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Pokertek Inc. (NASDAQ:PTEK)

Q2 2013 Earnings Call

August 7, 2013 11:00 AM ET

Executives

Mark Roberson – CEO, CFO and Treasurer

Analysts

Thomas Pierce – Van Clemens

Operator

Good day ladies and gentlemen, and welcome to the Quarter 2, PokerTek Earnings Conference Call. My name is Matthew, 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 toward the end of this conference.

If at any time during the call you require assistance, please press star zero and an operator will be happy to assist you. As a reminder, this call is being recorded for replay purposes.

And now, I’d like to turn the call over to Mr. Mark Roberson, Chief Executive Officer, please go ahead, sir.

Mark Roberson

Thank you, Matthew. Good morning. Before we get started with the review of the quarter, I would like to remind you that today’s call is being webcast, and that certain statements we make regarding future expectations may constitute forward-looking statements for purposes of the Safe Harbor Provisions under Federal Securities Law.

Our actual results may differ from the expectations expressed, and the company assumes no responsibility to update forward-looking statements as a result of new information or future events.

Today’s discussion will include non-GAAP financial measures, specifically EBITDA, a reconciliation of EBITDA to GAAP net income is include with the earnings release.

Also, please refer to our filings with the SEC for additional information regarding risks and uncertainties that may affect our business and our future results.

With that, we’ll jump into the quarter.

Financial results for the second quarter were strong, and the company demonstrated good progress towards achieving its goals for the year.

The improvement in revenue, margins and operating results is a direct product of focused execution in our target markets and tight controls over our spending.

Being predominantly recurring revenue business, operating in markets with long sales and regulatory cycles, our results in Q2 can largely be traced back to plans and actions that we began executing nine to 12 months ago.

As we look ahead, we’re equally excited about the prospects for the next year.

First, I’ll provide a brief recap of the financial performance for the quarter, and then we can discuss progress on the previously communicated operating objectives and markets more specifically.

Financially, Q2 was a great quarter. Revenues increased 54% to 1.6 million with recurring revenue increasing by 300,000 and system sales increasing 200,000 driven by placements in Canada, Mexico and the US.

For the first half, product mix was on target with recurring revenue comprising 86% of total revenue compared to 73% in the prior year period.

Gross margins remain strong at 77% for the quarter, and 76% for the half. We continue to expect margins to remain strong in the high 60% to mid 70% range going forward as we grow.

Operating expenses remained well controlled increasing 150,000 for the quarter. Spending for lab testing and product approvals increased our operating expenses. We expect those expenditures to benefit future periods.

With increased revenue, favorable sales mix, margin expansion and controlled spending, net operating results increased 87% from last year.

EPS was negative $0.01 per share for the quarter, and negative $0.03 for the first half improving 80% on the quarterly basis and 25% on a year-to-date basis.

We were EBITDA positive and delivered positive cash from operations for both the quarterly, and the year-to-date periods.

Our balance sheet has improved significantly over the past six months with cash increasing to just over 1 million. Overall, a solid financial performance that we intend to build upon.

Moving from the financials to a more strategic view, in our past two conference calls, we stated four objectives for this year.

Number one, increase our penetration in current markets, number two, enter new markets, number three, obtain regulatory approvals for our ProCore platform, and four, continue to control our operating cost to drive EBITDA and EPS growth.

During the second quarter, and the first half, we made meaningful progress and continue to track to those objectives.

Objectives one and two both deal with increasing product penetration. One, through leveraging our current market, and two, by entering new markets. In both areas, significant progress was made during the first half, however the Q2 placements and financial numbers, don’t fully reflect those efforts yet, and we would expect to see those start to impact future periods.

With regard to objective number one, expanding and leveraging our relationships in our current markets, we were actively planning projects for the second half in the cruise market, Mexico and in the United States.

Those include both opportunities to place PokerPro and ProCore with existing customers and with new customers in those markets.

With regard to entering new markets, we’re continuing to make progress in Macau, while the sales cycle and approval process is taking a bit longer than we originally anticipated. We’re optimistic that we are nearing successful completion of that process.

The table cap restrictions which limit the number of manual table games allowed in Macau, has caused many operators to remove manual dealt poker tables, leaving player demand unmet for lower limit games.

We continue to believe that Macau represents a nice opportunity for e-tables, and expect our first installation of that market to occur soon.

We have also been working closely with our distribution network in South America and now have contracts in place with several customers in Columbia. As you may recall, we indicated that our plan for South America was to focus our near term efforts on Columbia where we completed our initial installation in Q1.

I know that most people listening to the call would probably not be too familiar with the size and characteristics of the South American gaming market. There are several countries in South America notably, Columbia, Argentina, and Peru, that each have hundreds of electronic only properties.

The largest cities will normally have one or two full service casinos with live table games, and the surrounding suburbs and the rest of the country, are generally served by slot properties with no, or minimal table games.

These types of markets are idea for electronic table games where we can offer their patrons a complete table games experience using our electronic platforms.

With our initial efforts focused on Columbia, we’re shipping a full container this week to kick of the first meaningful round of poker and ProCore installations there.

As we create penetration in Columbia over the next several quarters, we will also begin to increase our reach to Peru and other markets in the region as well.

Third, we plan to achieve regulatory approval for our ProCore product. As you may recall, we submitted this product to the lab in March, and we are now in the final stages of testing and approval.

Testing has gone well, and we expect to have the final approval in hand during this quarter, the third quarter, which will then allow us to begin marketing BlackJack and EZ Bac on the ProCore platform to customers in regulated environments.

Fourth, and finally, with regard to the objective of controlling our cost, and driving EBITDA and earnings performance, I would hope that our quarterly results demonstrate our ongoing commitment to fiscal responsibility.

Everyone on the team here is accustomed to challenging each other, and myself to ensure that we operate efficiently. I certainly expect that will continue as we grow.

So overall, a very strong financial quarter with great opportunities ahead. With that, we’ll conclude the formal remarks, and open the line if there are any questions.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line of Thomas Pierce of Van Clemens. Please proceed.

Mark Roberson

Good morning, Tom.

Operator

Un-mute, sir. We have no response from Mr. Pierce. Is your line un-mute Mr. Pierce? Your line is now open Mr. Pierce. We have no response, sir.

(Operator instructions)

Again, we have – Mr. Pierce is on the queue again from Van Clemens. Please proceed, sir.

Thomas Pierce – Van Clemens

Can you hear me now? Can you hear me?

Mark Roberson

We can hear you, Tom. Good morning.

Thomas Pierce – Van Clemens

Good. Good morning. Good quarter. I just wanted to know if you could expand a little bit on Macau and what’s going on over there?

Mark Roberson

Yes, sure can. Good question, Tom. With regards to Macau, as we previously discussed, our primary focus initially is with poker, we’re currently working with customers and with the regulatory process in Macau, and we expect to install our first poker installation there soon.

I believe that’s the same indication that I gave two months ago on our last call which I realized, a couple of months have passed. We’re still in the regulatory process.

It’s taken a bit longer than we would – anticipated, but it’s continuing to move forward, and we’re still optimistic that we’ll be able to announce that installation very soon.

Thomas Pierce – Van Clemens

Very good. Are you working with anybody over there?

Mark Roberson

We are, but I would rather not be specific as to the particular customer at this point.

Thomas Pierce – Van Clemens

Okay. Well thank you.

Mark Roberson

Thanks, Tom.

Operator

Thank you. There are no more questions in the queue at the moment. (Operator instructions)

Okay, we have no more questions. So now, I’d like to hand over to Mark Roberson for the closing remarks.

Mark Roberson

Thank you, Matthew, and appreciate everyone’s time who’s listening to the call. Thank you and have a good afternoon.

Operator

Thank you for joining today’s conference ladies and gentlemen, this concludes the presentation. You may now disconnect. Have a very good day.

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