Executives
Traci Mangini – SVP, Corporate Finance
Clarence Chung – Chairman and CEO
Andy Tsui – Chief Accounting Officer
Analysts
Paul Sonz – Paul Sonz Partners
[Jim Crabb] – No company listed
Elixir Gaming Technologies, Inc. (EGT) Q1 2010 Earnings Call May 12, 2010 8:30 AM ET
Operator
Welcome to the Elixir Gaming Technologies, Inc. first quarter 2010 earnings conference call. (Operator instructions) As a reminder, this conference is being recorded today, Wednesday, May 12, 2010. I would now like to turn the conference over to Ms. Traci Mangini. Please go ahead.
Traci Mangini
Thank you, operator. 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, let me review the Safe Harbor Statement. Some of the statements that the company will make on this conference call such as statements about 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 first quarter earnings and recent corporate developments. Following that, Andy will review in more detail our financial results for the quarter. Clarence will then conclude our prepared remarks with our second 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?
Clarence Chung
Thank you, Traci, and good morning, everyone. Elixir Gaming posted continued solid improvement in both gaming participation revenues and consolidated adjusted EBITDA for the first quarter 2010. Our performance marks strong progress following the refocusing of our operations and streamlining of our cost structure since 2009.
Andy will go through the financials in more detail, but here are some of the highlights on our performance. Total gaming participation revenues for the first quarter improved 15% sequentially to a record $2.8 million largely driven by a higher installed gaming machine base and slightly improved consolidated average net win of $107. We continue to adhere to our strict cost controls and as a result cash SG&A was $1.4 million for the first quarter of 2010, below our prior guidance range of $1.5-1.8 million and down 45% from the prior-year period.
Adjusted EBITDA which we define as earnings before interest, tax, depreciation, amortization and non-cash expenses was $1.3 million for the first quarter 2010 which represents a sequential gain of 64% from the prior quarter and this is our fourth consecutive quarter attaining positive adjusted EBITDA.
I would now like to take this opportunity to highlight some recent operational achievements and corporate developments that provide me confidence in our future success. Our core gaming machine participation operations continue to gain positive momentum. In mid-February 2010 we executed quickly on our December 2009 expansion contract with NagaWorld and placed approximately 110 units out of the total contracted 200 additional machine units.
In April we had approximately 40 machines and the remaining approximately 50 gaming machine placements under these contracts are on target for installation before the end of the second quarter 2010. As a result, we anticipate 640 gaming machines in operations at NagaWorld by the end of June 2010 which represents remarkable growth since our first placement at NagaWorld approximately 15 months ago.
Also despite the growing installed machine base during the recent quarters the average net win per unit for our operations at NagaWorld have remained strong. We attribute it 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 Pehn area in early 2009. In fact, average net wins for our operations at NagaWorld went over $200 for the months of November and December 2009 and January 2010, and despite the addition of approximately 110 machines in mid-February and 40 machines in April we are pleased to say the net wins held strong at $194 per unit per day for the first quarter and $183 in April.
We attribute the slight decline to the decrease in machine placements in the early months of this year and the typical ramped up period associated with new machine placements. The strong results at NagaWorld has resulted in attractive cash flows for the company. As you may recall, under our July 2009 expansion contract we placed 200 additional machine seats for which we pay a commitment fee to NagaWorld of $5.84 million.
For these 200 units we are entitled to collect on a daily basis 100% of the net win per unit per day starting from the first day of operations until we have received the total cumulative amount of $7.3 million which is $5.84 million commitment fee, our share of the net earnings and winnings. As of March 31, 2010 we had collected the full $5.84 million commitment fee in cash from these additional machines representing an impressive payback period of approximately 6 months on our commitment fee.
We have similar collection terms for the 200 additional machines under the December 2009 contract. In mid-February 2010 we began collecting 100% cash of the net win on a daily basis on the additional machines placed so far under the December 30, 2009 expansion contract. As of May 1, 2010 we have recouped approximately $1.3 million from these initial placements of the total $4.1 million commitment fee.
Turning to the Philippines, as part of our initial interest to optimize performance in this market which includes the reallocation of gaming assets within the market, we closed down one underperforming venue in January 2010 and we deployed certain gaming assets to higher performing venues. As a result our installed machine base declined 3% from December 31, 2009 to March 31, 2010.
We continue to refine and redeploy our gaming machine base in the market and as of May 1 our operating installed base in the Philippines had increased 8% since the end of the first quarter to nearly 900 units across six venues in operations. Average net win for our Philippines operations was $56 for the first quarter, which was down 2% from $57 in the fourth quarter of 2009. In April average net win in this market improved to $59 on the higher machine base. The fluctuations in average win per day in this market are due to the just discussed strategic initiatives to drive longer-term improved performance.
We remain focused on not only maximizing our gaming machine performance for our existing operations but also adding new, high potential venues. On April 9, 2010 we entered into a machine participation agreement with Grand Golden Company Ltd., to place approximately 60 electronic gaming machine seats on a participation basis at its new Grand Golden Casino in Kampong Cham Province, Cambodia near the Vietnam border.
This is an attractive opportunity for us as it not only provides us the ability to expand with minimal capital expenditure as we anticipate using machines from existing inventory but enables us to enter a new and well trafficked location in Cambodia with partners that are established gaming operators in the region. We anticipate the full deployment of the 60 gaming machine seats in November 2010 following the completion of the renovations of the design floor, [inaudible] by the venue owner.
In addition to our core gaming participation operations we have increased our focus on improving our Dolphin operations. In particular unlocking some of the value in our under-exploited assets; our Dolphin gaming chairs. These efforts include increased marketing and the development of gaming platforms.
Initial interest for our existing and potential new customers has been strong and in April 2010 we secured our first gaming [club] order to Melco Crown Entertainment’s City of Dreams Casino Resort in Macau. The order, which also includes some gaming chips, is valued at revenues of approximately $370,000 Australian and is expected to be recorded in the second quarter of 2010.
Lastly, we continue to explore means to strengthen our balance sheet and financial flexibility. As you will recall, in April 2008 we issued an unsecured promissory note to Elixir International, a wholly owned subsidiary of Elixir Group Ltd., our principle shareholder. The note was subsequently amended in November 2008 and again most recently in July 2009 under which we deferred repayment of principle and interest on the outstanding principle balance on the note of $9.2 million until July 2010 while interest of 5% continues to accrue.
It bears mentioning that on April 20, 2010 in relation to the sale of Elixir International by Elixir Group Ltd., Elixir International signed and transferred all of its rights and obligations under our note to Elixir Group. The assignment and transfer has no impact on the note terms or the repayment obligations except that when the repayment schedules resume in July 2010 the monthly repayment of principle and interest under the note [inaudible] or at the direction of Elixir Group instead of Elixir International.
With solid momentum in our overall core gaming participation operations, the successful refocusing of our operations and the execution of our cost reduction initiatives improved financial flexibility and attractive expansion opportunities. We believe we are positioned to grow earnings and shareholder value in the future.
With that let me turn the call over to Andy to review the financial results in more detail. Andy?
Andy Tsui
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 machines and electronic card shuffling system which were sold to Shuffle Master in April 2009 has been reclassified as discontinued operations.
Total revenue for the quarter was $4.4 million compared to $4.5 million in the fourth quarter of 2009 and $1.7 million in the first quarter of 2009. Slot participation revenue was a record $2.8 million for the first quarter. Average daily net win per unit improved to $107, up 2% from the fourth quarter 2009 and up 73% from $62 in the first quarter of 2009. Our installed base of machines in operation during the quarter increased 7% from 1,299 units as of December 31, 2009 to 1,384 units as of March 31, 2010.
Slot participation revenue from NagaWorld, our sole venue in operation in Cambodia, increased to approximately $2 million during the quarter, up 32% from fourth quarter 2009 levels of $1.5 million reflecting a higher in-store machine base at NagaWorld. Average net win per unit in Cambodia was $194 for the first quarter, a modest decline of 1% from $196 in the fourth quarter of 2009 given the addition of 111 units at NagaWorld during the quarter. Our installed base of machines in operation in Cambodia increased 25% from 440 units as of December 31, 2009 to 511 units as of March 31, 2010.
In the Philippines slot participation revenue for the quarter was approximately $883,000, down 13% from the fourth quarter 2009 level of $952,000 and up 33% from the first quarter 2009 level of $628,000. Average net win for the first quarter for the Philippines was $56, down 2% from $57 in the prior quarter and in the same period last year. Our installed base of machines in operations in the Philippines decreased slightly by 3% from 859 units at the end of December 31, 2009 to 833 units as of March 31, 2010.
The quarterly sequential declines in revenue, net win and installed machine basis in the Philippines reflects short-term fluctuations in average net win in this market due to the execution of a strategic initiative to optimize gaming machine performance in part due to the reallocation of machines within this market.
Revenue for the quarter also included $121,000 from Dolphin table games [seatery] which decreased from $635,000 in the fourth quarter 2009 period and was up from $78,000 in the year-ago period. We attribute the sequential decline to the lumpy nature of the gaming trip order and we believe it is not representative of the future growth potential for this business division.
In addition, our Dolphin non-gaming division which is primarily comprised in the manufacture and sale of automotive components contributed revenue of $1.4 million during the quarter, roughly flat with the fourth quarter 2009 and up 108% from $0.7 million in the first quarter of 2009. Adjusted EBITDA was $1.3 million for the quarter compared to $0.8 million in the fourth quarter of 2009 and a negative adjusted EBITDA of $2.6 million in the first quarter of 2009.
Cash SG&A expenses for the quarter was $1.4 million which was below our guidance range of $1.5-1.8 million. Cash SG&A expenses decreased 14% from $1.7 million in the fourth quarter of 2009 and 45% from $2.6 million in the prior-year period due to our aggressive cost reduction initiatives implemented over the last year and a half.
We incurred tax expenses of approximately $235,000 in the first quarter. This was mainly due to reported taxable income during the quarter from our operations in Cambodia, partially offset by losses in other business entities. The proper tax in Cambodia was approximately 20%; however we are currently working on an initiative which could minimize our future tax expenses for our Cambodia operations.
Our consolidated net loss for the quarter was $1.7 million or $0.01 per share on a weighted average share count of 115 million shares. This compares to a net loss for the fourth quarter of 2009 of $16.7 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 assets of $13.7 million, our net loss was $2.6 million or $0.02 per share for the fourth quarter of 2009. The net loss for the first quarter of 2009 was $6.2 million or $0.05 per share on a weighted average share count of 115 million shares.
Turning to our balance sheet, as of March 31, 2010 we have $5.1 million in cash as compared to $4.2 million as of December 31, 2009. The increase in cash balance was the result of strong cash flow from our Naga operations offset by capital expenditures for new and used machine purchases for the NagaWorld expansions and the repayment of $2.7 million to Naga which accounts for the remaining 50% payment of both the commitment fees for the expansion of gaming machine and one-time nonrefundable contract amendment fees.
I will now turn the call back to Clarence to discuss our second quarter guidance and future outlook. Clarence?
Clarence Chung
Thank you Andy. Before we open up the call to your questions I would like to discuss our future outlook. As you can see we have achieved solid improvement in refining our core participation model and have successfully executed our cost reduction initiatives.
These achievements have provided us quality recurring cash flows and adjusted EBITDA and a solid foundation for continuous earnings growth. Based on this, I would like to provide you some of our near-term expectations.
Given continued strength of NagaWorld operations our higher installed machine base and strict cost controls we expect to achieve quarterly sequential improvement in both total gaming participation revenues and consolidated EBITDA for the second quarter 2010. Based on our cost containment initiatives and current scale of operations we expect second quarter 2010 SG&A cash expense in a range of $1.5-1.8 million. We expect that the consolidated gaming machine installed base will increase to approximately 1,500 seats by the end of the second quarter 2010.
Looking further ahead we continue to actively pursue additional placement opportunities in new potential markets where we can leverage our expertise and relationships and capitalize on the expansion opportunities that exist in the emerging gaming markets in Pan-Asia. For such new projects we are seeking an operator role. Our target markets include border cities in Cambodia, with strong filler markets from neighboring countries such as China and Viet Nam as well as opportunities in new countries such as Viet Nam and Laos.
We are encouraged by the pipelines of opportunities in these markets and are evaluating the potential projects. We look forward to providing more details to investors on such opportunities as they develop and mature. We intend to sort our future target deployment trends through our existing inventory of gaming machines which as of March 31, 2010 was 380 seats as well as through the purchase of new and used gaming machines where appropriate.
Given our strong current and projected cash flow generating capabilities from our operations at NagaWorld and our relationships with gaming equipment manufacturers we anticipate funding of our existing targeted 2010 expansion plan from cash on hand and expected net cash inflow from operations.
In summary, I am pleased with our progress in driving continued improvement in operating and financial performance with solid momentum in our core gaming participation operations and a much reduced and comfortable cost structure we are even better positioned to maximize returns on our existing operations and capitalize on the growth opportunities that exist in the emerging Pan-Asian gaming market.
Let’s now open up the call to your questions.
Question and Answer Session
Operator
(Operator Instructions) The first question comes from the line of Paul Sonz – Paul Sonz Partners.
Paul Sonz – Paul Sonz Partners
I have a question in terms of the cash. We can do this a couple of ways; one is an estimate of cash you will have at the end of the second quarter. Then as a detail to that I was interested in the percentages we are getting at NagaWorld now because you get 100% until you get paid back. There are two separate groups of machines and I wondered if you could explain where we stand in terms of being paid back on the two commitment fees that we paid?
Clarence Chung
In fact we can look at it from two aspects. One, as I mentioned the cash on hand as of end of March is about $5.1 million U.S. whereas today it is approximately $5.5 million. So without significant capital expenditure we are gradually building up our cash position for future expansion, etc. So indeed from that perspective we are quite comfortable in terms of our cash position.
As Andy mentioned also we expect to recoup the balance of the cash prepayment or commitment fee paid to NagaWorld in the next 4-5 months time. So in other words, obviously we will have additional $3-4 million coming back in to the cash pool. So in that case I would say that we are quite comfortable in terms of the cash and that is why we are even looking at new projects that would incur capital expenditures and we do think we are capable to do this and fund it internally.
Paul Sonz – Paul Sonz Partners
By the end of the second quarter you would expect to have approximately $7-8 million in cash on the balance sheet?
Clarence Chung
I would say probably it may not be by end of second quarter because we are only about 45 days from end of second quarter. I would say in the next 3-4 months time we will add $3 million more.
Paul Sonz – Paul Sonz Partners
From the $5.5 million we have today?
Clarence Chung
Correct.
Paul Sonz – Paul Sonz Partners
In terms of you talk about having an operator role going forward. Just as an idea, I am not sure whether this entails if you might build your own facilities but use of the word operator indicates that is a possibility. I have no idea what the cost of construction would be in that part of the world. Is there any guidance you can give us in terms of if you did choose to build something what we could think of as…would the size of facilities be the same as the Melco clubs for instance in Macau and if so what kind of construction on a per square foot basis we could look at?
Clarence Chung
I think the meaning of an operator can have multiple meanings. Obviously we are the “operator” in our NagaWorld operations. In other words, we help run the slot machines there. I would consider myself an operator in NagaWorld.
With that said, that is one meaning. Obviously while I don’t exclude ourselves or the company that we are not going to do more operator roles which one obviously can be a NagaWorld kind of operation or secondly we can be an operator in other casinos. So I wouldn’t sort of preclude ourselves and restrict ourselves from that.
To answer your second question in terms of the building costs I would say it depends obviously on one, the countries and the location as well. I must say while the building costs can be high but you can build a good enough facility. I just think of a very simple example like I think NagaWorld the property as I understand the hotel wing properties the budget for that is less than $100 million. So indeed in Cambodia you can build things in that magnitude within $100 million whereas in the new Singapore result world or in [inaudible] it costs billions of dollars.
Paul Sonz – Paul Sonz Partners
When you talk operator I assume that means you have equity ownership in the facility or in the operation. Is that correct?
Clarence Chung
It depends. Again, with NagaWorld I have 25% interest in all of the net wins. If you consider that as an ownership interest, I own 25% of the revenues from the slot machines.
Paul Sonz – Paul Sonz Partners
The only thing I think about there is at some point the contract comes to an end and then they could get another operator or something like that. So the question is going forward I would assume what you are getting at is what you really want is a position where that can’t happen. That you have something that is more enduring?
Clarence Chung
I must agree this is one of the options. In other words you don’t have the [tenure] restrictions and limitations. Maybe by then you can have 100% shares of the revenues plus you are more in the driver’s seat. Again, that is one of the options.
Paul Sonz – Paul Sonz Partners
I look forward to you having further delineating your plans when they become clear.
Clarence Chung
We would love to and we will give more color as those projects become more mature.
Operator
The next question comes from the line of [Jim Crabb] – No company listed.
[Jim Crabb] – No company listed
I understood the gaming tax in Cambodia was about 2% and that was a tax rate that would last until 2018. Is that in fact true?
Andy Tsui
The gaming tax is 2% applied to certain entities that would have an agreement with the Ministry of Economic and Finance from what I understand. The proper tax is actually 20% from a commercial entity.
[Jim Crabb] – No company listed
I guess it seemed to me if the commercial entity was a gaming entity I made the assumption the lower tax would apply. That apparently wasn’t the case. You said you were looking at some kind of an initiative, I believe is the word you used, that might allow some tax relief going forward. Can you give us any idea what that amounts to and what the likelihood is? That is a substantial amount of money. Obviously it is 20% of the win unit per day that disappears from the commercial entity.
Andy Tsui
We are working on the direction we were basically discussing before. We are looking forward to working with the Ministry of Economic and Finance and getting a more preferential treatment on the revenue or the tax on profits. So at this point we are still working with them and once we finalize the long-term agreement we will be able to enjoy the tax benefits as a gaming company.
[Jim Crabb] – No company listed
I mean this in the best of ways but what I am trying to figure out is we have discussed the enormous opportunities in the Pan-Asian area for participation gaming or perhaps opening a facility. You have talked about a higher quality, more robust business model for the last six months or so. I have assumed that. I think somewhat like Paul said that means a greater amount of ownership or participation in management or partnership or some such thing. With all of those opportunities available we have announced since Naga one 60 unit installation.
Can you kind of address that? What the priorities are to get the machine count moving up in some kind of a reasonable time period. I realize we are generating cash now every day so that at least takes us off of a respirator from a corporate standpoint. Can you kind of give me some color as to where you are headed and what we might expect to hear going forward because it seems to me from what I have heard in the past the original guys were talking about thousands and thousands of machines. I think you have correctly put this thing on a different tact and probably a more appropriate one. What do we do from here to get the machine count running higher? What is involved in that?
Clarence Chung
This is a very difficult question. I will try to tackle it from this perspective. Obviously in the world without resources and limitations we can do everything. But unfortunately where we are, and Elixir Gaming as a company has been in certain of those resources we are living in a resources restriction. So indeed, while obviously I myself want to grow the machine count. Having said that we have the CapEx requirements as well as the financing resources limitations. It is kind of trying to balance all of the various factors I just mentioned. So indeed in order to build the machine count it could may well be that we do the following; a joint venture partnership as you mentioned, self build or doing the traditional machine placement.
I think the bottom line from our perspective is we are trying to grow the shareholder value or the stakeholder value. Indeed, I would say that this is my number one priority. So indeed, I think living within the constraints and trying to work around the constraints in order to sort of build a company and build a business model to the next level is what my everyday thinking is. Indeed we are working on a couple of interesting opportunities I would love to share more with all of the shareholders when it is more mature.
[Jim Crabb] – No company listed
At some point last year we readjusted the note terms with at that time it was Elixir International and now Elixir Group. Is there any opportunity for any leeway with that note? Have we heard any more or is it under discussion whether we might get some more forbearance on that note for awhile?
Clarence Chung
We will. Yes, in fact I am probably more concerned or as concerned as yourself and other shareholders than anyone else in this particular matter. Given the fact this is one of my constraints; the financial resources constraints. So in other words, while I obviously Elixir Group has been very supportive even up to today. So indeed from my perspective I think it would be also in their interest too because if we come across certain good opportunities and indeed we are bound by certain of the financial resources and restrictions and if they can relieve us of this by deferring so we can do those projects which I would say at the end of the day it would benefit also them as one of our major shareholders.
So I would say they have always been supportive and indeed they are supportive while we speak and indeed there are dialogues between us, the companies and Elixir Group, in terms of the repayment [inaudible] is continuing. Understand that the more close to July 1 probably the urgency is more high from our perspective. Again, I am more concerned than anyone else in this respect.
[Jim Crabb] – No company listed
Last year sometime and I am trying to think of it was I believe at one of the conferences you were at, you had talked about an ideal-sized casino and you didn’t want to into a facility where you didn’t believe you could place at least 150 machines over some reasonable period of time and you would be able to do at least $125 per day. If you were to build a facility, a physical plant, for 150 machines in Cambodia or Laos or Viet Nam do you have any idea, and this gets back to the question Paul asked, what a facility of that size, a slot operation only would cost you? It seems like it would be sort of a vacant building. It doesn’t seem like expensive construction even in the United States let alone in Cambodia. Would you have any thoughts about that?
Clarence Chung
I can make reference to by looking at certain of the existing casinos, as I mentioned earlier on, you can build something like a 5-6 star resort as those in Macau which easily takes billions of dollars. But, in markets like Cambodia or Laos, etc. and in particular some of those border casinos I would say the amount required is much, much less than that. I don’t think even if you want to build something like this in that area they would appreciate that but probably it is [overly] done for that particular market. I would say there good enough properties should be sufficient for that particular market.
If I look around those obviously you can build 1-3 stories and definitely the cost of those would be a lot less. Again, obviously while we would look at the different options and different opportunities and obviously evaluating what sorts of financial resources we have as of today.
[Jim Crabb] – No company listed
I am not trying to put you on the spot any more than I have to, but again if I build a place that would house 150 slot machines and I guess I would assume that would be on one floor would it cost me $2 million, $10 million or $20 million to build a building over the top of those machines that would keep the rain out and the dust out?
Clarence Chung
I would say that while all of the above can be correct because you can build a casino warehouse with $2 million and probably you can still do that for $5 million or even $10 million. I would say it depends. Indeed all of your answers are correct and can be correct.
[Jim Crabb] – No company listed
Do you have any thoughts about if the company were to go into something like we are talking about number one I would assume it would be a gaming establishment so there would be a 2% tax. Is that a correct way to think? I know I am putting your feet to the fire here a little bit but I think it is important. I need to know the answers if I can get them.
Clarence Chung
I would say this would properly applied and it is a government license in Cambodia. I would say the tax rates would be similar but not necessarily 2%. It would be I would say something in that range because I am just taking Naga as an example. They struck a deal with the government a couple of years ago to get their current existing tax rate to 2%. So I am not sure. Obviously if a new license is being discussed and negotiated today the rate might be different.
[Jim Crabb] – No company listed
So this isn’t just a flat 2% tax for whomever opens a casino? It is a negotiated thing with the gaming authorities in the country?
Andy Tsui
That’s correct.
Operator
There are no further questions at this time.
Clarence Chung
If there are no further questions, thank you operator. We would like to thank our shareholders for their continuing support. We look forward to updating you on our progress in the near future. Thank you so much.
Operator
Ladies and gentlemen that concludes the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Have a great day everybody.
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