PokerTec, Inc. (NASDAQ:PTEK)
Q1 2009 Earnings Call
May 4, 2009 5:30 pm ET
Chris Halligan – CEO
Mark Roberson - CFO
[Mark Smith – Felt]
[Warren Filaright] – Private Investor
Good day ladies and gentlemen and welcome to PokerTek Inc. first quarter of fiscal year 2009 earnings call. (Operator Instructions) I would now like to turn the call over to Mr. Mark Roberson, Chief Financial Officer; please proceed sir.
We would like to welcome all of you to the PokerTek earnings call for the first quarter ended March, 2009. Before we begin, please note that we will make forward-looking statements on today's call, which are made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future performance and are subject to risks and uncertainties that may impact our business.
We undertake no obligation to publicly update or revise any forward-looking statements. We also strongly encourage you to read the information contained in our public fillings with the Securities and Exchange Commission.
I will start off today's call by reviewing our financial performance after which Chris Hooligan our CEO, will provide commentary and we’ll have a Q&A session following prepared remarks.
As everyone on the call is aware, the economic environment has had its challenges over the past several months. Gaming revenues are down and companies in all industries are adjusting to rapidly changing market conditions.
Overall our revenues declined from prior quarters on lower product sales of PokerPro and Heads-Up Challenge. The bottom line benefited from cost reduction actions taken throughout 2008 and again in January of this year.
As a result the company posted a 20% improvement in EPS and a 47% improvement in EBITDAS as compared to the first quarter of 2008. Total consolidated revenues were $2.1 million for the quarter, a decrease of 33% from $3.2 million last year.
Licensing revenues contributed $1.4 million while product sales contributed $747,000. Starting with sales of casino products, we had no shipments to Aristocrat during the current quarter. In the prior year sales of casino products contributed $634,000 of revenue.
Our revenue from casino product sales for the current quarter included our share from the sale of two Aristocrat owned tables in Europe as well as consumables to other customers totaling $100,000. As we discussed on the last call, orders from Aristocrat softened heading into the fourth quarter and we expected Q1 to be soft as well.
We’re optimistic about the long-term demand for PokerPro in the international markets served by Aristocrat however we currently expect the next several quarters to be more heavily weighted towards Nevada, and our other domestic markets then in 2008.
Casino licensing was $1.45 million for the quarter, down $134,000 or 8.8% from the prior year. While our overall PokerPro table count increased 27% from 210 to 266. It may seem counterintuitive that licensees would be down slightly while table count increased so it may help to break down the table count in more detail.
At March of last year, we reported 210 tables, that included 162 North American tables on lease and 48 tables sold to Aristocrat. This year we have 266 tables of which 168 tables were on lease in North America and 98 had been sold to Aristocrat.
As you can see from those numbers most of the table count growth over the past four quarters resulted from product sales to Aristocrat which generate nonrecurring product margin in the period of sale. Those prior sales would also be expected to generate additional licensing fees in future quarters after they’ve recouped their cost.
I would also remind you that the first quarter of 2008 included approximately $80,000 of revenue which had been deferred from 2007 in accordance with GAAP so that also impacted comparability of license fees from last year to this year.
On a sequential basis compared with year-end, our table count declined by nine tables for the quarter from 275 tables at December to 266 tables at the end of March. There were 21 new North American installations, notably Harris Cherokee in North Carolina, Indiana Live in Hoosier Park in Indiana.
These new installations were offset by the removal of 30 tables primarily Trump Plaza, New Jersey, and [Ludo] Quebec in Canada. As you remember from our year-end call, at [Ludo] Quebec, an agreement was reached with our dealers union which included the removal of some automated games. At Trump Plaza in Atlantic City, the portion of the casino that held the Poker Room was closed in early January.
For the benefit of our analysts on the call, as of March 31, 2009 we had 266 tables of which 166 were on lease and 98 sold to Aristocrat. Of the 168 domestic tables under lease 59 were on cruise ships, and the remaining 109 were deployed in North American land based casinos.
For the Heads-Up Challenge business, sales came in at $647,000 for the quarter as compared to $1.046 million in the first quarter of 2008. We saw softening of demand during the fourth quarter and continuing into Q1. This line of business was especially impacted by the economic environment as well as the appreciation of the US dollar relative to other currencies.
Those economic factors combined to cause operators to be much more conservative with their capital. Direct costs which include cost of product sales and depreciation of leased assets decreased to $1.3 million for the quarter from $1.8 million in the first quarter of 2008.
This decrease was primarily attributable to the lower volume of casino and Heads-Up Challenge product sales and was partially offset by higher depreciation on PokerPro tables. Operating expenses were $2.5 million for the quarter. This is a decrease of $1.1 million from $3.6 million in Q1 of 2008.
As a percent of total revenue operating expenses were 119% compared with 113% last year. The $1.1 million decrease in operating expenses was primarily driven by lower employee related expenses.
We reduced headcount and other operating expenses in a series of steps over the course of 2008 and again in January of this year. We currently have approximately 40 employees at March, which is about half of where we were at our peak in early 2008.
Overall we reported a net loss of $1.8 million or $0.16 per share for the quarter, an improvement from $0.20 per share last year. EBITDAS has improved 47% to negative $675,000 for the quarter. On a sequential basis EPS was flat at $0.16 for the third quarter in a row as the margin impact of reduced product sales was offset by expense reductions.
Turning to the balance sheet and cash flow, we closed the quarter with cash equivalents of $1.6 million. In January we liquidated the auction rate securities with UBS, resulting in net cash proceeds of $1 million after repaying the loans.
As these investments were redeemed at par there was no gain or loss realized on the disposition. Cash used in operating activities improved 46% to $943,000 for the quarter. This compares with $1.7 million in the prior year.
Overall our bottom line operating results and cash flows improved in the face of tough economic conditions. With a leaner organizational structure we believe the company will be better positioned as our top line growth resumes in future quarters.
Thank you and I’ll now turn the call over to Chris for his commentary.
Thank you Mark, Q1 2009 marked several important milestones for us at PokerTec and I’m pleased to have the chance to discuss what we’ve done.
Among our single accomplishments in Q1, we had several important new casino placements. We completed the licensing process in the state of Nevada. We continued to make inroads with our Heads-Up Challenge amusement business. We showed continued discipline in managing costs and sustaining the business. And we sustained investment in our products which is the key to long-term success.
With that backdrop I’ll add some color to Mark’s financial overview. As he mentioned our revenues declined sequentially [inaudible] with our costs, resulting in improvement in both EPS and EBITDAS. At the close of Q1, PokerPro represented just under 3% of the approximately 10,000 poker tables in the world.
With approval in Nevada, and increasing acceptance from operators and players around the world, there is still tremendous headroom for our casino business. As we grow that business we have achieved several new installations in Q1 that are exactly the kind of customers that we’re targeting for PokerPro today.
Specifically I refer to our installations at Harris Cherokee, Indiana Live, and Hoosier Park. I’d like to talk about each of those for just a moment. Harris Cherokee is unique in that it’s the only licensed casino in the Smoky Mountain region in the United States. There is not other casino for hundreds of miles in either direction.
As part of the Cherokee tribes [compact] with the state of North Carolina, they utilize electronic gaming exclusively within the casino. This makes PokerPro a perfect fit for Harris Cherokee as it allows them the excitement and profitability of poker while conforming to their regulatory obligations.
When we first installed PokerPro at Harris Cherokee, we opened with five tables. The response from players is immediate and clear. They loved PokerPro. Due to long wait times for seats, PokerTec and Harris Cherokee jointly decided to expand the installation to seven tables which are busy all week long and have added a new dimension to the clientele at the casino.
Just as a note, we have considered adding additional tables since the expansion but we’re physically out of space for now. So today its seven busy PokerPro tables in the heart of the Smokey’s at Harris Cherokee.
By selecting the right customers and showing discretion in our initial table installation we’ve built a budding success at Cherokee and are looking to replicate that model in other jurisdictions such as Indiana. Similar to the Cherokee’s the state of Indiana requires commercial [racinos] to run their poker games using electronic gaming devices.
With that in mind we approached both the Indiana Live and Hoosier Park when both first considered opening poker rooms over a year ago. Interestingly, PokerTec was involved in a competitive selection process at both Indiana properties. Thanks to the quality of our products and the commitment and expertise of our team we were selected over competition in both instances and are now reaping the benefits of our efforts.
Both our 10-table room in Indiana Live and the four-table installation in Hoosier Park are off to great starts and are generating nice returns for our customers and our shareholders. We’ll also place PokerPro in markets where manual poker is dealt but you’ll see us partnering with operators that view poker as an incremental amenity to offer their patrons and in other cases, with operators that wish to lower their costs in their poker room by automating it while simultaneously reaching out to an incremental and new target market.
In addition to those important installations we also completed our field trial and the licensing process for PokerPro in the state of Nevada. Thanks to that important accomplishment we now have the ability to expand our footprint in the most important gaming market in the world. There are over 1,000 poker tables in Nevada, as well as several casinos that don’t offer poker today but would like to.
We intend to be smart and aggressive in placing tables in Nevada and are delighted to have license in the Silver State. I am pleased to announce that we have launched our second installation in Nevada as of this past weekend. Mountain View Casino in Pahrump, Nevada, opened their new PokerPro room with two tables on Friday, and they’re off and running.
Prior to our installation with them, Mountain View had not offered poker so we’re a great fit for one another. As Mark mentioned our international sales growth has slowed as Aristocrat continues to work through inventory. Worldwide interest in the product remains high however, and there are several new jurisdictions that could prove to be Greenfield’s for PokerPro that are just on the horizon and Aristocrat and PokerTec continue to work well attacking those opportunities.
Despite our recent slowdown I remain optimistic about PokerPro’s long-term prospects around the world. In addition to our casino business we continue to build on our amusement business which is anchored by Heads-Up Challenge. As a reminder in just 18 short months we’ve placed over 1,500 Heads-Up Challenge units around the world.
Heads-Up Challenge contribute almost $650,000 in Q1 revenues despite major currency headwinds overseas and a general tightening of the capital budgets domestically. The reason the games continue to make their way into the market is simple, they continue to earn money for our operators.
As evidenced by the continued popularity of pub poker across the country there is significant interest in legal, amusement only poker from restaurant and bar patrons everywhere. Heads-Up Challenge allows bar owners and route operators to capitalize on this interest by offering fun, legal amusement only poker at the corner sports bar or the neighborhood restaurant.
As part of our company’s entrepreneurial bet, we in Q1 we began trialing a small number of Heads-Up Challenge units on a unique hybrid lease purchase model which has the potential to generate both significant volumes during tough economic times, and higher long-term margins based on game success.
Its too early to tell to what extent we’ll scale that model but we have several enthusiastic partners that are assisting in the cause and we are optimistic based on our experience to date. In light of the general economic conditions that prevail today, we’ve also done a good job managing our costs.
We’re still making investments in the areas that count and we’re still poised for growth across all of our product lines but we’ve made several hard choices to better conserve our cash and we’ll continue to be vigilant on cost throughout the business.
It’s a testament to our cost consciousness that we’ve been able to post increases in both EPS and EBITDAS despite declines in revenue. Our cuts have been judicious though. We believe we have two long-term winners in PokerPro and Heads-Up Challenge and we’ll continue to be prudent in balancing expenses and investments as we go forward.
Perhaps the most important of these investments are our ongoing efforts to improve our product lines. Although both are already market leaders, we know we need to make them better in all regards, less expensive to manufacture and support, more attractive to players, and stronger earners for our customers.
With the bulk of our product regulatory efforts now behind us, we can focus on delivering several new game changing features on PokerPro including PokerPro Plus, which will allow players to play side games of poker and black jack while waiting their turn in a poker game, and house bank side offering such as rabbit hunting and [slop a lot] to name a few, which will allow our operators to deliver a better gaming experience for their players while improving the economics for themselves.
We also plan to improve our world leading multi table tournament functionality by offering additional features that make daily tournaments which are traditionally a loss leader in the poker room, into a source of not just customer acquisition but also incremental profit.
Features such as these deliver on the key promise of PokerPro. Our games can do things that manual poker games can’t and never will. This is in distinct contrast to other automated table games which offer speed and efficiency but too often little else.
And with regard to Heads-Up Challenge, we’ve learned a tremendous amount as we’ve entered the amusement business. Based on our experience to date, we believe that future iterations of our amusement games can have even higher ROI and earning power based on reduced costs and expanded features.
In closing we’re positive about the future of PokerTec. We’re the leader in a large and growing space. We have a motivated team and we have a compelling vision of the future that’s shared among many thought leaders across our industry. It’s a tough climate but we remain undaunted and optimistic.
At this time, I’d welcome any questions.
(Operator Instructions) Your first question comes from the line of [Mark Smith – Felt]
[Mark Smith – Felt]
I’ve got a handful of questions, first off R&D expense, you cut quite a bit here both sequentially and year over year, can you give us an idea of how sustainable this level of R&D spending is.
I think if you look at Q1, I think its sustainable but probably on the low end. In the prior quarters in Q1 of 2008 we were still having some spending on the commercialization of the Heads-Up Challenge which obviously we’re no longer spending money in that area in terms of commercializing that product.
And right now if you look at the level in Q1 of 2009 from a personnel standpoint I think its pretty much sustainable, our third party spending that goes into there may tweak up a little bit, as we continue to work on cost reducing the PokerPro product and others, and we may incur some engineering in that regard.
But again I think within a range of plus or minus 20% you’re kind of looking at the steady stay.
[Mark Smith – Felt]
Second can you talk about the demand at this point in Nevada and then even outside of Nevada any other opportunities that you’re looking at within the domestic market.
Demand continues to be high. We’ve gotten a lot of notice based on the completion of our field trial, the Excalibur in Las Vegas. There’s a lot properties in Nevada that have expressed interest in PokerPro, both sites that have poker today and sites that don’t have poker.
One of the things that we’re trying to do is be judicious and smart while being aggressive about where we go place games. So we’re not just going everywhere where somebody raises a hand. But you saw that we installed a Mountain View in Pahrump, you’ll see more installations in Nevada throughout the balance of the quarter, and I’m pleased with demand in that part of the world.
Elsewhere we continue to grow. In other markets, there’s several markets where we expect to have incremental placements and you know the product is really carving out a niche for itself. There’s a category of players that prefer PokerPro. That category is growing, they recognize the benefits for players, faster play, air free, there’s no obligation to tip, its just a better economic deal for players and we’re really carving out a niche audience.
[Mark Smith – Felt]
Also looking at the casino product, you’ve got a fair amount on cruise ships, I’m just curious if you’ve received any feedback yet on cruises that go to Mexico and if demand is down on those and any potential impact that that may have looking at Q2 and beyond.
Well for us the port time is a time when the casinos are closed on cruise ships. And so as these cruises to some extent stop visiting as many ports the casinos are opened longer. So that actually could represent sort of a balance for us based on people not riding on cruises as much. So I think its pretty much a wash for us at PokerTec. But it does point out one other thing, we had a customer email in the other day, using PokerPro there’s not cards and chips that are being handled by everyone. So from an individual hygiene standpoint, our game, there are a lot of people who like to not have to touch cards and chips and PokerPro facilitates that.
[Mark Smith – Felt]
Any visibility on de installs, that was kind of the story here at the end of the year, but do have much visibility into any others that may be coming down the pipeline.
De installs are part of our business, its part of any gaming suppliers business. As I mentioned we’re trying to target markets and customers where we’ve got a little better visibility to the table sticking. We’re also trying to be a little more judicious in initial table count and what you saw at Harris Cherokee where customer actually grew their footprint after the initial install, that’s more what we’re targeting. But I feel pretty good about the install base today.
[Mark Smith – Felt]
Just looking at the revenue per table, it looks like that may have come down a bit, has there been any change in the contracts with casinos or any real reason or is that just a function of possibly gaming as a whole being down and players maybe spending less.
It think it’s a little bit of both but more the latter. We do have some games that are on participation and those games have obviously in some cases gone down as a consequence of the overall decline in gaming around the world. I think that’s the primary driver.
[Mark Smith – Felt]
Has there been any real change in pricing or structure of contracts that you can speak of.
We’ve called all of our vendors and shaken them down pretty good and we’ve had a couple of customers do that with us, but generally I’d say things are pretty steady based on where we’ve been the last six months or so.
[Mark Smith – Felt]
Heads-Up Challenge, we’ve seen that kind of flat line here on demand, outside of changes in currency is there anything to do to turn that business around and if you can talk a little bit more about this lease purchase program and the initial results.
So what we’re doing on the lease purchase program is pretty simple, we have been approached by fairly nontraditional set of distributors for games like Heads-Up Challenge where instead of purchasing the game out right, up front, they’ll make a substantial down payment and then we share in the earning power of the game. And actually our Chairman, Lyle Burrman, helped us sort of kick this off and we did a small number of trials in Q1.
They’re going well but its early and so we think that by lowering the initial barrier to take the game on, that there’s a potential to increase placements in the market. Longer term, these games they really speak for themselves and even though we’ve seen a little bit of a decline in placements in the market everything that we hear from the channel and from our customers and from operators is that we’ve been the least effected by the economic challenges at the macro level of most of the game suppliers.
Our games continue to earn, they continue to do well. And we anticipate being able to continue to place these things and as the economy picks up, we’ll be able to get back on the growth trend that we’re at, that we wanted to be on. Beyond that, I would say that we’ve learned a lot in this business.
We’ve added to the functionality of the game quite a bit. We’ve got additional games now, as you know Bacci is a good earners. We’ve sold Bacci upgrades to several customers and we have a really good vision for where to take this thing in the long-term from a cost and ROI standpoint.
We’re committed to it, we think it’s a great opportunity and the macroclimate notwithstanding we feel good about the business.
[Mark Smith – Felt]
Of the 182 Heads-Up Challenge tables sold, can you tell me how many were international and how many were domestic.
It was about 50/50, actually a little more then 50% were international. We sold 100 of those internationally and 82 domestically.
[Mark Smith – Felt]
Should we be concerned if you’re moving to a lease program on the Heads-Up Challenge just on the cash position and being able to finance—
Well that’s what I meant, there’s an up front component associated with it that gets us a long way down the road to cover what we need to do, so that we’re not funding these things, so we’re not floating people and I mentioned we did a small number of trials and we intend to make sure that any way that we scale this program, it will be in a way that’s cash flow neutral at least up front so that as we grow the business we can just kind of take the benefit of the recurring.
Operator if I can, I do want to address one question that actually was emailed to me by a shareholder which was Aristocrat, obviously they didn’t purchase any tables from PokerTec this quarter. They are a great partner, we continue to work very effectively with them and they’ve actually stepped up in a number of regions where they don’t have a particularly focused sales effort and have given us the right to go find additional distributors in some of our, in some third tier kind of international markets and we’re availing ourselves to that.
And so that was emailed in to me and I thought it was useful to address that for all the shareholders.
Your next question comes from the line of [Warren Filaright] – Private Investor
[Warren Filaright] – Private Investor
I’m just wondering what the status was in Canada with the dealers union and so on, I know last quarter you lost a lot of tables there, what happened in the first quarter and what’s going to happen in the future.
In the first quarter as I mentioned in the script we had de installations from Trump and from Canada and part of those de installations were coming from Canada. We believe that at this point we’re at a steady state with the Canadian customer. There’s now a mix of dealer tables and PokerPro tables in that jurisdiction and at this point we think the current number of tables is probably about right.
So we’re not anticipating any more de installs from Canada on the horizon that we can see at the moment.
If I could add, we’ve got a long partnership with folks at SEQ and the two companies made a lot of money together. They’ve got a good commitment and long-term to electronic gaming and are trying to find the right mix for the entirety of their business, meaning labor and customers and everything and so we feel comfortable where we’re at today and we actually think that in the long-term they’re going to continue to be a valuable and good customer for PokerTec.
And we also have other Canadian jurisdictions that we’re actively engaged in at the moment beyond Quebec.
It’s a big country.
[Warren Filaright] – Private Investor
What’s happening with New Jersey, any activity there now that you’ve lost Trump.
We’ve elected to kind of make the majority of our focus on some of the other jurisdictions right now. Atlantic City is a great market that’s full of a lot of great poker players but from an overall perspective there’s a lot of macro challenges that are facing Atlantic City and we feel like the right decision for our company in the spring of 2009 or the early summer of 2009 I guess, is to just kind of wait and see a little bit before we resume our field trial there and I think that’s what our shareholders should expect for the near-term.
[Warren Filaright] – Private Investor
Anything exciting as far as when you anticipate maybe turning the corner and showing a profit, a few quarters, a few years, what’s it look like.
I think what you’ve seen from us is we continue to manage our expenses pretty well. The timing of getting to profitability obviously is a function of revenues and in this current environment putting out predictions of revenues is pretty tough to do so obviously we have very aggressive internal goals on achieving those milestones but I couldn’t really give you a specific timing at this point.
There are no additional questions at this time; I would like to turn it back over to management for any additional or closing comments.
We appreciate everyone’s time and attention today. We’ve got a great product and a great vision and a good team, great team and we appreciate our shareholders’ continued confidence and I encourage you to go and find a PokerPro table or a Heads-Up Challenge table and have a good time there tonight. So thank you all for joining the call.
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