters come down, but for this year that should be a good proxy.

Okay, great. Thanks guys.

Thank you for your questions. If there are no further questions, at this time I would like to turn things back to Mr. Randy L. Taylor for closing remarks.

Thank you for joining us on the call this afternoon. We look forward to discussing further progress of our business when we report our second quarter results.

This does concludes today's presentation. We thank you for your participation.