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Executives

Harriet Fried – IR, Lippert/Heilshorn & Associates

Mark Roberson – Acting CEO, CFO & Treasurer

James Crawford – President

Analysts

Mark Smith – Feltl and Company

PokerTek, Inc. (PTEK) Q4 2009 Earnings Call March 9, 2010 5:30 PM ET

Operator

Good day, ladies and gentlemen, welcome to the fourth quarter and full year PokerTek earnings conference call. My name is Keith and I’ll be your operator for today. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session. (Operator instructions) As a reminder, this conference is being recorded for replay purposes.

I’d now like to turn the conference over to your host for today, Harriet Fried of LHA. Please proceed, ma’am.

Harriet Fried

Thank you, operator, and good afternoon, everyone. The purpose of this call is to provide PokerTek’s investors and other interested parties with information about the company’s operating results and to communicate other developments in its business.

Joining us from management are Mark Roberson, Chief Executive Officer and Chief Financial Officer and James Crawford, President and Founder.

Before we begin, I’ll read a Safe Harbor statement under the Private Securities Litigation Reform Act of 1995. The statements that are about to be made in this conference call that are not historical facts are forward-looking statements and involve risks and uncertainties, including customer acceptance of the Company’s products, the denial, suspension or revocation of permits or licenses by regulatory or governmental authorities, further approvals of regulatory authorities, the Company’s financial condition and other risks and uncertainties described in more detail in the Company’s most recent Annual Report on Form 10-K and other reports filed with the Securities and Exchange Commission.

The Company expressly disclaim any obligation to update or revise publicly any forward-looking statements whether as a result of new information, future events, or otherwise. The Company will also discuss EBITDA which is a non-GAAP measure and used internally to evaluate performance and allocate resources. The manner in which the Company uses the EBITDA may differ from the manner in which other companies use the term EBITDA or EBITDAS

With that introduction I’d like to turn the call over to Mark Roberson. Go ahead, please Mark.

Mark Roberson

Thank you, Harriet. I’d like to welcome everyone to today’s call. First, I want to tell you how excited I am to be here as PokerTek’s CEO and I want to thank the board and our shareholders for the opportunity. We had an important inflection point in the company’s history and I want to start by providing you with some opening comments about our progress over the past couple of quarters and where I see us going from here.

During the second half of 2009, our management team was focused on turning the business around financially and positioning PokerTek for profitable recovering revenue growth in 2010.

We cut our operating expenses almost in half, re-examined the previous business strategies, and implemented new strategic plans directing our sales, marketing, and development efforts towards those market segments with highest profit potential. As a result, our financial performance has improved significantly with our Q4 EBITDA just shy of breakeven and trending towards the black.

Getting the EBITDA’s breakeven is an important milestone for any company, but more important it represents the foundation from which profitable growth becomes possible.

Looking ahead, my focus as CEO and that of our entire team is to start growing our top-line in a manner that generates profits and builds value for our shareholders.

With that vision in mind, in building upon the lessons of our past, our strategic plan for 2010 encompasses the following elements

We will target markets for our products stick and accelerate our revenue growth. We analyzed our past performance in various markets and the lesson is clear. Markets with limited or no competition result in better retention and better financial performance for our electronic table games than those markets with intense competition.

We are focused on those opportunities where competition is more limited and favorable conditions exist. Target list is narrower and more focused and represents significant short-term and long-term growth potential and far greater earnings potential.

Number two, we plan to leverage our robust electronic platform and improve our ROI. We are redesigning our PokerPro platform to make it more robust and flexible while reducing the cost and complexity of manufacture. The benefit of this platform will be that it will enable us to significantly increase the return and margin on PokerPro.

Perhaps, more important from a longer-term point of view, however, this platform will provide greater flexibility to add other games down the road, diversifying our product line and increasing our longer-term revenue potential.

Third, we will continue to control expenses and drive bottom-line results. While growing and investing in our platform, we will stay lean and we will control our expenses.

As we grow in 2010, I would expect our operations to scale such that expenses grow at a lower rate than our top-line, resulting in an increased operating leverage, allowing the margins from increasing revenues to drop to the bottom-line. Overall, we made tremendous progress and I’m excited about the prospects ahead.

Before walking through our financial results and taking questions, I’d like to introduce you to James Crawford. James is one of the Company’s founders and has been instrumental in running sales and marketing. James, along with the rest of our team put a lot of effort into analyzing our markets and revamping our sales strategy. He’ll provide you with a more detail on the specific opportunities we’re currently targeting. James?

James Crawford

Thanks. As Mark mentioned, over the past six months, we spent a lot of time analyzing our markets and implementing new strategies to improve our product retention and our financial return. In the past, the Company’s strategy has been focused primarily on targeting and converting manual poker rooms and have a competitive traditional markets.

What we found was that our retention rates were exceeding 80% in situations where competition is limited and markets with a high density of manual poker rooms are historical retention rate has been closer to 30%.

We have focused our efforts and are now aggressively pursuing opportunities where there is a less saturation of positional poker rooms, including international and emerging markets.

In January, we regained control of marketing and distribution for PokerPro on a worldwide basis from Aristocrat. We can now be much more aggressive and increase our market penetration and revenues outside of North America.

Our focus now is on reestablishing our market share in those countries where we had a strong market share in the past, primarily Hungary, Bulgaria and Romania, and also other markets in the eastern European region. We have received a lot of interest as we reentered these markets and I expect installations to begin in Europe as we move into the second quarter.

We entered the Mexican gaming market during the third quarter. As of the end of December, we had 28 tables installed in Mexico and reported reaching our 40th table a few weeks ago.

In December and early January, installed PokerPro at more locations over a shorter period of time than any other time in the Company’s history.

Mexico is particularly attractive market given that manual poker is not legal. The casino operators they are established and mature and the country’s population exceeds 100 million people, seemingly providing a healthy population of poker players.

There are approximately 300 legal gaming venues in Mexico and that number is growing under the new gaming friendly environment. I expect our pace to moderate a bit but the attainable market remaining for PokerPro in Mexico is significant.

Continuing further south into Latin America represents a logical extension of our success in Mexico. Those markets, primarily, Argentina, Peru, Panama, Colombia, and Uruguay are served by many of the same operators we’re already working with in Mexico and other countries.

We’re in the early stages of developing our plans for the second half of 2010, but we are becoming more confident that South America is a next logical step and a nice growth opportunity.

In North America, we continue to focus on Canada where we have partnered with the Atlantic Lottery Corporation. Cruise Ships, where we continue to thrive, especially Carnival Corporation. Our current North American customers continue to be successful with PokerPro, primarily in locations with limited Poker saturation, such as Harris Cherokee and North Carolina, Indiana live, Hoosier Park in Indiana and Oaklawn in Arkansas, where we recently added table.

We believe that the U.S. market will continue to present opportunities in select markets and anticipate new markets opening up to provide longer-term growth. Mark?

Mark Roberson

Thanks, James. Hopefully, everyone has had a chance to see this afternoon’s earnings release containing the detailed financial results for the quarter. I’ll briefly review the highlights and then we can move to questions.

Total revenue for the quarter was $1.5 million compared to $3.1 million in the prior year. For the year, revenues $6.7 million compared to $14.4 million in the prior year. As we discussed in the past, revenues in 2008 were higher than the current year due primarily to a much heavier mix of one-time product sales, primarily sales to Aristocrat and sales of Heads-Up Challenge.

During 2009, as we transition towards a heavier recurring revenue model, we didn’t sell any PokerPro units to Aristocrat and we continue to transition our Heads-up business to recurring model in the U.S.

Looking forward, we expect to continue to balance our recurring revenue amusement business, the product sales in select markets, particularly, outside the U.S.

And in January, as James mentioned, we also announced that we would be transitioning the international PokerPro business from Aristocrat and we’re now operating on a direct basis in all markets.

I believe that represents a real growth opportunity for us in 2010, as we rebuild our market penetration in Europe. So, while the top-line is down considerably, the quality of the revenue stream from the viewpoint of predictability and margin performance has improved.

On the expense front, we implemented cost reduction initiatives across the board in 2009, particularly in the second half. Reducing operating expenses by 46% to $1.6 million for the quarter compared to $3.0 million for the quarter of 2008. For the year, operating expenses were $7.9 million as compared to $12.7 million.

Bottom-line results improved significantly. Net loss for the quarter was $1 million or $0.07 per share compared to a net loss of $1.8 million or $0.16 per share last year. For the full year, the net loss was $5.7 million or $0.48 compared to $7.6 million or $0.70 last year.

EBITDAS was negative $111,000 for the quarter, an improvement of 83% from negative 643,000 last year. For the year, EBITDAS was $1.7 million, an improvement of 49% from negative $3.3 million last year.

In conclusion, our operating results for 2009 improved as we focused on cost reduction and reevaluating our operating plans. Looking ahead, I believe the plans and the foundation are in place to allow for profitable growth. We’re now focused on more favorable markets with less competition and we’re leveraging our asset base to grow higher margin revenues.

I can guarantee you that we’re working hard everyday and are focused on delivering results. We also intend to make the investment community aware of the progress PokerTek is making.

We recently hired a New York based Investor Relations firm to help kick start a new outreach program. With their help, I will be spending much more time for actively meeting with shareholders, buy side analysts, and portfolio managers. We want to make sure that all these groups are more aware of our improved financial performance and our strategy to drive profitable growth.

Operator, we’re now ready to open the call for questions.

Question-and-Answer Session

Operator

(Operator instructions) And your first question comes from the line of Mark Smith with Feltl and Company. Please proceed.

Mark Smith – Feltl and Company

Hi, guys. A handful of questions for you.

Mark Roberson

Okay.

Mark Smith – Feltl and Company

First off, can you comment on any change in demand for the Heads-Up Challenge product in both international and domestic markets?

Mark Roberson

Yes, go ahead, James.

James Crawford

Mark, James Crawford. I would say that what we’ve seen is in the U.S. the market is really slowing down just because the amusement business itself is just in dire straits. The credit markets have dried up for the operators that traditionally purchase units and put them into locations and operate that traditional business. It’s really just diminished to the point that it’s hard to do business, a regular business on that basis.

Internationally, we have had demand in Australia, South Africa and in Europe. So as the dollar I think falls back away from the pound and the euro a little bit, there was created a little bit more demand for PokerPro or for Heads-Up Challenge in those areas. We can’t really predict what happens. We’re getting a lot of interest but no solid continuing orders.

Mark Roberson

Just to add on to that, the Heads-Up Challenge product is continuing to perform relatively well compared to other coin-op products in the field. But the fact is coin-up products across the board in the using space in bars and restaurants are just down year-on-year which makes it tough for operators to operate a successful business, particularly, with all the layers of distribution and margin in traditional market.

And that’s one of the reasons that we migrated our business towards an operator direct model where could cut out some of the layers and some of the margin as we lease directly to operators to build on recurring revenue business.

And again, sort of moving forward, our strategy with this business, we’re going to continue to patiently grow the recurring revenue side of the business and also seek opportunities to sell product as we can, particularly, internationally, to drive cash flow.

James Crawford

The other thing I’ll add about the U.S. market specifically is that restaurants revenue and sales are down pretty significantly. And they’re just very reluctant to give up any dollars of coming through the door. People just are putting them in the music boxes and the pinball machines and the video games like they used to.

Mark Smith – Feltl and Company

So of the 50 Heads-Up Challenges that were put out during the quarter were most of those international event?

Mark Roberson

No, no, most of those were domestic in the U.S and they were primarily weighted towards lease product direct operators. So we’re continuing to put product out. It’s just slower than it was what you saw in 2008, because the economy is weaker. But the demand is still there, it’s just much slower and we’re being much more patient with that business at this point.

Mark Smith – Feltl and Company

And any more color you can give us on the initial results of the installs in Mexico?

Mark Roberson

Yes, at this point, we recently announced the 40th table in Mexico, just a few weeks ago. So we’ve had, as James mentioned, probably the busiest, two months to three months period we’ve ever had in terms of installations. So they haven’t been in the field all that long, but the early results after some of the tables have been in the field two months to three months are that it is going well.

The customers are happy with the product. The product is getting good play. We’re seeing good acceptance of the product. So overall, it’s just like any other business. There are few pockets where tables are performing much better than others and we got a little work to do to continue to manage that business. But overall, the reception has been very, very positive.

James Crawford

And one thing I’ll add is that in the Mexico market it’s the first opportunity we ever have where we’re actually competing against ourselves. So it’s just a business where we have several different entities that we’re distributing directly to, where literally in the same block we may have competing casinos with our same products. So we’re learning to deal with that.

Mark Smith – Feltl and Company

Okay. Looking at your inventory of both Heads-Up Challenge and your PokerPro products is this something where you’ve got ample inventory for the next few quarters, are you going to have to go out and buy or produce more tables?

Mark Roberson

We feel really good about our inventory position at this point on both fronts. Particularly, we were a little concerned that we may run tight on inventory in the first half of this year, prior to completing the transaction with Aristocrat where we took over the inventory that they had previously carried. So after that transaction, we have a healthy portfolio of inventory that we can deploy over the next year.

Mark Smith – Feltl and Company

And then as you move much more to a licensed revenue model, both by getting away from Aristocrat in the PokerPro business as well as moving to a recurring revenue piece in the Heads-Up Challenge product, just looking at your cash burn, is this something that we should be concerned about? Do you have the cash to be able to fund any growth or increase in demand for your tables in either business?

Mark Roberson

At this point, we’re lucky that we have a very healthy inventory position that we can use to deploy to fund revenue growth. And also as we’re turning the corner from negative EBITDA and burning cash and operations to being an EBITDA positive company, where our revenues exceed our cash operating expenses. We’re in a much healthier position from that point of view.

We also have in place our line of credit facility with Silicon Valley Bank. As we’ve said in the past, that remains intact. We’ve not tapped it in the past. And we still haven’t tapped into that yet. So we have some cushion to be able to fund future growth with inventory position that we’ve got. As with most CEOs and CFOs, I’d always love to have more cash in the balance sheet. But being lean to some degree produces healthy business habits.

Mark Smith – Feltl and Company

Great, thank you.

Mark Roberson

Thanks, Mark.

Operator

(Operator instructions) Gentlemen, it appears there are no other questions for you today.

Mark Roberson

Okay. Thank you and I appreciate everybody being on the call and participating. We’re excited about 2010. Thanks and have a good evening.

Operator

Ladies and gentlemen, that concludes today’s conference. Thank you for participating. You may now disconnect. Have a great day.

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Source: PokerTek, Inc. Q4 2009 Earnings Call Transcript
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