Executives
Traci Mangini - Senior Vice President of Corporate Finance
Yuk Man Chung - Chairman of the Board, Interim Chief Executive Officer
Tony Lam - Senior Vice President of Operations
Andy Tsui - Vice President of Finance
Walter B. Stowe, Jr. - Vice President and General Counsel
Analysts
[Steve Goodimo - Vergis Capital]
Elixer Gaming Technologies, Inc. (EGT) F3Q08 Earnings Call November 13, 2008 8:30 AM ET
Operator
Welcome to the Elixer Gaming Technologies third quarter results conference call. During the presentation all participants will be in a listen-only mode. Afterwards we will conduct a question and answer session. (Operator Instructions) As a reminder, this conference is being recorded Thursday, November 13, 2008. I would now like to turn the conference over to Ms. Traci Mangini, Senior Vice President of Corporate Finance.
Traci Mangini
With me today on the call are Clarence Chung, Chairman and Chief Executive Officer, Tony Lam, Senior Vice President Head of Operations, Andy Tsui, Vice President of Finance, and Walt Stowe, Vice President and General Counsel.
Before we start let me review the Safe Harbor statement. Some of the statements that the company will make on this conference call such as statements of the company’s plans and expectations are forward-looking. While forward-looking statements reflect the company’s good faith beliefs, they are not guarantees of future performance and involve risks and uncertainties. The company’s actual results could differ materially from those discussed on this phone call. Some of these risks and uncertainties are described in today’s news announcement and in the company’s filings with the Securities and Exchange Commission including the company’s reports on Forms 8K, 10K and 10Q. Elixer Gaming assumes no obligation to publicly update or revise any forward-looking statements.
On this call we will review the developments that have occurred since we reported our second quarter results in mid-August. The agenda for today’s call will be as follows.
First, Clarence will review his outlook for the company, provide some added color on the new agreements we entered into with Elixer International which were announced last week, and discuss a significant contract for our Dolphin division. Following that, Tony will provide a brief review of our Q3 financial results and certain key operating metrics. He will also provide detail on our cost-cutting initiatives, some changes being implemented in our strategy to more effectively address the Cambodia market, and finally end with an update on our guidance targets. We will then conclude by taking questions from analysts and institutional investors.
With that let me turn the call over to Clarence Chung.
Yuk Man Chung
Welcome everyone to Elixer Gaming’s third quarter 2008 conference call. As I’m sure you all are aware, I assumed the CEO role at Elixer last month at a time when we have been addressing some specific near-term challenges that have served to mar the long-term potential of our unique opportunity. Before I address these items in more detail, I thought it would be helpful to provide a brief background with myself to help you gauge my readiness to bring immediate and long-term values to Elixer Gaming.
I have been directly involved in the gaming industry for about five years now having joined Melco as CFO in December 2003. However I am currently a director of Melco Crown Entertainment. I have a good degree of familiarity with Wall Street as I spent several years as an investment banker managing an alternative investment fund prior to joining Melco. Importantly, I’ve served as a director of Elixer Gaming for a little more than a year and been able to bring these perspectives to my new role.
Let me be very clear right at the beginning of this call. Elixer needs to do a better job executing a business plan that remains unique in the industry and continues to offer much more upside than we are capturing at present. Following my appointment as CEO I was able to immediately confirm that we have the right organization structure, expertise, business partners and most important the internal desire to do a better job in realizing the significance potentially inherent in our business plan.
There have been too many hiccups in the first years of operation many of which in hindsight could have been better anticipated although others we have faced were routine for companies in a startup phase of operation. That being said, with our position in the emerging Asia Pacific market, improving operating execution, growing expertise and a sense of urgency to effectively implement our strategic plan, I’m very optimistic about our future successes.
Next I want to review some of the details of the agreement with Elixer International we announced last week as they represent a meaningful inflection point in Elixer Gaming’s ability to deliver values to shareholders and a very good indication of the overall commitment to the company’s success in the near and longer term.
Through this agreement we have significantly improved the balance sheet, greatly enhanced the financial [profitability], lowered interest and [inaudible] costs going forward, and have eliminated the potential dilutive impact of more than 41 million shares that could have been earned by Elixer group. Most importantly, we accomplished all of these without reducing our ability to execute on our machine rollout plans from now through the end of the year 2009.
As a result of this agreement our balance sheet is significantly improved since September 30, 2008. We have reduced total outstanding obligations by approximately $14 million through the returns and sales of certain machines back to Elixer International at then net book value.
Pro forma for the new agreement our outstanding obligations to Elixer Group have been reduced to $12.1 million which is in the form of notes payable. The terms of this notes payable has been reset with a reduced interest rate of 5% down from 8% and extends terms of payment by seven months. Under the new term we make no payment due in quarter four of this year and begin making monthly payments of about $530,000 for a period of 24 months starting from January 2009. Under the previous terms we were required to make equal monthly payments of $675,000 for the 24 months beginning April 2008.
Further, the return of the approximately 715 electronic gaming units to Elixer International has reduced our cost [inaudible] expense by approximately $200,000 per month and served to reduce our forward inventory related operating expenses.
Before turning the call to Tony for his comments, I’m pleased to announced that our Dolphin division has recently secured the RFID gaming chip order from Melco Crown Entertainment’s much anticipated new City of Dreams Casino and Entertainment Resort in Macau. The order is for over 1 million RFID gaming chips with a value of approximately [inaudible] 4.2 million dollars which at the current exchange rate equals to approximately US dollars $2.7 million. Elixer Gaming expects to book this revenue in the second quarter of year 2009.
With that let me turn the call over to Tony to continue our presentation before we get to your questions.
Tony Lam
Total revenues for the quarter were $3.6 million up $1.1 million from the slot participation business. Slot participation revenue was up 38% on a quarterly sequential basis. Adjusted EBITDA which we define as earnings before interest, taxes, depreciation, amortization and noncash stock compensation expense for the quarter was a loss of $2.8 million compared to a loss of $3.2 million for the prior quarter.
Cash SG&A for the quarter was $3.9 million down approximately $300,000 from Q2. As you can see during the quarter we made some improvements in terms of reducing our cash operating expenses and we will achieve much more material reductions in the future. We are focusing on further cost cutting in initiatives which include the following:
Closing our Macau office. This will be done in phases and will be completed by the end of December of the year with no leave penalty. Downsizing our US office. This has been an ongoing process over the last year and will be completed by the end of March 2009. We plan to sublease this office space. Close our China manufacturing plant, which will be done by the end of December 2008. Significant headcount reductions.
Senior executive voluntary paid cuts of 10% to 20%, materially reduce travel expenses. With geographically dispersed operations we will always incur some travel expense; however all travel has been cut to the bare bone in terms of cost and frequency as that is necessary to run the business. External consultancy costs and other expenses are being reduced where possible.
Under these initiatives we expect to achieve a quarterly cash SG&A run rate of under $3 million by Q2 2009. Before turning to some new operating metrics, I want to review our cash flow position. We ended Q3 with $17.8 million in cash, down from $27.3 million at the end of Q2. The cash reduction was a result of payment of approximately $6 million to Elixer International for prior gaming machine purchases and $3.8 million in cash operating expense.
Based on our current business plan which is primarily focused on the high potential markets of the Philippines and Cambodia the improved interest and payment terms are [inaudible] payable and materially reduce operating cash flow. We believe we have sufficient cash to fund our planned operations through 2009.
Now turning to our venue and installed base metrics. We ended the quarter with 1,283 machines in operation in 12 venues compared to 1,018 in 10 venues at the end of Q2. The breakout of our machines in operation for Q3 was 1,103. The breakout of our machines by market at September 30 is as follows. In the Philippines we had 787 units installed in five locations and in Cambodia we had 496 units in seven locations. During the quarter we opened two new venues at a total of 240 units and closed three venues due to the underperformance in Cambodia which had a total of 261 installed units.
After careful analysis of these [inaudible] performance careful attempts to optimize the net wins and evaluation of the venue owners resources, we believed it was best to redeploy some of these machines to other venues where we could achieve higher revenues.
As we discussed on the last few conference calls, we have undertaken a broad range of optimization initiatives, each aimed at generating improvement in net revenues and wins per machine. Net slot participation revenue to EGT during the quarter was $1.1 million, up 38% from Q2. Average net win per machine per day for the quarter improved to $47 up from $29 for Q2 an increase of 62%.
Now here are some details in our two markets. In the Philippines average net win per machine per day was $48 for the third quarter compared to $36 for the second quarter. Net revenue to the company in the quarter was healthy at approximately $602,000 up 34% from Q2. With steady improvements quoted each month during Q3. One of our new clubs opened during the quarter was a strong contributor to this performance.
In Cambodia average net win per machine was $46 for the third quarter compared with $23 in the second quarter. Net revenue to the company in the quarter was approximately $460,000 up 44% from Q2. Revenue for the quarter was strongest in July due to subsequently reduced machine count, a temporary downturn in player traffic during the Cambodian elections, and volatility in Roulette players payout in our key venues.
In Cambodia we are proactively making strategic efforts to drive net revenue improvements. With our three key venues in Cambodia we are evolving from a machine [inaudible] vendor who participates in marketing activities to an operating partner who designs, plans and executes marketing plans and promotions including loyalty programs, floor layouts and designs. We are also utilizing experienced slot [inaudible] consultants that provide additional depth to our gaming expertise.
With respect to the implementation of the slot management system, we are pleased to report that the slot management system is installed in all of our venues in the Philippines and we have a control center in our office that allows live access with data. In Cambodia we have installed the system in two of our three top venues. In the third venue we will be installing the system on a number of machines on which we plan to utilize jackpot [link]. Going forward and consistent with our shared cost budgeting we plan to install the full system in all Cambodian venues that are entitled to meet our mid- to long-range growth objectives.
Turning to our contract pipeline and rollout plan. We continue to look to execute on existing contracts and add contracts from new vendors. Our primary focus remains not on quantity but on quality. We expect to have updates in this regard to report to the market shortly.
Now before turning the call over to you for questions, I would like to review some of our guidance metrics.
Under new leadership we are repositioning our operations in Cambodia and have re-evaluated our contract pipeline. Based on this the timeline for opening selectively targeted new venues and our strategic decision to close three underperforming venues in the third quarter, we now anticipate ending the year with a minimum of 15 venues and 1,500 machines in operation. That said, based on our current contract pipeline we will anticipate reaching a minimum of 2,500 machines in operations by the end of 2009 and we believe that we have the needed level of machines, capital and strategic relationships to execute on our plans.
To continue to focus on cost reductions, the benefits of which we only started to realize in Q3, we plan to achieve a cash SG&A quarterly run rate of under $3 million by Q209, and reflecting our installed base expectations and lower operating costs we are reiterating today our expectation for achieving adjusted positive EBITDA beginning in the second half of 2009.
Let us now open the call to your questions.
Question-and-Answer Session
Operator
(Operator Instructions) Our first question comes from [Steve Goodimo - Vergis Capital].
[Steve Goodimo - Vergis Capital]
If you achieve your guidance for next year of 2,500 machines installed, is it fair to say that the revenue would then double? Can you help us out in terms of what that could look like for next year? If you did basically $10 million of revenue for the year-to-date nine months, are we talking that the revenue would go up to about $20 million?
Tony Lam
With 2,500 machines operating in Q4 we’re looking at approximately getting up to the $3 million level in terms of our revenue.
[Steve Goodimo - Vergis Capital]
$3 million for the quarter you mean?
Tony Lam
Yes, for the quarter.
[Steve Goodimo - Vergis Capital]
But you’re at that level right now so is it because we’re losing revenue because machines are being taken away or is it just the win per machine now is declining so much?
Andy Tsui
The total revenue for the quarter is $3.6 million which includes our table game and a la mode business.
[Steve Goodimo - Vergis Capital]
I see what you’re saying.
Andy Tsui
The slot business is about $1.1 million for the quarter.
[Steve Goodimo - Vergis Capital]
Then on the table game products and the non-gaming products, could you talk about those revenue items? How do we project those forward? Is that just basically going to [inaudible] and I’m sorry. Andy, what did you mention about the table games? You did $400,000 this quarter. Would that look to be about the same going forward?
Andy Tsui
With the plan to close down our China manufacturing facility, I think the sales revenue for the table game business will definitely slowdown much more. The only item that we have is the chip orders for our Dolphin plant.
[Steve Goodimo - Vergis Capital]
What about the old V&X products? The Shuffle Master and the DeckChecker and things like that? Are you shutting those all down?
Yuk Man Chung
In terms of the manufacturing side, the answer is yes. However we do have certain arrangements with some of our distributors in terms of selling certain of these items.
[Steve Goodimo - Vergis Capital]
Just clarify again? You said the adjusted EBITDA for the second half of ’09 would be just positive or did you give a number with that?
Yuk Man Chung
The forecast at this point is we will achieve an EBITDA positive in the second half of 2009 but the definition that we have already discussed in Tony’s conversation is that excluding depreciation, stock options expenses as well as any other noncash items.
[Steve Goodimo - Vergis Capital]
I caught the definition. I was just saying, when you say positive do you mean $100 is positive or are you talking like $1 million or $2 million?
Yuk Man Chung
Again, it’s very difficult for us because we don’t have a crystal ball; however I think we are striving to reduce the cost base and that has been explained in Tony’s explanations and also we are working really hard on ramping up the revenue from the participation gaming area. So I think hopefully with the increase in the revenues and then the reductions of the costs that would achieve what we expect.
Operator
I will now turn the call back to Mr. Clarence Chung. Please continue with your presentation or closing remarks.
Yuk Man Chung
To conclude, as we have noted throughout the call we believe the recent agreement with Elixer Group, new contracts, cost savings and a sense of urgency on executing again our strategic plans are evidence that real progress is now being made in our business. With consistent performing and growing revenues now in operation in the Philippines and the plans to address the Cambodia markets that include evolving our present plan in this market towards being an operating partner who designs, plans and executes marketing plans and promotions including warranty programs, full layout and designs we are better proficient to realize growth from our current base of operations and capitalize on new opportunities.
To achieve success against our business model and being delivering consistent and sustainable shareholder value it’s going to take a lot of work on our behalf but I am convinced we have the right staff in place to do this and I know they are fully committed towards these goals.
Thank you for your continued support and interest and for your participation today. We look forward to speaking with you again shortly and hopefully seeing many of you at the G2E show next week.
Operator
Ladies and Gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Have a great day.
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