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Executives

Mark Roberson – Acting Chief Executive Officer and Chief Financial Officer

Analysts

Mark Smith - Feltl & Company

PokerTek Inc. (PTEK) Q3 2009 Earnings Call November 3, 2009 5:30 PM ET

Operator

Welcome to the Q3 2009 PokerTek Incorporated earnings conference call. (Operator Instructions) I would now like to turn the presentation over to your host for today’s call, Mr. Mark Roberson, Acting Chief Executive Officer and Chief Financial Officer of PokerTek Inc.

Mark Roberson

Welcome everybody to PokerTek Incorporated earnings call for the third quarter ended September 30, 2009. The purpose of this call is to provide our investors and other interested parties with information about our results for the quarter and to communicate other developments in our business.

During this call we make forward-looking statements that reflect our expectations and beliefs about the future. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations or beliefs. These factors include items discussed today and also in our SEC filings. I also remind you that the company does not update such forward-looking information and we cannot provide assurance that any such expectations will be achieved.

We will also be discussing EBITDA which is a measure that the company utilizes to evaluate performance and allocate resources that are also utilized by our credit facility. EBITDA is a non-GAAP financial measure and may differ from the manner in which other companies use EBITDA. A reconciliation to EBITDA to GAAP net loss can be found in our earnings release and will be included in our form 10-Q when it is filed with the SEC.

Today I will review the financial results and discuss recent developments after which we will take your questions. Let’s start at the top. Revenues are lower when compared to the prior year period because our business in 2008 was dominated by nonrecurring hardware sales of PokerPro hardware to Aristocrat and sales of Heads Up Challenge.

For the quarter revenues decreased 64% to $1.6 million and 54% to $5.2 million for the first nine months. Product sales for the quarter were $217,000 a decrease of $2.6 million or 92% from the third quarter of 2008. For the first nine months product sales totaled $1.3 million a decrease of $5.6 million or 81% from the comparable period of 2008.

Again, we had no shipments to Aristocrat during the first nine months of 2009 as they continue to hold sufficient inventory position and the Eastern European markets where their business was particularly strong in early 2008 and where they placed a lot of the units that we sold during 2008 continue to be weak.

Sales of Heads Up Challenge were $211,000 in the quarter down from $1.5 million in the third quarter of 2008. As we discussed on the last call we began transitioning the Heads Up business from selling through traditional distribution to an operator-direct model. We are currently placing tables directly with operators on a recurring revenue basis, recognizing less up-front, one-time product sell revenue and building a recurring revenue business. Accordingly, recurring revenues represented a much larger proportion of the total than in past periods.

Revenue from recurring license and service fees totaled $1.3 million for the quarter and $3.9 million for the first nine months of 2009 representing 86% of total revenues in Q3 compared to 35% in Q3 of last year. Direct cost of revenue which includes cost of goods sold as well as depreciation and amortization of leased products, was $0.9 million for the third quarter a decrease of 68% from the comparable period of 2008.

For the first nine months of 2009 direct cost of revenue was $3.1 million a decrease of 55% from the comparable period of 2008. Direct costs declined in line with the lower hardware sales and were partially offset by increased depreciation and amortization on leased products.

Our operating expenses were $1.9 million for the third quarter a decrease of $1.3 million or 41% from the third quarter of 2008. For the first nine months of 2009 operating expenses were $6.5 million a decrease of 35% from the comparable period of last year. We continue to emphasize expense controls and our expenses declined 11% on a sequential basis from Q2.

Quarterly net loss per share of $0.11 improved 31% from $0.16 in the third quarter of 2008. Quarterly net loss was $1.3 million an improvement of 27% from $1.8 million in the third quarter of last year. For the first nine months of 2009 net loss per share improved 21% to $0.42 per share from $0.53 in the year-to-date period last year. Net loss was $4.7 million on a year-to-date basis an improvement of 19%.

EBITDA came in at $0.2 million negative for the third quarter. That is an improvement of 60% from $0.5 million for the third quarter of 2008. On a year-to-date basis EBITDA was $1.6 million an improvement of 41% from negative $2.6 million for the comparable period of 2008.

Our PokerPro table count was 255 as of the end of the quarter compared with 272 a year ago. During the quarter we removed the tables at Excalibur as previously announced and had several other customers elect to convert their poker rooms to allocate higher revenue generating slots, offsetting new installations and causing a reduction in the overall count.

Of the overall table count of 255, 157 tables were on lease in North America and 98 tables had been sold to Aristocrat. Of the 157 tables on lease, 55 of those tables were on cruise ships and 102 were in land-based casinos.

Moving to the balance sheet, we took a number of actions to strengthen our financial position and improve liquidity during the quarter. We renewed our credit facility with Silicon Valley Bank providing continued access to working capital. We raised $500,000 in cash from a private placement transaction. We entered into a stock purchase agreement with ICP Electronics. ICP has been a long-time partner and as we modify our Heads Up business to purse an operator recurring revenue model their partnership provides a significant advantage.

We modified our $2 million term loans to extend the maturities to 2012, reduced the cash interest rate to 9% and provide an option to pay interest in common stock. Subsequently our lenders also agreed to convert 60% of the principle balance of those loans into common stock leaving our balance sheet with only $800,000 in total debt outstanding. These transactions combined with our expense reductions leave us in a better position as we turn our focus to growth opportunities.

We continue to see challenging conditions in the U.S. economy as our gaming and restaurant customers face reduced consumer spending. Accordingly we are proceeding cautiously and keeping a tight watch on expenses. We do see encouraging signs both North and South of the border as we entered two new interesting market segments during the quarter. We installed three locations in partnership with Atlantic Lottery Corporation. ALC selected PokerTek to be their exclusive vendor. They run the lottery in the provinces on the east coast of Canada.

In addition to traditional lottery activities, ALC oversees VLP’s in bars and other locations. This is a good partnership for us on several fronts. First of all, ALC has been a fantastic partner and we are optimistic about our prospects to grow with them. In addition, this is our first collaboration with a lottery and we believe the ALC model is something that will be watched by other lottery organizations and has the potential to open new markets with PokerPro in the future.

We also entered the Mexican gaming market with an initial one-table installation at a Emotion Casino in Puerto Vallarta. Mexico is an interesting market. Prior to just a few months ago there was no legal poker allowed in the country. With the recent regulatory interpretation changes the market is now open to electronic table games but with no manual dealers, chips or cards allowed.

Currently there are over 300 casinos in Mexico catering to the over 100 million residents of that country and that number is expected to grow over the next 12-24 months. With no legal manual competition these are both examples of new market opportunities that play directly to the strengths of automated poker and to PokerPro.

In conclusion, we made significant progress with regard to our balance sheet this quarter and we continue to manage our spending aggressively. Our bottom line results improved significantly and we were within $200,000 of being EBITDA positive on a quarterly basis. In addition we entered the Mexican market and also launched our first installations with ALC in Canada and continue to expand our Heads Up Challenge operator direct business.

That concludes our prepared remarks. Now we will take any questions you may have.

Question and Answer Session

Operator

(Operator instructions) The first question comes from the line of Mark Smith - Feltl & Company.

Mark Smith - Feltl & Company

In Mexico has there been any chance of you doing all of the work there yourselves or are you using a paid distributor?

Mark Roberson

No we are distributing direct ourselves in Mexico.

Mark Smith - Feltl & Company

Any plans to change that?

Mark Roberson

No, we don’t have any plans to change that. We are talking directly to the large operators in Mexico. There are four large operators that control about 2/3 of the market and then there are a lot of other quality operators in addition to those four as well. Our plans are to distribute in contract directly with those operators.

Mark Smith - Feltl & Company

Turning to Heads Up Challenge can you talk about demand for Heads Up Challenge under the new leasing model?

Mark Roberson

Being that it is a new model, it is a little bit of an experiment and we are proceeding cautiously. We had pretty good demand in Q2 with our operators we were putting in place and selling to. We have 144 units out under this new model through the end of September. Obviously the economy is challenging. Bars and restaurants are difficult places for anybody to do business placing product so we are proceeding cautiously and watching it month by month. During the quarter we had pretty good placement with our operators.

Mark Smith - Feltl & Company

Outside of that leasing model, talking about product sales is that still the model in international markets? If you can talk about any change in demand in the international markets for Heads Up Challenge especially with the declining dollar.

Mark Roberson

Internationally we continue to sell the product direct. We are seeing again the effects of the economy on international distributors as well. Their business in all regions has suffered. With the decline of the dollar we haven’t necessarily seen a corresponding immediate uptick in demand for our product. We are still seeing orders but they are sporadic. Again, it has a lot more to do with the economic situation than all those countries and consumer spending and bars and restaurants and amusement games than with just the impact of currency at this point.

There are some statistics published that in the U.K. for example there are 50 pubs closing per day in the U.K. It is definitely a challenging environment from being a restaurateur, a pub operator or a vendor that is placing product into those markets.

Mark Smith - Feltl & Company

I think you deserve some credit for your cuts in SG&A but my question is as deep as you are cutting is there risk of hitting bone and how much deeper can you cut before you run into trouble?

Mark Roberson

At this point I don’t think we have cut into too much bone at this stage. We are definitely lean. I think we are appropriately lean. There are certainly some areas if we had plenty of flexibility I might want to invest more resources into but at this point I think our operating structure is pretty right sized.

I don’t see us taking those SG&A costs down going forward. I think you can sort of look at it as being steady state at this point. As we continue to grow and work to grow the top line in the future that might put a little pressure on SG&A and we might see an uptick going forward. I wouldn’t expect a significant uptick but we are going to control costs extremely closely even as we start to grow the top line. At this point I don’t think there is a lot of low hanging fruit for continued SG&A cuts.

Mark Smith - Feltl & Company

So 1.5 to 1.75 million including stock based comp is probably a decent run rate in the near –term?

Mark Roberson

Repeat that number again?

Mark Smith - Feltl & Company

$1.5-1.75 million?

Mark Roberson

That is about right.

Operator

It appears there are no further questions. Back to you.

Mark Roberson

Thanks everyone for joining the call. We really appreciate your attendance and interest. Have a good evening.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Good day.

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