Traci Mangini – SVP, Corporate Finance
Clarence Chung – Chairman and CEO
Andy Tsui – Chief Accounting Officer
Paul Sonz – Paul Sonz Partners
Elixir Gaming Technologies, Inc. (EGT) Q4 2009 Earnings Call March 9, 2010 8:30 AM ET
Ladies and gentlemen, thank you for standing by and welcome to the Elixir Gaming Technologies, Inc. fourth quarter 2009 earnings conference call. During the presentation, all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session. (Operator instructions) As a reminder, this conference is being recorded today, Tuesday, March 9, 2010. I would now like to turn the conference over to Ms. Traci Mangini. Please go ahead.
Thank you, operator. And good morning, everyone. I’m 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.
Now, the agenda for today’s call will be as follows. First, Clarence will provide the highlights of our fourth quarter earnings and the significant achievements over the last year that have contributed to our solid performance. Following that, Andy will review in more detail our financial results for the quarter. Clarence will then conclude our prepared remarks with our first quarter guidance and future outlook. We will then take questions from investors and analysts.
With that, let me turn the call over to Clarence Chung. Clarence?
Thank you, Traci, and good morning, everyone. I’m pleased to report that Elixir Gaming has posted solid fourth quarter financial results, achieving not only record gaming machine participation revenue, but also our third consecutive quarter of positive adjusted EBITDA, which are defined as earning before interests, taxes, depreciation and amortization.
As a result of our improving performance, we also earned positive adjusted EBITDA for the fiscal year 2009, which marks the first year of achieving this important milestone since our new business model was first enacted in September 2007. While Andy will go through the financials in more detail, here are some of the highlights on our performance.
Total revenues for the fourth quarter improved 26% sequentially to $4.5 million, largely driven by the strength in our core gaming participation revenue, which posted remarkable sequential growth of 34% to a record $2.5 million. Consolidated average net win per unit was $105 and was achieved on higher machine installed base. We continue to adhere to our strict cost controls, and as such, cash SG&A was in line with our prior guidance range of $1.5 million to $1.8 million for the fourth quarter and down 48% from the prior year period.
As a result, of the strong top-line performance and strict cost control, we achieved another quarter of positive adjusted EBITDA Fourth quarter adjusted EBITDA was $0.8 million, which was more than double that of the third quarter 2009 period. We believe this performance is a direct reflection of our accomplishments over the last year in restructuring our operations and streamlining our cost structure, and notably it was achieved during a very challenging economic climate.
I would like to take this opportunity to highlight some of these significant achievements that have not only contributed to our recent performance, but also provided me confidence in our future success. Our strong revenue performance was driven in large part by our core gaming participation business, which notably as of the last two quarters now comprise over half of our consolidated revenue.
For this business division, we have dramatically grown our consolidated gaming machine seats in operation and refined our partner contract in assets (inaudible) focus on these venues set over the greatest potential return on our gaming assets. A strong contributor to our success has been our operator-partner relationship with NagaWorld, our sole venue in operations in Cambodia.
As you know, in January 2009, we initially placed approximately 200 machines at NagaWorld, a luxury casino resort and the only licensed casino in Cambodia’s Phnom Phen area, where we have joint control over the operations of the electronic gaming machines. Since this initial placement, we have increased a number of units at NagaWorld to 560 as of mid-February 2010 and are on track to reach 640 during the second quarter of 2010.
Despite the growing installed base, the average net win per unit for our operations at NagaWorld has experienced aggressive growth. We attributed to our targeted marketing efforts to build strong customer loyalty, the right machine mix, and the benefit of the closure of all slot clubs previously operating in the Phnom Phen region early in 2009.
In fact, average net win for our operations at NagaWorld, of which over $200 for the recent months of November, December and January. And despite the addition of 120 machines in mid-February, we are pleased to say that net wins have (inaudible) strong at 188 per unit.
Turning to the Philippines, we are working to refine our installed base and reallocate gaming assets to focus on optimizing performance in this market. As of March 1, our operating installed base in the Philippines was 833 units across six venues in operations. This is down 3% on December 31, 2009, but includes the closures of one underperforming venue.
Average net win for our Philippines operations was $57 for the fourth quarter, which marked solid sequential and year-over-year improvement. We continue to believe that the Philippines and our venues there will support higher net win over the long term due to our planned reallocations of gaming assets; the focus on our more profitable venues; the benefits of the ramp-up of several immature venues, which were open in the second half of 2009; and targeted marketing initiatives.
However, due to our strategic plan to reallocate assets, minor near-term fluctuation in average net win in this market is expected. In addition to our core gaming participation operations, we have increased our focus on improving our Dolphin operation in particular and marking some of the values in our under-explored assets, our Dolphin gaming chips.
We have accelerated our marketing efforts and expanded our product lines to include higher margin slots. These efforts are beginning to show results with a solid improvement in gaming chip orders during 2009 and current year to date, including the large RFID chip holders through the City of Dreams in Macau, which opened in June 2009.
Orders from new casino customers and stronger reorders from existing customers with a true product offering, strong IP and solid relationships in Asia and Australia, we believe we can better capitalize on these opportunities in the global gaming chip market and continue to improve on our future performance for Dolphin gaming chips and slots in our existing and new markets.
With regard to our non-gaming operations at Dolphin, which principally comprised the manufacture and sale of automotive components to numerous different customers such as GM Holden, Toyota, Honda, and Futuris Automotive. We continue to weather the difficult time for the global automotive business and saw sequential and year-over-year improvement in sales revenues for the fourth quarter 2009 period.
It is important to note that Dolphin has been a qualified supplier to several major auto manufacturers in Australia and elsewhere for an extended period of time. And while Dolphin also (inaudible) sales volume, it has been negatively impacted due to the decline in auto production in Australia, resulting from the global financial crisis and (inaudible) of the Australian dollar. Dolphin remains a stronger supplier in the industry, and we believe, is positioned to gain share going forward with the consolidation of competitors in the market.
In addition to Elixir Gaming’s strong frontline performance, we have achieved another quarter and first fiscal year of positive adjusted EBITDA since we began our new business model. This important achievement has been driven not only by our revenue growth, but also dramatic improvement to our cost structure. During 2009, we reduced cash SG&A expense to $7.6 million, a decline of 45% from 2008. And these cuts were executed without impacting our operational capabilities.
It’s also worth repeating that during the year, our cost structure also benefited from the divestiture of our unprofitable legacy table game business to Shuffle Master in April 2009. This transaction is simultaneously resolved a long-term litigation with Shuffle Master not only provided us $2.8 million in cash consideration, but also helped us to reduce our operating expenses in three resources to better focus on growing our core operations.
Lastly, it is important to note that we have also made solid progress on strengthening our balance sheet and financial flexibility. As you may know, in July, we entered into an agreement with our largest shareholder, Elixir International, to amend the secular promissory note issued by us in April 2008 and amended in November 2008. Under the amend (inaudible) payment of principal and interest on the outstanding principal balance of the note of $9.2 million until July 2010.
However, the interest of 5% continues to accrue. But these terms provide us cash flow advantage by reducing cash outlays of approximately $1.6 million a quarter until July 2010 and improve our financial flexibility, enabling us to pursue growth opportunities. We recently completed an annual valuation review of our gaming machine assets and recorded a non-cash impairment charge of $13.7 million as of December 31, 2009.
We believe this is a necessary and final step in the refining of our business model in an effort to formulate our future deployment plans and determine the usability of our machines to reveal [ph] to optimize machine performance. Further, its first data -- our revenues and related costs and materially reduce our depreciation expense. (inaudible) the time needed for us to achieve positive GAAP earnings, which could now be as early as the fourth quarter of 2010.
Also, our operations at NagaWorld has provided attractive cash flow. As you may recall, under July 2009 expansion contract, we placed 200 additional machine seats, for which we paid a commitment fee of $5.84 million to NagaWorld. For those 200 units, Elixir Gaming is entitled to collect on a daily basis 100% of the net win unit per day starting from the first day of operation until we have received the total accumulated of $7.3 million, which is the $5.8 million commitment fee plus our share of the net win.
Since the first of these machines were installed during September 2009 until March 1, 2010, we have collected a total of $6.7 million in cash. Based on this and the current trend, it implies an intrinsic payback period of approximately six months on our commitment fee.
In addition, in mid-February 2010, we began collecting 100% cash of the net win on a daily basis on the additional machines under the December 30th, 2009 expansion contract. Again, the total number of units under this contract will total 200 by the end of the second quarter.
This positive momentum in our overall core gaming participation operations, the successful refining of our gaming participation model and improvement in our execution capabilities and operational efficiency, Elixir Gaming has emerged a much stronger and leaner company and is better positioned to grow shareholder value and capitalize on selected growth opportunities.
With that, let me turn the call over to Andy to review the financial results in more detail. Andy?
Thank you, Clarence. Good morning, everyone. Before I discuss our financial figures for the quarter, I would like to note that historical revenues and expenses from our portfolio of automated card verification machine and electronic card shuffling systems, which were sold to Shuffle Master in April 2009, had been reclassified as discontinued operations.
The total revenue for the quarter was $4.5 million, up 25% from $3.6 million in the third quarter of 2009 and up 125% from $2 million in the fourth quarter of 2008. Slot participation revenue was a record $2.5 million. Average daily net win per unit improved to $105, up 22% from $86 in the third quarter of 2009 and up 123% from $47 in the fourth quarter of 2008. Our installed base of machine in operation during the quarter increased 15% from 1,127 units at the September 30, 2009 to 1,299 units as of December 31, 2009.
Slot participation revenue from NagaWorld, our sole venue in operation in Cambodia, during the quarter increased to approximately $1.5 million, up 42% from third quarter 2009 level of $1.1 million, reflecting strong win per day performance and increased installed machine base in NagaWorld.
Average net win per unit in Cambodia was $196 for the fourth quarter, up 5% from $187 in the third quarter of 2009. Our installed base of machine in operation in Cambodia increased 14% from 385 units at the end of September 30, 2009 to 440 units as of December 31, 2009.
In the Philippines, slot participation revenue for the quarter was approximately $953,000, up 24% from third quarter levels of $769,000 and up 26% from the fourth quarter 2008 level of $758,000. The increase was a result of improved net win per unit per day and a higher installed base.
Average net win for the fourth quarter for the Philippines was $57, up 8% from $53 in the prior quarter and up 12% from $51 in the year-ago period. Our installed base of machine in the operation in Philippines increased 14% from 742 units at the end of September 30, 2009 to 859 units as of December 31, 2009.
Revenue for the quarter also includes $675,000 from our Dolphin table game products subsidiary. This increased 18% from $572,000 in the third quarter 2009 period and was up substantially from $53,000 in the year-ago period. The increase was principally the result of increase in RFID gaming chip order from our existing customers.
In addition, our Dolphin non-gaming division, which primarily comprised automotive component, contributed revenue of $1.4 million during the quarter, up 16% from $1.2 million in the third quarter of 2009 and up 50% from $9 million in the fourth quarter of 2008.
Adjusted EBITDA, which we define as earning before interests, taxes, depreciation, amortization and non-cash expenses, was $808,000 for the quarter compared to $337,000 in the third quarter of 2009 and a loss of $3.3 million in the fourth quarter of 2008. As Clarence discussed, we continued to exercise strict cost control.
Cash SG&A expenses for the fourth quarter was $1.7 million, which was in line with our guidance range of $1.5 million to $1.8 million. Cash SG&A expenses increased slightly from $1.5 million in the third quarter of 2009, but decreased 48% from $3.2 million in the prior year period due to aggressive cost reduction initiative implement over the last year.
Our consolidated net loss for the quarter was $16.3 million or $0.14 per share on a weighted average share count of $115 million shares. Excluding the non-cash impairment charge related to our gaming asset of $13.7 million, our net loss was $2.6 million or $0.02 per share. This compares to a net loss for the third quarter of 2009 of $3.7 million, or $0.03 per share, on a weighted average share count of 115 million shares or a net loss for the fourth quarter of 2008 of $4.8 million, or $0.04 per share, on a weighted average share count of 115 million shares.
Turning to the balance sheet, as of December 31, 2009, we have $4.2 million in cash as compared to $4.7 million as of September 30, 2009. The cash reduction was a result of the payment of $2.7 million to NagaWorld, which account for a 50% payment of both the commitment fee, for the expansion of gaming machines and one-time non-refundable contract amendment fees and other operating expenses, which was largely offset by strong cash inflow from our NagaWorld operations.
As previously reported and as Clarence discussed, we took a $13.7 million non-cash write-down on our gaming asset as of December 31, 2009. The impairment includes the write-down to fair market value of certain gaming machine in inventory deemed as non-performing for the company’s market and the write-down of the Philippines operations gaming assets based on whether the carrying value of the machines in operation in this market were higher than the expected value as forecasted by the projected cash -- future cash flow.
This serves to better align our revenue and related costs and rationalize the carrying value of the asset against the projected income for the Philippine market. In addition, it materially reduces our depreciation expenses with an annualized saving of approximately $3.5 million. The write-down is reflected on the balance sheet as a reduction to our gaming equipment and system assets.
As of December 31, 2009, gaming equipment and system assets were at $26.5 million. The machines write-downs for the resale are reflected under current asset held for resale as of December 31, 2009, asset held for resale was $930,000. Our current gaming machine inventory circle for deployment is approximately 400 units.
Our debt as of December 31, 2009 was $9.4 million, which is owed to our largest shareholder, Elixir International. Under the current note’s terms, we are required to begin monthly payments of approximately $550,000 for a period of 18 months beginning in July 2010.
I’ll now turn the call back over to Clarence to discuss our first quarter guidance and future outlook. Clarence?
Thank you, Andy. Before we open up the call to your questions, I’d like to discuss our future outlook. As you can see, we have made solid progress in refining our core participation model and improving our execution capabilities and operational efficiency. These achievements provide us positive momentum entering 2010. Based on this, I’d like to provide you some of our near-term expectations.
One, given the strong performance at NagaWorld, our high installed machine base and strict cost controls, we expect to achieve quarterly sequential improvement in both total gaming machine participation revenue and consolidated EBITDA for the first quarter of 2010.
Second, based on our cost containment initiative and current scale of operations, we expect first quarter 2010 cash SG&A expense in the range of $1.6 million to $1.8 million. Third, with strong cash flow from our operations at NagaWorld, offset by capital expenditures for our expansion plan, we anticipate a cash position of approximately $4 million to $5 million as of March 31, 2010.
Looking further ahead, we remain focused on selectively growing our installed base through the addition of high potential new venue in our targeted market. Put simply, we are focused on quality, not quantity. Based on our current contract and factoring in our optimization initiative for underperforming venues and machines in the Philippines, we expect to reach 640 gaming machine seats at NagaWorld within the first half of 2010 and maintain a minimum installed base of approximately 800 units in the Philippines in 2010.
In addition, we continue to actively pursue additional placement opportunities in new and existing markets where we can leverage our expertise and relationships and capitalize on the solid foundations we have built in Cambodia and the Philippines. For such projects, as with NagaWorld, we are seeking an operator role.
Key markets of interest are border cities in Cambodia with strong feeder markets from neighboring countries such as Thailand and Vietnam, as well as opportunities in new countries such as Vietnam and Laos. We are encouraged by the pipelines of potential projects in these markets and remain focused on those projects that maximize return on our gaming assets.
We do intend to augment our existing inventory with the purchase addition of gaming machines to solve our future targeted deployment plans. Given our strong current and projected cash flow generation capability from our operations at NagaWorld, the state of the previously owned gaming machine market and our relationship with gaming equipment manufacturers, we anticipate funding our existing targeted 2010 expansion plan from cash on hand and expected net cash flow from operations.
In summary, I’m pleased with our progress in driving continued improvement in operating and financial performance over the last year. As a young company operating in a difficult global economic climate, we have successfully overcome challenges and have emerged a stronger and leaner company that is even better positioned to capitalize on the growth opportunities that exist in the Pan Asian gaming market and to generate improvement to the company’s top and bottom line results.
Let’s now open up the call to your questions. Operator?
Thank you. (Operator instructions) Our first question comes from the line of Paul Sonz with Paul Sonz Partners. Please proceed with your question.
Paul Sonz – Paul Sonz Partners
Paul Sonz – Paul Sonz Partners
Is there any estimate of -- or do you have a goal for how many machines you would like to have placed by the end of this year -- additional machines?
Thanks, Paul. We do not have guide to a particular range for 2010. And in fact, as I discussed, we have currently have approximately 1,400 machines in operation, and we expected to have 640 at NagaWorld by the end of the second quarter and maintaining at least 800 in the Philippines. I think we are actively pursuing new projects in existing and new markets and with the solid foundation that we have built out in the Cambodian and the Philippines market. And in fact, Elixir Gaming has built up our reputation and goodwill there. And we have been actively discussing in various markets of interest, like in the border cities of Cambodia as well as opportunities in new markets in Laos and Vietnam. I must say that there are people that come to us for discussing joint venture partnerships and I do hope that I can share with you and the rest of the shareholders any new venues -- contract in the near future.
Paul Sonz – Paul Sonz Partners
Excellent. And another question, in terms of the machines necessary to fulfill your commitment in NagaWorld, the additional 80 machines, I think 400 machines in inventory. How many of the machines -- of the additional 8- machines are you going to be placing at Naga will come out of that 400 inventory?
I would say that we are still actively evaluating where to put. And in fact, we -- I have a conference call with my team earlier today to discuss -- and in fact, I think we will have a composition of new machines and some of the existing machines from our current inventory in order to have the right mix. And you can see that NagaWorld is still a growing market, and the market hasn’t been matured yet. And we are evaluating the performance of those machines on the floor, and we are actively looking at replacing certain of the lower performing machines so that to achieve higher net wins overall. So I would say that it would be a combination of new and existing machines from the inventory list.
Paul Sonz – Paul Sonz Partners
In terms of -- I guess I can ask -- I'm going to ask this question in two different ways, because it may be one way that makes more sense to answer. In trying to assess the envelope of potential growth that the company has, I have to try and understand the cost of -- the average cost of machines in the new venues that you hope to have. And I'm not quite sure whether to ask you what I should use as an average input for the cost of a new machine, and I also recognize that there is a wide variability, whether it's a multiplayer or standalone or whatnot. Or whether the right question for me to ask is, how much should I put in my model for CapEx on a quarterly basis to try and smooth that out? Is there anything that you would like to talk to me about on those issues?
Well, to be honest, Paul, I think it’s difficult for us to give you an average number. I would say that there are some good machines in the previously used machine markets and they can be in the range -- they would be in the range of 5,000 to 7,000 per unit. And obviously, for new machines, it can range from 15,000 to 20,000 per unit or per seat rate. In fact, we are -- and I would say that it depends on the different market, even within, let’s say, for example, Cambodia, it will be different among the various regions. So in that case, I would say that for a growing market like in the Phnom Phen.
I would say that we will use quite some good machines, which is a newer machine so that to attract and build the net win. So in that case, we will have a higher proportion for using newer machines, whereas in other markets, which indeed the demand, it will be a little bit different so that probably we can use a combination of new or relatively older machines, I would say. But having said that, in this, a portion of those previously used machines (inaudible) inventory can be higher. So again, it’s not a simple answer that I can give it to approximately.
Paul Sonz – Paul Sonz Partners
Separate question, in terms of the new venues, is there an estimate of what the minimum -- or what the minimum size that you would go in terms of seats, or how should we figure what -- would you be going less than 200 in a particular venue, or is there any comment you want to make on that?
I would say that as a rule of thumb, probably we would prefer venues of higher than 150 machines so that it would be a lot more cost effective for us to operate. But having said that, I think there are circumstances that warn that if we are not a operator role and we would like to get a (inaudible) in that particular market, then probably we would be agreeable to a less than that minimum amount that’s spent we can put in. But having said that, yes, we operate -- if we are not the “operator,” then the resource that we need to spend in that particular venues could be lower, and that is why it’s cost us for us too.
Paul Sonz – Paul Sonz Partners
One last question is, in terms of the chips, are there -- do you have a significant sales pipeline for chips?
That’s good. Well, in fact, we have been working on this very diligently. In fact, by giving -- introducing the new class and continue to show our capabilities in the tradition in RFID chips to existing and to new customers. I think we have -- we are getting a very good response. I must say that there are strong enquiries and we are actively trying to convert them into orders. So in fact, the enquiries are many. And we’re actively pursuing to trying to close some of those into genuine order, and I can see some of those -- some of those have been converted into new orders. For example, as I mentioned, we are somewhat dominating the Australian market. We have the partnerships to casino in Melbourne, (inaudible) and Sydney as well. So in this -- and also in Macau. Obviously we supplied to two of the state operators there. So, yes, recurring order from existing customers are strong, and also we are actively pursuing to some new customers as well.
Paul Sonz – Paul Sonz Partners
Excellent. And please, I beg your forgiveness for asking one more additional question. In terms of the financing or the loan that you have outstanding with your large shareholder, has there been any movement on further -- making further adjustments to that agreement, to further --?
I must say that -- yes, before July 1st.
Paul Sonz – Paul Sonz Partners
Well, I must say that Elixir International has been very supportive to us. And this is evidenced by what they have supported to us in the last couple of years. And in fact, we are constantly reviewing the situation, and indeed it’s also (inaudible) to continue the support to us. But having said that, we believe [ph] our cash flows and indeed we do believe that even in the case that we need to repay -- paid the low -- the note that are trying in July. We do have the -- we do have the cash generated from operations as well as the cash reserve to do so, not impacting our potential expansion plan too. But again, we are evaluating the position with Elixir International on a geographic basis as well.
Paul Sonz – Paul Sonz Partners
Great. Thank you very much.
Thank you, Paul.
(Operator instructions) There are no further questions at this time. I will turn the conference back to our moderator to continue with their presentation and closing remarks.
Thank you, operator. We would like to thank our shareholders for their ongoing support. We look forward to updating you on our progress in the near future. Thank you, again.
Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation, and you please disconnect your lines.
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