PokerTek's CEO Discusses Q1 2013 Results - Earnings Call Transcript

May. 8.13 | About: PokerTek, Inc. (PTEK)

PokerTek, Inc. (NASDAQ:PTEK)

Q1 2013 Earnings Call

May 8, 2013 11:00 pm ET

Executives

Mark Roberson – Chief Executive Officer, Chief Financial Officer & Treasurer

Analysts

Thomas Pierce – Van Clemens

Dennis John Lavalle – Lantern Investments, Inc.

Jack Frid – Discovery Investments LLC

Operator

Good day ladies and gentlemen and welcome to the Q1 2013 PokerTek, Inc., Earnings Conference Call. My name is Catharine and I will be your operator for today. At this time all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of the conference. (Operator Instructions) As a reminder, this call is being recorded for replay purposes.

I would like to turn the call over to Mr. Mark Roberson, Chief Executive Officer. Please proceed sir.

Mark Roberson

Thank you and good morning. Before we get started, I would like to remind you that we’ll make forward-looking statements on today’s call and that actual results may differ from the expectations expressed. We undertake no obligation to update those statements, expectations or forecasts. The discussion will include non-GAAP financial measures including EBITDA. A reconciliation to GAAP net income is included in the earnings release. Also please refer to our filings with the SEC for further information regarding risk factors, forward-looking statements and non-GAAP measures.

As we discussed in detail during our last conference call in March, our plans for 2013 include the following. To increase penetration in our current markets including Mexico, Ontario, Ohio in the cruise markets, to enter new markets in South America and Asia; to secure regulatory approvals for our ProCore platform with Blackjack and EZ Bac and to continue to control our operating costs as we grow to drive EBITDAS and EPS growth.

During the first quarter, we made meaningful progress and remain on track to achieve those objectives. As you review the financial results for the quarter, there are several areas I would like to highlight. Recurring revenue increased 26%, driven primarily by the addition of gaming positions in Canada and Mexico. Total revenue however, declined in comparison to 2012 as we had several large hardware sales in the prior year period. For the current quarter, our revenue mix was 98% recurring whereas in 2012 65% was recurring and 35% was from hardware sales activity.

As we’ve indicated in past discussions, our goal was recurring revenue to approximate or exceed 85% of total revenue over time. For the past several quarters, we’ve been tracking at almost 100% recurring, which is considerably higher than our target mix. Looking ahead, I expect to generate more hardware sales to balance our revenue mix and drive increased profitability.

For the quarter, gross margins remain strong at 75%. Our operating expenses remain well controlled and consistent at $1.2 million. As a result, EBITDAS was positive $121,000 and EPS came in at negative $0.02 per share. We generated $350,000 in cash from operating activities during the first quarter. Total cash on the balance sheet increased by $800,000 from year end to over $1 million, the increase was from a combination of operating cash flow and the proceeds from the private placement would substantially strengthen our balance sheet.

I’ll be happy to dive deeper into the financial statement comparisons, if there are questions after the prepared remarks. But first, we’ll walk through our key market initiatives and provide some additional color on our progress and expectation in those markets. Let’s start with Canada where we’ve games installed at six properties in Ontario. The first phase of PokerPro installations were at properties where we believed demographics and other factors will drive very high levels of player adoption and game performance. Those initial installations are performing very well and I believe it’s fair to say that they are exceeding both our expectations and those of the operator. We are evaluating other opportunities to increase the penetration of PokerPro and ProCore in Canada in the second half of the year.

In the U.S., we opened our first electronic charity poker room in Ohio, six months ago. The charity model is a new approach for us and is one that we believe presents tremendous potential in Ohio and perhaps in other states as well. The initial response from players and charities has been quite positive and we continue to see play levels increasing. We’re working with operators to open additional locations in Ohio. Those locations are in various stages of local approval processes and we’re confident that additional charity rooms will open at Ohio this year.

We reentered Mexico in December and continue to add additional gaming positions in that market during the first quarter. As of March 31, we’re at 200 gaming positions in eight locations. We expect to add games as additional operators receive their E table permits and begin to make plans to add E tables back to their floor.

In South America, we completed our first installations in Uruguay and Colombia during the first quarter. The market in South America contain large numbers of slot and bingo properties where table games are currently underserved and where we can provide a compelling value proposition with our E table products. We plan to focus our efforts over the next several months on growing the installed base in Colombia and working with our new operators there to drive player adoption.

In Asia, we’re initially focusing on Macau where the table cap restriction is creating a supply demand imbalance for poker, baccarat as well as other games. With the table cap restriction creating opportunities for E tables where we actively working to secure our first poker install and to build demand for our new baccarat products. We will also be traveling to Macau in several weeks as we introduced EZ Bac at the G2E Gaming Show.

At our year end call, we indicated that we were preparing at that time to submit the ProCore platform with Blackjack and EZ Bac through the Gaming Labs International to begin the testing and approvals process. I can now report that product testing is well underway and proceeding according to plan. Once approved, we will have additional opportunities to deploy ProCore Blackjack and Baccarat to customers in regulated markets.

Overall, we made a lot of progress in Q1. We continue to expand in Mexico; we installed our first games in South America, we began the approval process for blackjack and EZ Bac, we continue to control our operating expenses and we substantially strengthened our balance sheet. We have a lot to look forward to in the second quarter and the second half of the year.

Thank you and we’ll now take any questions.

Question-and-Answer Session

Operator

Thank you (Operator Instructions) Please standby for your first question which is from the line of Tom Pierce from Van Clemens. Please go ahead.

Thomas Pierce – Van Clemens

Thank you. Good morning guys.

Mark Roberson

Good morning, Tom. How are you doing?

Thomas Pierce – Van Clemens

Good. Just checking now with some of your products, I am wondering if you’ve been able to replace some of the existing competitors.

Mark Roberson

It’s certainly with PokerPro. We’ve been able to displace most competitive product than a lot of our target markets. And I would say for the most part at this time we have the niche electronic poker market largely to ourselves and at this time don’t really have much serious competition in that market.

With regards to Blackjack and Baccarat, again that’s a new product for us, we’re getting indications from a number of customers that they would like to replace some competitive product that they may currently have with our product. As you know, we’re currently working through the GLI approval process. So once we have that approval in hand which again we feel that we’re based on the progress to date that we’re on track to have approval mid-year that we’ll then be able to take advantage of some of those opportunities to replace competitive product in the field.

Thomas Pierce – Van Clemens

Very good, just one another thing. Can you give a little further update on Ohio I mean you went into the one place with 17 tables, which is not worth too much but it seems like it’s not too much. And I think you said the other ones you probably put 10 tables in, is that correct?

Mark Roberson

Yeah, we’re still experimenting I would say with the model of the precise size of the operations. The first installation was 17 tables and the play in that room continues to build. There is certainly an argument that 17 tables is an appropriate number for that room. We still tend to think that maybe it’s a little oversized but it’s growing, so take that for what it’s worth.

The other rooms that we’re looking at in Ohio I do believe we’ll be sized more in the 10 table range, 8 to 10 tables.

We have between 2 to 4 operators in locations that we’re actively working with right now and that we’ve been working with for sometime for the past several months. In Ohio, there really isn’t a lot of regulation over the charity market but there are local regulations, city council approvals and other things that have to happen for the operators to be able to open those rooms. And I will say that we’re actively working through that local approval process as we speak for a couple of additional rooms.

Thomas Pierce – Van Clemens

Well, thank you.

Mark Roberson

Thanks Tom.

Operator

Thank you (Operator Instructions) We have further question from Tom Pierce. Please go ahead.

Thomas Pierce – Van Clemens

Well, I was going to give somebody else a chance, but I guess nobody was going to step into the [battery] [ph] box. Can you give us any further progress report of Shanghai?

Mark Roberson

I think you meant Macau right Tom?

Thomas Pierce – Van Clemens

Macau, I meant Macau.

Mark Roberson

Macau, yes, as we’ve discussed in the past, we are targeting Macau and feel that we’re quite close to being able to open our first poker room in that market, just a little background for those who may not have heard me say this before on the call. Macau is an interesting market for all the obvious reasons of size and growth and everything that everybody sees in the press about Macau. It’s also unique in that there are restrictions on the number of tables that can be placed into the market across all the properties in that market and they’ve already hit the table cap the maximum allowable tables in the market.

And as that has happened for operators that begun removing poker in order to make room for baccarat tables so Macau has become quite underserved as it relates to poker as well some other games, and operators are having to juggle baccarat tables around, put them on and off the floor to remain in compliance with these table cap issues. So our approach right now is we expect to start with poker as our initial installation to alleviate the undersupply of poker in the market and the demand that’s built up there.

And I would just say that we’re - based on our progress to date with the operator that we’re working with we’re very optimistic about that installation taking place in the, I will just say in the coming months. With regard to baccarat, we will be showing the EZ Bac product at the Trade Shows in May. We have a lot of optimism regarding that product and we will know a lot more about its reception in the market and what the potential is after the Trade Show and after we get some operator feedback in the coming weeks.

Thomas Pierce – Van Clemens

When is that Trade Show again? What date?

Mark Roberson

It is around May 22, 23, 24 in that range.

Thomas Pierce – Van Clemens

Okay, all right, very good. Thank you.

Mark Roberson

Thanks Tom.

Operator

(Operator Instructions) We have a third question from Dennis Lavalle from Lantern Investments. Please go ahead.

Dennis John Lavalle – Lantern Investments, Inc.

Hey, guys I got a question for you concerning the traditional table market in Vegas, New Jersey. I think at one time you guys had a penetration in those markets. And could you tell me where the status is and what’s going on in those markets and is there any opportunity for PokerTek in those markets? Thank you.

Mark Roberson

Thanks Dennis. Yeah, good question. Really on key part of our strategy was really putting a lot of efforts and resources in going after the traditional poker markets like Atlantic City, like Los Vegas. Over time we migrated our strategy to focus more on those markets that were underserved with poker like Mexico, like South America, like Macau, like Ontario. And we focused a lot more of effort in those markets where there is a lot less competition from competing poker rooms that we have to go up against.

And that’s been a more successful strategy for our E tables to this point. That said we certainly don’t ignore some of these traditional markets either. And there are pockets of opportunity within those markets that we can take advantage of where there are operators who don’t have poker, who want to have a full service offering and want to add 2 or 3 tables to their floor, so they don’t have to send people down the street for poker.

There were also other areas where our product works very well with things like Omaha, tournament play and other features that work very well even in competitive poker rooms. In Ohio, for example, in the charity room we spoke about for the first time, we are in a relatively close proximity to the Horseshoe there. So we are to some degree head to head with a traditional casino in probably a 30 mile radius and our business is growing. And I take that as a very good sign for the product acceptance and player acceptance of electronic tables as we move through the adoption curve with players.

As time goes on we’re seeing more and more indications of interest from operators in more traditional gaming markets in the U.S. And I would expect us to have some installations in some of those markets in the U.S. I wouldn’t expect to see the largest part of our strategy, I wouldn’t expect it to, all of a sudden, you to see us reverse course and start spending lots of money trying to gain significant market share on the strip, for example, but I think you will see us do installations in some of the more traditional gaming markets over the course of the year. Hope that answer to your question.

Dennis John Lavalle – Lantern Investments, Inc.

Thank you.

Mark Roberson

Yes.

Operator

Thank you. The next question is from Jack Frid from Discovery Investments. Please go ahead.

Jack Frid – Discovery Investments LLC

Mark, when you are in Minneapolis, we talked a bit about (inaudible) and tell about the recurring revenues from used equipment, the tables had come back…

Mark Roberson

Yeah

Jack Frid – Discovery Investments LLC

We do refurbish them.

Mark Roberson

Yes.

Jack Frid – Discovery Investments LLC

At a reasonable price and then get them back into the marketplace. Can you just give us a little idea like the number of machines that are coming back, the cost again and get them out there? I mean eventually it’s got us seem like there is a lot of free cash flow coming back if you can replace those machines after you guys would cost out of them for earnings?

Mark Roberson

That’s been a double edged sword but one of the pleasant surprises is our occurrences as our business matures. We do as a leasing company and [this guess as a true] any leasing business where you’re generating recurring revenue from a lease model. You’re going to have product you put in the field come back, people change their floor, people change their strategy, customers to lease product for few years, move in a different direction. It’s going to happen and you’re going to have tables come back, it’s true for every gaming company and we’re no different in that respect.

I would say that we significantly reduced the number and percentage of tables that we see come back off lease and have to refurbished as we’ve moved our strategy towards targeting niche markets with less competition from insurance poker rooms. So we’ve dramatically cut down on the number of tables, coming back through the facility and having to be refurbished but we still always have that.

When we bring product back, we’re able to completely refurbish the hardware. We will bring a table back, we completely strip it, we pull every wire out of it, we pull all of the monitors out, we pull all the boards out. We thoroughly test every component, every connection, clean it, refurbish it. It takes about a day of labor to assemble a new table and takes probably 2.5 days to completely refurbish an order table.

However, when we’re done with very little variable cost outside of our normal fixed overhead, we’re able to put that table back out in relatively like new condition and it will can go out in the field and stay for an indefinite period of time on a refurbish basis. So a part of our success has been being able to redeploy and repurpose equipment that comes back that certainly has been beneficial to our margins. As you see our margins grow from under 40% to over 70%.

I think one of the questions you asked in Minneapolis that I should also touch on was what happens as you move into the newer hardware and you’re not refurbishing as much as your margins, all your margins going to decline as a result. And if you’re calling in, we talked about that a little bit and because we have reduced the cost of our newer platforms from a hardware standpoint and buyback 40% to 45% as we’re putting out ProCore and as we put out new poker tables in the future, we expect to be able to maintain that 70% margin.

Jack Frid – Discovery Investments LLC

Thank you.

Mark Roberson

Thank you.

Operator

Thank you, sir. We have no further questions at the moment.

Mark Roberson

Okay, thanks everyone for calling. I would definitely appreciate your time. We’re very excited about the second quarter, as well as the back half of the year. We’ve got a lot of good things in the hopper and I look forward to speaking with some of you as we proceed through the next few months and certainly at our next quarterly conference call in really August. Thank you.

Operator

Thank you for joining in today’s conference. This concludes the presentation. You may now disconnect and have a very good day.

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