Executives
Traci Mangini – Senior Vice President Corporate Finance
Clarence Chung – Chairman, Chief Executive Officer
Andy Tsui – Vice President of Finance
Tony Lam – Senior Vice President of Operations
Analysts
[Paul Sante] – [Paul de Sante Partners]
Elixir Gaming Technologies, Inc. (EGT) Q1 2009 Earnings Call May 14, 2009 8:30 AM ET
Operator
Welcome to the Elixir Gaming Technologies first quarter results. (Operator Instructions) It is not my pleasure to turn the conference over to Ms. Traci Mangini. Please go ahead.
Traci Mangini
Good morning everyone. I am Traci Mangini, Senior Vice President of Corporate Finance for Elixir Gaming Technologies. With me today on the call are Clarence Chung, Chairman and Chief Executive Officer and Andy Sewe, Chief Accounting Officer and Tony Lamb, Senior Vice President and Head of Operations.
Before we start, let me review the Safe Harbor Statement. Some of the statements the company will make on this conference call such as statements about 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 SEC including the company's reports on 8-K, 10-K and 10-Q. Elixir Gaming assumes no obligation to publicly update or revise any forward-looking statements.
Now the agenda for today’s call will be as follows: First, Clarence will review the company's recent progress and our operation of gaming devices in the Philippines and Cambodia. Then he will review the progress being achieved in our cost reduction initiatives. Following that, Andy will provide a brief review of our financial results and discuss key operating metrics. Clarence will then conclude our prepared remarks with an update on our 2009 roll out plan and financial guidance. We will then take questions from analysts and investors.
With that, let me turn the call over the Clarence Chung.
Clarence Chung
Thank you Traci. Good morning everyone. Elixir Gaming has made significant progress in 2009 on several fronts. We have a leaner operating team that is highly qualified to drive improvement in our gaming participation business. Also we have rationalized our operating structure to maximize efficiency and we have implemented dramatic improvements to our core structure. Together these factors leave us with great [inaudible] to pursue growth opportunities in our targeted Pan-Asian markets and to generate solid returns from these opportunities.
In my opinion our operating performance in the first quarter does not accurately reflect the scope of our progress so we would like to highlight some of our recent accomplishments that give me confidence in the future success of Elixir Gaming.
Our net wins per day are improving and importantly they are improving on a high operating machine base. For the first quarter 2009 consolidated efforts net win for the company was $62, an increase of 32% from the prior quarter. In the Philippines we continued to post improvements in average net win per machine for the quarter. Average net win for this market was $57, up 11% on a quarterly sequential basis.
In April this positive growth trend continues with average net wins reaching $62, a 9% improvement when compared to the first quarter 2009 period. We believe that the Philippines and our value will support even higher net wins and we remain steadfast in our goal to accelerate growth in our venues in these markets.
We are starting to take a proactive approach to drive sustainable growth in net wins today in the Philippines as we have been working with our value owner partners on strategies to implement more targeted marketing initiatives. Such initiatives leverage our expertise from our successful marketing and promotion efforts at Premier Club at NagaWorld which helped accelerate revenues and net win growth. We will be implementing these initiatives later in this quarter and expect that we will see positive results.
In Cambodia average net win for the quarter was $77, up 112% from $36 in the fourth quarter of 2008. However, given that average net win results include the venues closed during the quarter this doesn’t necessarily portray the strong performance from Premier Club at NagaWorld. As you know, during the first quarter we aligned with a strong new partner, NagaWorld, and took on an operator role at Premier Club. In January we quickly delivered on our agreement with NagaWorld to provide approximately 140 seats to the Premier Club brand portion of their floor. We have since ramped up our installation base to 240 machines and net win results have been strong.
For the month of February our average daily net win per machine was $54 on an average machine base of 146. In March our average daily net win per machine increased substantially to $167 on a high average machine base of 196 units. Average net win held strong in April at $163 on an average machine base of 236 units.
We attribute this strong performance to our aggressive marketing efforts such as daily draws which have served to build stronger customer loyalty and the benefit of the closures of All Slot Club previously operating in the Phnom Penh region with the exception of NagaWorld which has an exclusive casino license in the area. We continue to work closely with NagaWorld on marketing initiatives to maximize revenue and win per day at these venues.
During the quarter we grew our operating installed base 9% to 1,065 machines. This growth came despite the closure of four of our venues in Cambodia which resulted in the removal of 176 machines. We remain focused on selectively growing our installed base through the addition of high performance, new venues in our targeted markets. We are on target to open two new attractively located venues in the Philippines before the end of the current quarter which will add approximately 200 machines to our installation base. We are optimistic about the potential for these new venues.
In addition, we are actively pursuing several other projects in the Philippines as well as opportunities in other high potential Asian countries such as Viet Nam and Laos which are experiencing some major casino development. As you can see, we are making improvements that will drive growth on the top line. However, we are also urgently focused on aggressive improvement to our cost structure.
In the first quarter we continued to make solid progress against our cost reduction initiatives and in doing so reduced our cash SG&A expense to $2.6 million for the quarter. This is a decline of 20% from the December quarter. Going forward, we have identified additional and meaningful cost saving opportunities. We now anticipate achieving a quarterly run rate for SG&A cash expenses of under $2 million by third quarter 2009 compared to our target of $2.5 million for the same period.
This new target will represent annualized savings of approximately 44% from the 2008 annual level of $14.3 million. Pursuant to these initiatives we closed our Las Vegas and Macao offices and our factories in China to realign resources with our core participation business and materially downsized our Cambodia and Hong Kong offices. We have also reduced total headcount by approximately 30% from peak levels during the third quarter of 2008. In addition, senior management has taken voluntary pay reductions and travel and external consultant fees have been kept to the bare necessary.
Importantly, we have made these cuts without impacting our operational capabilities and we now have the right team and the operating structure in place to respond quickly to growth opportunities in our markets. With the reduced operating structure the benefits from executing on growth projects will be enhanced.
Turning to our balance sheet, during the first quarter we benefited from the cash proceeds from the sale of our legacy table game business to Shuffle Master. As discussed in detail on our fourth quarter call in March, we divested our legacy table game business and simultaneously we solved a long-term litigation with Shuffle Master. We received a total of $2.8 million in cash consideration from Shuffle Master of which $2.4 million was received in March and the remaining $400,000 was received in April.
Again, this agreement are clearly positive to the company as they serve to strengthen our balance sheet and free up important management resources to better focus on our core slot participation business. In addition, this quarter we expect to record approximately $3 million in revenue with a net profit margin of approximately 25% from our contract to supply RFID chips to the new Cedar Greens resort in Macao.
With that let me turn the call over to Andy to review the financial results in more detail.
Andy Tsui
Thank you Clarence. Good morning everyone. We ended the first quarter of 2009 with 1,068 machines in operations at six venues as compared to 977 machines in operation in nine venues at the end of the fourth quarter. The 1,068 unit installed base was comprised of five venues in the Philippines with a total of 831 units and one venue in Cambodia with a total of 237 units.
The quality sequential increase was due to additional machine placement at NagaWorld, on target with our pure state installation goal for the end of the first quarter. Total revenue for the quarter was $1.8 million, of which $146,000 was from the slot participation business. In the Philippines slot participation revenue for the quarter was $628,000, down 21% from the fourth quarter level of $791,000. The decline is the result of a change from the revenue recognition from an accrual to a cash basis for one venue in this market. The change in accounting principle resulted in approximately $180,000 being booked as deferred revenue in the quarter.
Importantly, we believe this is an isolated situation. Our machines remained in operation at this venue as we are actively engaged in discussions with the venue owner to reach an amicable solution. Slot participation revenue from Cambodia during the quarter increased to approximately $318,000, up 11% from the fourth quarter 2008 level of $286,000 reflecting strong performance at the Premiere Club NagaWorld which opened the last week of January 2009.
This strong performance was achieved despite the closure of four clubs in the market and without a full quarter benefit from Premier Club in NagaWorld. Adjusted EBITDA, which we define as earnings before interest, taxes, depreciation, amortization and non-cash expenses improved to a loss of $2.8 million for the quarter compared to a loss of $3.6 million in the first quarter of 2008.
We continue to make strong progress on our cost reduction initiatives during the quarter. Cash SG&A expense for the quarter of 2009 was $2.6 million, a decrease of $0.6 million on a quarterly sequential basis and $0.7 million from the prior year period. The principle areas we experienced reductions were in the salaries, travel, legal expenses and in addition we incurred a restructuring cost of $0.5 million during the quarter related to the severance package for senior employees.
We ended the first quarter with $12.9 million in cash as compared to $14.5 million as of December 31, 2008. The cash reduction was the result of our operating expenses, capital expenditures on Premier Club in NagaWorld and payment to Elixir International on our outstanding notes payable which were partly offset by cash payments of $2.4 million from Shuffle Master.
We believe that our current cash on hand and machine inventory levels are sufficient to fund the vast majority of our new venue openings and extension through the end of this year. I will now turn the call back to Clarence to discuss our roll out plans and financial guidance.
Clarence?
Clarence Chung
Thank you Andy. Before we open up the call to your questions I would like to discuss our 2009 roll out plans and financial guidance. As discussed in our fourth quarter conference call in March, given the effect of the venue closures in Cambodia and taking a conservative approach in view of the current global economic situation, we are taking a measured and very selective approach to machine placement growth.
We anticipate adding another 3-4 new venues over the remainder of 2009 which would increase our installed base by approximately 400 machines. Two of these new venues are on target to be opened next month in prime locations in the Manila area. Based on the roll out plan and our current healthy inventory of over 1,100 gaming machines we anticipate incurred minimal CapEx to impact ongoing managed growth in year 2009.
As just discussed, we expect to achieve a cash SG&A quarterly run rate of under $2 million by the third quarter 2009. Based on these expectations and consistent with our previous guidance, we expect to turn adjusted EBITDA positive in the third or fourth quarter of 2009.
In summary, I think it is evident that despite the challenging global economy we have a clear strategy to improve performance and are making steady progress on this front. We have faced challenges but are emerging stronger and I firmly believe that with our much leaner operating structure now in place Elixir Gaming is even better positioned to capitalize on the growth opportunities that exist in emerging Pan-Asian gaming markets and to generate improvement to the company’s top and bottom line results.
Let’s now open the call to your questions. Operator?
Question-and-Answer Session
Operator
(Operator Instructions) The first question comes from the line of [Paul Sante] – [Paul de Sante Partners].
[Paul Sante] – [Paul de Sante Partners]
My first question is could you explain a little bit more about what is going on in the Philippines in terms of you said an amicable resolution is possible. I am not clear on what the disagreement is and is this a problem that could become a more generalized problem?
Clarence Chung
We believe this is more like an isolated instance. We are still negotiating with the venue owner in terms of more like the cash payments on our net winning.
[Paul Sante] – [Paul de Sante Partners]
Could you explain what the disagreement actually is?
Clarence Chung
This is relating to just one venue. In effect this one venue there is some sort of arrangement between the owner and the authority influences not relating to our agreement with the owners. However, that impacts the cash flows to the owners and then to us. In that case the owner is actively trying to negotiate and trying to resolve the issues of them with the relevant authorities, etc. so they can get the cash flows and then pay us. In fact, we have been in active discussions on a weekly basis with them and in fact they have shown cash flows flowing to us. In fact, we did receive about $30,000 in April from them. We understand they are sincerely trying to resolve that situation with the relevant authorities. From our perspective we are being active. We are aware they are paying on the conservative funds and that is why we are trying to use these counting [equipment] and the deferred income that we booked as income for the period.
[Paul Sante] – [Paul de Sante Partners]
So the disagreement is between the operator and the Philippine government authorities and you just happen to be sort of stuck in the middle?
Clarence Chung
Yes you are right. In fact, they are very frank and open to us in this respect and we are working as a team to try to resolve that situation.
Operator
We have a follow-up question from [Paul Sante] – [Paul de Sante Partners].
[Paul Sante] – [Paul de Sante Partners]
As long as other people are not asking questions I wonder if you could give us some kind of thoughts on any chance that you would change the agreement with Elixir International in terms of the debt payments where they might be put off because I see that we have enough cash for this year based on projected openings but if agreements such as you have with NagaWorld were to come along in other venues it seems like the current payment structure you have with Elixir International might become a drag on growth. Is there any potential that agreement could be restructured or stretched out?
Clarence Chung
I think this is a very good question and in fact unfortunately I think we are seeing Elixir International is a separate company and in fact it is one of our major channels. It is not appropriate for us to comment on their motivation or actions. However, I must say that while anything is possible and with a 39% ownership in EGT and in effect Elixir International has been a very strong supporter of the company in the past and as of today and we see no reason their support would be changed in the future.
[Paul Sante] – [Paul de Sante Partners]
A separate question, has there been any progress made in selling the subsidiary assets which are non-core? I am specifically referring to the Australian operations.
Clarence Chung
In fact as I just discussed we just sold our table games business to Shuffle Master. In fact we are rationalizing the company’s businesses. We do constantly review our other “legacy” businesses and in fact again this is what we are actively looking. However, having said that the chip business, RFIB chips, is quite a growing opportunity. In fact we did just complete the 3 million orders for the [inaudible] and in fact also we are having quite good inquiries for new orders, etc. Having said that, anything is possible but however with the chip orders and the chip business I think it by itself it can be a good business too.
[Paul Sante] – [Paul de Sante Partners]
The [car] business, does the [car] parts business continue to remain cash flow positive?
Clarence Chung
It has been I think not only in the U.S. but Australia too the [car] business is also experiencing a difficult time. In fact, we are doing some sort of auto parts which also where we see reduced orders from the car industry. So in this world we are trying very hard to shift that balance to other businesses like the chip business.
Operator
There appear to be no further questions at this time.
Clarence Chung
Thank you operator. We would like to thank our shareholders for their ongoing support and we hope to see you in Macao in June for the G2E Asia Gaming Show and look forward to updating you on our progress in the near future. Thank you.
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.
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