Executives
Clarence Chung - Chairman and Chief Executive Officer
Andy Tsui - Chief Accounting Officer
Traci Mangini - Senior Vice President, Corporate Finance
Analysts
Paul Sante - Paul de Sante Partners
Elixir Gaming Technologies, Inc. (EGT) Q3 2009 Earnings Call November 10, 2009 8:30 AM ET
Welcome to third quarter 2009 earnings conference call. (Operator Instructions). It is now my pleasure to introduce Traci Mangini. Please go ahead, madam.
Traci Mangini
Thank you operator, and good morning everyone. I am Traci Mangini, Senior Vice President, Corporate Finance for Elixir Gaming Technologies. With me today on the call are Clarence Chung, Chairman and Chief Executive Officer, and Andy Tsui, Chief Accounting Officer.
Before we start, please let me review the Safe Harbor Statement. Some of the statements that the company will make on this conference call such as statements of 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 Securities and Exchange Commission including the company’s reports on forms 8-K, 10-K, and 10-Q. Elixir Gaming assumes no obligation to publicly update or revise any forward-looking statements.
The agenda for today’s call will be as follows: First, Clarence will review the company’s recent achievements in our operation of gaming devices in the Philippines and Cambodia and in our Dolphin gaming chip operation. Then he will review the progress being achieved in our cost reduction initiatives and steps we have taken to continue to improve our financial flexibility. Following that, Andy will provide a brief review of our financial results. Clarence will then conclude our prepared remarks with an update on our roll out plan and financial guidance. We will then open the call up to investors and analysts for their questions.
With that, let me turn the call over the Clarence Chung.
Clarence Chung
Thank you, Traci, and good morning everyone. I am pleased to report that Elixir Gaming has posted solid third quarter financial results which I believe is the direct reflection of our accomplishments over the last 12 months in restructuring our operations and streamlining our cost structure, and was achieved despite disruption due to extreme negative weather conditions during the quarter in one of our markets.
The strength of our operations in NagaWorld and our optimization initiatives in the Philippines enabled us to grow gaming machine participation revenue by 5% on a quarterly sequential basis. Notably, this growth was off of record gaming machine participation revenue in the prior quarter.
Given the solid improvement in core gaming participation revenue and our continued efforts to restructure our operations and cost restructure. We achieved positive adjusted EBITDA for the third quarter of 2009. It marked the second consecutive quarter of achieving these important targets since our new business model was first enacted in September 2009.
I would now like to highlight some of our recent accomplishments that impacted third quarter results as well as provide details on more recent events that give me continued confidence in the future success of Elixir Gaming. We’ve quickly improved our execution capability. For the quarter, consolidated average net win for the company was $86. While this is a decrease of 9% from the prior quarter, it represents an 83% improvement compared to the prior quarter. Unfortunately, this performed was achieved despite challenging weather conditions in the Philippines and the ramp up of additional machines in our Cambodian markets, which typically has a near-term dilutive impact on average net wins.
In the Philippines, average net win was $53, down 9% on a quarterly sequential basis and up 10% from the year-ago period. The decline reflects the negative impact of an eventful cyclone season that saw record rainfall during the summer months. It included tropical storm Ondoy that struck the Philippines on September 26th, and resulted in 40-year record flooding in certain areas of the country including Manila. With the help of our operation team who worked diligently and with personal sacrifice through these challenging events, we were able to materially minimize the damage to our assets. We’re thankful to them for their efforts.
We continue to firmly believe that the Philippines and our venues there will support higher net wins than historically reported, and we remain aggressively focused in our growth to achieve long-term growth in our venues in this market. To that end, we’re taking a proactive approach to drive sustainable growth in wins per day in the Philippines. We’re working with our venue owner/partners on various marketing and promotions strategies which have proven successful at our operations at NagaWorld, to implement more targeted marketing initiatives.
We believe that these initiatives which include such things as loyalty programs will take some time to ramp up, but they will begin to show positive results over the coming quarters. We also continue to evaluate underperforming venues and adjust the machine mix as appropriate.
With the resumption of normal business activity in the aftermath of the storm and the early results of our efforts to optimize performance in the overall market, we’re pleased to report that net wins for our operation in the Philippines are already starting to show improvement. For the month of October, net wins for this market was $60, up 13% from the third quarter level. In Cambodia, average net win for the quarter for our sole venue in operation, NagaWorld, was $187, down 5% from $197 in the second quarter 2009. This decline was driven by the additional machine placements in this venue during the month of September.
As you may recall, during the first quarter, we allied with a strong new partner at NagaWorld and took an operator role. For those not familiar with NagaWorld, it is a luxury casino resort in Cambodia and the only licensed full-service casino in the capital city of Phnom Penh. For the months of May through August, average net wins exceeded $200 on a constant average installed base of approximately 240 machines. We attribute this to our own performance, to our targeted marketing efforts to build strong customer loyalty, and the benefit of the closure of all slot clubs previously operating in the Phnom Penh area.
Based on our proven performance at our operations at NagaWorld and strong relationship with Naga Club, on July 25th 2009, we entered into another contract with NagaWorld to place an additional 200 electronic gaming machines on a participation basis at its casino resort with the option to place up to 200 more machines by the end of the year. To date, under this contract, we have placed 168 electronic machines of the contracted 200 in prominent areas of NagaWorld corporate casino floor where we have joint control over the operations of these machines including floor staff and respective audit rights.
The additional machines were primarily sourced from the company’s existing inventory and we’re expecting to place the balance of 32 machines in December. In consideration for placement of the additional machines, we paid a commitment fee of $5.84 million to NagaWorld. However, Elixir Gaming is entitled to 100% of the net win per unit per day from the additional machines, starting from the first day of operations until we have received a total accumulative amount of $7.3 million which represents the commitment fee plus our 20% share of the win per unit per day. Revenue from these additional machines are collected and settled daily by Elixir Gaming. From September 9th to October 31st, we have collected $1.1 million on these additional machines.
While we experienced challenges in September due to the normal dilutive impact to net win with the ramp up of additional machines, we believe our participation revenue and net wins will improve from the September levels as these new machines ramp up, and as we implemented wider-scale marketing initiatives. In fact, in October, consolidated average net wins from our operations at NagaWorld improved 19% from the September level to $153 on an installed base of 384 machines. Based on the momentum in our consolidated gaming machine participation operations, we anticipate that we will more than offset the softness in the beginning of the fourth quarter due to the weather related challenges in the Philippines and achieve quarterly sequential improvement in gaming machine participation revenue in the fourth quarter 2009.
We remain focused on actively growing our installed base through the addition of high potential new venues in our target markets. In this regard, we continue to expand our placement of gaming machines in operation. Our current operating installed base is 1286, which is up 24% from 1037 from the end of the second quarter. The increase is the result of opening of three new venues in the Philippines and our expansion at NagaWorld for a total of 498 machine placements since the end of the second quarter. These 498 placements include one new venue in the Philippines with 44 machines, which is now fully deployed under the current contract; 142 machines in a second venue in the Philippines, which have been operating under a soft launch until October 23rd, where full-scale marketing began; 144 machines at a third venue in the Philippines which became operational in mid October; and 168 machines as part of the previously discussed expansion at NagaWorld.
The additional machine placement was offset by the removal of a total of 249 machines as a result of the closure of one of our underperforming venues in the Philippines in September and routine machine mix shift driven by our net win optimization initiatives.
In addition to our core gaming machine participation business, we’ve made process in unlocking some of the value of the company’s under-explored assets, our Dolphin gaming chips. We have recently accelerated marketing efforts and are in the process of expanding our product line to include high-margin slots to better capitalize on the opportunities in the global gaming chip market in the future. We believe our efforts are beginning to show results.
As you know, in the second quarter of 2009, we booked $3.2 million in revenues from this division, which included a large order from the new City of Dreams casino in Macau. In the third quarter, revenue from gaming chips was $572,000, more than double that of the year-ago period.
As you can see, we’re making progress in driving top line growth; however, we have also successfully enhanced our operational efficiency, which includes dramatic improvement in our core structure. In the third quarter, we continued to make solid progress against our cost reduction initiatives and in doing so reduced our cash SG&A expense to $1.5 million for the quarter, considering our previously stated expectations of $1.8 million. The third quarter cash SG&A is a decline of 20% from second quarter 2009 levels and 61% from the year-ago period. Importantly, we’ve made these cuts without impacting our operational capabilities.
In an effort to support growth and continue to improve our operation and execution, we recently added a key new member to our operations team. Don Hallmark joined us in October as Regional Vice President of Slot Operations. Don has over 20 years of experience in slot operations and oversees our operations in both the Philippines and Cambodia. Prior to joining us, he was Regional Director of Slots for Las Vegas Sands Corporation for which he managed slot operations for the company’s corporate properties in Macau and Singapore. In this capacity, Don oversaw and analyzed performance reports of over 4000 gaming devices, and in Singapore, focused on developing these new slot markets. Prior to Las Vegas Sands, he held similar senior slot management positions at properties such as Tropicana Resort and Casino and Palms Casino and Resort in Las Vegas.
We believe that we have the right team and operating structure in place to respond quickly to growth opportunities in our markets. With positive momentum in our overall core gaming participation operations, the successfully refocusing of our operations and improvement in our execution capabilities and operational efficiency, Elixir Gaming has emerged a much stronger and meaner company, and is better positioned to capitalize on selective growth opportunities and grow shareholder value.
With that, let me turn the call over to Andy to review the financial results in more detail.
Andy Tsui
Thank you Clarence, and good morning everyone. Before I discuss our financial figures, I would like to note that historical revenues and expenses from our portfolio of automated card verification machines and electronic card shuffling systems, which were sold to Shuffle Master on March 16th 2009 has been reclassified as discontinued operations.
The total revenue for the quarter was $3.6 million of which $1.8 million was from the slot participation business. Slot participation revenue for the quarter was $769,000, up 4% from the second quarter levels of $737,000; the increase as a result of improved net wins per unit per day. For the third quarter, we continue to recognize revenue on a cash basis for one venue in this market which consists of 164 machines. However, we reached a settlement agreement with the venue owner and as a result we resumed recognizing all revenues from this venue on an accrual basis for the fourth quarter period.
Slot participation revenue from Cambodia during the quarter increased to approximately $1.1 million, up 6% from the second quarter 2009 level of $1 million, reflecting solid net wins per day performance and increased installed machine bases at NagaWorld in the last three weeks of the third quarter period. As Clarence mentioned, revenue for the quarter also includes $572,000 from Dolphin table games products segment, principally the result of our RFID gaming chip order from our existing customers.
Adjusted EBITDA which we define as earnings before interest, taxes, depreciation, amortization, and non-cash expenses was $337,000 for the quarter compared to $1.5 million in the second quarter of 2009, which included a one-time gain from the settlement of a legacy legal suit of a large RFID gaming orders and a loss of $2.9 million in the third quarter of 2008.
Also, as Clarence discussed, we continue making strong progress on our cost reduction initiatives during the quarter. Cash SG&A expenses for the third quarter of 2009 was $1.5 million, a decrease of 20% on a quarterly sequential basis, and 61% from the prior year period. The principle areas we experienced reductions were in the salaries, travel, and legal expenses. The company’s consolidated net loss from continued operations was $3.7 million or $0.03 per share on a weighted average share count of 115 million which compared to a net loss for the third quarter 2008 of $7.3 million or $0.06 per share on a weighted average share count of 115 million shares.
Turning to the balance sheet, we entered the third quarter with $4.7 million in cash as compared to $9.5 million as of June 30, 2009. The cash reduction was the result of the payment of $5.84 million to NagaWorld as a commitment fee from expansion of gaming machines at this venue and operating expenses. As Clarence mentioned, we already collected $1.1 million on these machines from September 9th through October 31st.
I will now turn the call back over to Clarence Chung to discuss our rollout plan and financial guidance.
Clarence Chung
Thank you Andy. Before we open up the call to your questions, I would like to discuss our near-term rollout plan and financial guidance. Based on our current contract and rollout schedule and factoring into our optimization initiatives for underperforming venues, we expect our year-end 2009 placements to total between 1300 to 1400 machines. Of this, we expect to have 440 machine placements at NagaWorld in Cambodia and the remainder in the Philippines. In addition to these plans, we have an option to add up to 200 more machines in prominent locations on the casino floor at NagaWorld. This option expires on December 31st 2009; however, the company has refused to use this gaming space till February 28th 2010. When evaluating this option, and if we exercise, it would most likely be with an initial commitment of at least 100 of the additional machines.
Looking further ahead, we are also actively pursuing additional placement opportunities in new and existing markets. Deployments for such projects could be as early as the first half of 2010. Such projects that are in negotiation phases include two venues outside the Phnom Penh area in Cambodia which could total over 500 machines and one project in Vietnam.
For these properties as with NagaWorld, we are seeking operator growth. Our current gaming inventory is approximately 1000. In efforts to formulate our future deployment plans, we are commencing an assessment of the usability of the machines with a view to optimize machine deployment, and we would determine if the potential adjustments to the valuation of these machines is needed.
As for financial outlook, we anticipate revenues from gaming machines on participation to increase in the fourth quarter of 2009 from the third quarter of 2009. As the strength in the company operation in Cambodia and growth in gaming machine placement are anticipated to offset softness earlier in the quarter from the recent typhoon in the Philippines.
Based on the execution of our cost reduction initiatives and our current scale of operations, we anticipate quarterly SG&A cash expenses to be in the approximate range of $1.5 million to $1.8 million. This target represents savings of approximately 53% to 60% compared to the 2008 level.
In summary, I’m pleased with our progress and believe we are executing well against our strategies to drive continued improvement in performance. We have overcome challenges and have emerged as stronger company that has even had a position to capitalize on the growth opportunities that exist in the emerging Pan-Asian gaming market and to generate improvements to the company’s top and bottom-line results. I’m firmly committed to this goal, and as a result, have extended my employment contract as Chief Executive Officer of EGT for another 3 years.
Let’s now open up the call to your questions.
Question-and-Answer Session
Operator
(Operator Instructions). Our first question is from the line of Paul Sante - Paul de Sante Partners.
Paul Sante - Paul de Sante Partners
What estimate do you have for cash at your end prior to the exercise of any options?
Andy Tsui
We normally don’t disclose that detailed information in the call, but we expect that the cash was to accumulate as we are recouping our commitment from Naga.
Paul Sante - Paul de Sante Partners
The question goes to the issue of whether you’ll have sufficient cash to exercise the option if you choose to do so?
Andy Tsui
We’ll basically go with our project with the existing cash, so in such case, our CapEx is only limited to the level that is appropriate for our cash flow.
Clarence Chung
Having said that, I think as of September 30th, we had approximately $4.6 million cash on hand and this is a rough calculation, and in fact, we are confident that we have sufficient cash internally generated for exercising of those options.
Paul Sante - Paul de Sante Partners
So, at this point, there are no plans for any financings?
Clarence Chung
In fact, we do not have major need that we would turn to look out for external financing at this moment, but as I mentioned, obviously we are going expand on a management basis for the year 2010 onwards, and indeed I think if we encounter certain good opportunities which exceed our current resources, we made turn to find various options for the financing, but having said that, I think we are currently based on our internally generated funding in projecting our expansion.
Paul Sante - Paul de Sante Partners
The machines you’ve discussed that there is going to be a revaluation and an analysis of the machines you have in inventory, and I wasn’t sure whether that indicated that just in comparison to what other new machines available are, it would be appropriate to lower the valuation on the machines in inventory or whether you were saying that some of the machines in inventory are not going to be usable in future venues, which is correct?
Clarence Chung
This is an ongoing process whereby, as I mentioned, we are on the one hand trying to optimize the machine revenue generating capabilities and it is an ongoing process; the customers help us and indeed different markets have different needs and different favors to the various machines, and in this respect, the company is commencing an analysis of the various machines on the floor as well as in the warehouse just to make sure that we have the optimal machine mix to be able to be deployed on the floors.
Paul Sante - Paul de Sante Partners
So, does that mean that some of the machines that you have in inventory are not appropriate to be used in your business?
Clarence Chung
If I mention, I think we are just commencing that review and indeed I think it is too early to make any conclusion at this moment in time.
Paul Sante - Paul de Sante Partners
Last question, how is the auto business going?
Clarence Chung
In fact, as you can view from the general economy’s news for Australia, I think Australia is picking up quite well as compared to other western countries, and in fact, we saw increased activities and increased orders from the auto businesses and in fact we are quite pleased at that.
Paul Sante - Paul de Sante Partners
If you needed to go outside of your inventory to find new machines or to get additional machines, what would be the current market for machines that you might be interested in in terms of their cost?
Clarence Chung
There are various options; obviously, we can buy the new machines that are offered by the various manufacturers and the pricing ranges from $20,000 to $30,000, but again, they are other options like very good secondhand machines that are also available in the market. So, I think from our perspective when we consider what is the right mix, we also consider whether or not we need to keep all the brand new machines for particular venues or for particular markets, and indeed we might make combinations of new and good-enough secondhand machines from the market, and to enhance the investment value for all the machines that we put on the floor in that particular venue.
Operator
We have a followup question from the line of Paul Sante - Paul de Sante Partners.
Paul Sante - Paul de Sante Partners
I don’t want to miss this opportunity to ask questions; could you give us a little bit more information or color about the new opportunities that you mentioned; I believe you said that there were two in Cambodia and I wasn’t quite sure if you meant that there would be close to Phnom Penh or if they would be further out; and could you discuss where it would be like Naga like facilities, and also the same question applies to Vietnam, is that going to be again sort of a high-end resort kind of opportunity?
Clarence Chung
I would say that for over the last 12 months or so, Elixir Gaming has a good name in the region whereby we are a company that know the business and then we know the executions as well, and we have demonstrated to the market that, in particular, NagaWorld is performing successfully in our operations; so, indeed I think there are opportunities coming to us on a constant basis. For the venues that I mentioned in Cambodia or in Vietnam, I would say that it varies in terms of the size of the casino or the floor operations, but having said that, our individual venues placement would be cost economical for us to place machines in each venue for over 150 machines per venue because that would help us in terms of the economy to work out better. Unfortunately, I cannot name any of those specifics to you at this moment in time, but all of those are very interesting opportunities that is worth for us to expand our resources to take a look at the opportunities as well as to actively negotiate with our partners there.
Paul Sante - Paul de Sante Partners
The placement in Vietnam, can you give us an idea of the number of machines that might be put there?
Clarence Chung
Again, I think it would not be less than 150, and I think the final number is yet to be determined, and again, this is due in the negotiations and it is a little bit too early to say.
Paul Sante - Paul de Sante Partners
The new placements in the Philippines, how long do you think that they will be before they reach maturity in terms of wins per day?
Clarence Chung
Again, I think that the combination of the marketing we put in as well as whether or not this is the right machine mix for the new venue is too early to say, especially for the three venues that we just opened in the last quarter is still too early to sort of determine, but we are seeing growth and we are actively putting marketing campaign and initiatives just to boost up and ramp up the net win.
Paul Sante - Paul de Sante Partners
On the new opportunities, if they do come to fruition, would you expect them to be in operation in the first half of next year?
Clarence Chung
It may not be all of them, but we are working on that; I would say that it would be a good potential that one of them will happen in the first half of next year, not to mention that the exercise of the options for the NagaWorld arrangement.
Paul Sante - Paul de Sante Partners
When you said on the exercise the option, if you did exercise it, the initial exercise would be for 100 machines; would that mean that that is your decision about the total that you would exercise or that you would do a 100 and then you take another look and decide whether to do the final 100.
Andy Tsui
We are taking a relatively conservative approach in terms of ramping up the machine count, and indeed so far we did see some good ramp up and the short period of ramp up and we are confident that the slot market there has not reached a maturity. So, indeed we are quite optimistic in terms of having the additional 100 or 150 machines to be ramped up relatively quickly, and again, we would like gradually get additions to new machines rather than just dump 200 machines onto the floor, and we do think that that would be a better approach.
Operator
There are no further questions at this time. You may resume with your presentation or closing remarks.
Clarence Chung
Thank you operator. We would like to thank our shareholders for their ongoing support. We hope to see you at the G2E in Las Vegas next week and look forward to updating you on our progress in the near future. Thank you.
Operator
Ladies and gentlemen, this does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Have a great day everyone and a great evening.
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