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Global Cash Access Holdings, Inc. (NYSE:GCA)

Q4 2013 Results Earnings Conference Call

March 11, 2014 05:00 PM ET

Executives

Todd Valli - VP of Corporate Finance and IR

Ram Chary - Chief Executive Officer

Randy Taylor - Chief Financial Officer

Analysts

David Bain - Sterne Agee

Jason Kreyer - Craig-Hallum

Jeff Bronchick - Cove Street Capital

Matthew Kempler - Sidoti & Company

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Global Cash Access Holdings, Incorporated 2013 Fourth Quarter and Full Year Earnings Conference Call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference call will be opened for questions. This conference is being recorded today, Tuesday, March 11, 2014.

And I would now like to turn the conference over to Todd Valli, Vice President of Corporate Finance and Investor Relations. Please go ahead, sir.

Todd Valli

Thank you. And welcome everyone to our fourth quarter and full year 2013 earnings conference call. Joining me on today's call is President and Chief Executive Officer, Ram Chary and Chief Financial Officer, Randy Taylor.

Before turning the conference over to Ram, please note the following. First, we have posted our earnings release to the Investor Relations section of our corporate website at www.gcainc.com. Second, if we use any non-GAAP financial measures for references, we will provide the appropriate GAAP financial reconciliation on our website.

Third, a replay of today's call will be posted on our website after 5:00 p.m. Pacific Time. Fourth, please note that today’s discussion contains forward-looking statements based on the environment as we currently see it and are subject to a number of risks and uncertainties. These include, without limitation, statements regarding market and segment trends, conditions impacting our business and the overall gaming industry for 2014 and future periods.

The anticipated impact of less favorable pricing terms associated with customer contract renewals in 2014; the anticipated impact of certain customers not renewing their contracts; flat-to-low industry growth; limited domestic casino openings in 2014, projected increases in our kiosk sales and service business in 2014, continued investment with respect to the company’s technology infrastructure and personnel, our product pipeline and ability to introduce new products and services and our projections and guidance regarding cash EPS, adjusted EBITDA and other financial metrics.

And fifth, for factors that could cause actual results to differ materially from those described in our forward-looking statements, we refer you to our SEC filings and the risk factors set forth therein.

With that, I’m pleased to introduce our President and CEO, Ram Chary.

Ram Chary

Thank you, Todd. Good afternoon everyone and thank you for joining us today to discuss our fourth quarter and full year 2013 financial results. I was drawn to GCA; because I have a great passion for their payment space and I believe that my background uniquely matches our go forward opportunity.

In my short time here, I have been most impressed by the depth of talent that we have in our organization. We have an ideal balance of gaming and payments background and I truly believe our recent leadership appointment created unified team that will fuel the company’s growth. I am personally very committed to building deep client relationships. And I’m fortunate to be joining a team that has proven to have the deepest in the industry.

Our dominant market position provides for an enviable foundation from which we will be able to grow. In any investment we make we will always be mindful of our gaming core to ensure that overtime our gaming clients ultimately benefit from our expanded capabilities.

We also believe that as an innovator in our space, we will be able to capitalize on global opportunities. Obviously all of these signs of optimism must lead to results.

To that end, I’ll turn it over to Randy to review fourth quarter financial results and provide 2014 fiscal guidance. And I will be remiss if I didn’t congratulate Randy on his new responsibilities, I’m looking forward to working with you.

Randy Taylor

Thanks Ram and good afternoon everyone. Let’s start by reviewing our two primary non-GAAP performance indicators; cash EPS and adjusted EBITDA as compared to our full year guidance. Our cash EPS, which is defined as net income plus equity compensation expense, deferred income tax expense and amortization expense provided by diluted shares outstanding were $0.78 for the year, consistent with our guidance of between $0.74 and $0.83.

Weighted average diluted shares for full year totaled $67.2 million, which is spot on of our guidance. Adjusted EBITDA, which excludes non-cash stock compensation expense was $71.2 million for the year, again consistent with our guidance of between $70 million and $74 million.

For the quarter, our cash EPS of $0.19 on 67.4 million diluted shares and adjusted EBITDA was $17.1 million.

Now for our fourth quarter segment information, on a segment basis, cash advanced revenues, operating income and operating margins were $56.8 million, $14.5 million and 26% for the fourth quarter.

Cash advanced revenues increased by 3% compared to the same period last year, primarily due to growth in some of our international markets. Cash advance, operating income decreased by $0.9 million or 6%, primarily due to the margin compressions on new and renewed business.

ATM segment revenues, operating income and operating margin were $66.2 million, $6 million and 9% for the fourth quarter. Revenue decreased by $3.6 million or 5% as compared to the same period last year. The decrease in revenue was primarily a result of lower transaction volume and our same-store locations combined with previously disclosed lost business. ATM operating margin decreased by 50 basis points as a result of margin compression on new and renewed business and transaction volume decreases.

Check services segment revenues, operating income and operating margins were $4.8 million, $2.5 million and 52% for the fourth quarter. Check services revenues decreased by 15% primarily due to fewer transactions which included lost business and overall decline in same-store transaction volume. Margin percentage for Q4 was consistent with the same period last year.

Our other segment revenues, operating income and operating margins were $12.6 million, $5.7 million and 45% for the fourth quarter of 2013. Of note, our other segment includes the result of kiosk sales, kiosk parts and services and central credit operations among other ancillary results. Other revenues increased by $6.9 million or higher 121% primarily due to higher kiosk sales. Other segment operating income increased by $2.8 million or 97%, again due to higher kiosk sales; other segment operating margin percentage increased by 6%.

The kiosk business has margins that are below that of the other components of the segment. As kiosk sales have grown proportionately faster than the rest of the segment, the overall impact on the margin percentage for this segment is a net decline compared to same period in the prior year.

Corporate operating expenses decreased by $0.8 million or 4% to $17.4 million for the quarter due to lower non-cash stock compensation expense. The other company metrics to note, same-store cash to the floor our best indicator of industry trends showed overall growth accretion of approximately 2.5% for both Q4 and the full year 2013 compared to same period last year. The same-store cash performance was driven by both credit and debit card transactions of the Cash Access segment. Combined credit and debit transaction volume was up 4.8% and 4.1% for Q4 and the full year, respectively.

ATM same-store cash to the floor was basically flat at less than 1% growth for both Q4 and the full year. Same store transaction volume was down 2.9% and 3.2% for Q4 and the full year respectively.

Looking briefly at the balance sheet, as of December 31, 2013 cash and cash equivalents were $114.3 million. Please note that our daily cash balance fluctuates significantly due to our large settlement receivables and settlement liabilities and the ultimate timing of when cash received from the issuing bank and when we reimbursed our casino customers.

As of December 31, 2013, our total borrowings outstanding were $103 million and our leverage ratio was approximately 1.5 times. Our total capital expenditures were $15.1 million for the full year 2013 of which $14 million was spent and $1.1 million was accrued but not yet paid as of December 31st. Capital expenditures were consistent with our previously provided estimates of between $14 million and $15 million.

For the full year of 2013, we repurchased approximately 2.6 million shares of our common stock for approximately $18.2 million under the $40 million maximum share repurchase program approved in late 2012. The average price per share repurchased in 2013 was $7.10.

Now for the 2014 guidance. Full year ending December 31, 2014, we estimate that cash earnings per share will be between $0.82 and $0.87 on diluted shares of approximately 67.1 million. Adjusted EBITDA will be between $73 million and $76 million. Estimated outlook is based primarily upon the combination of following assumptions.

Growth in our kiosk sales and service business in 2014, flat to low growth in the domestic gaming industry, the anticipated impact of less favorable pricing terms associated with our customer contract renewals in 2013 and 2014 and reduced interest rates paid on our credit facility. We also expect 2014 capital expenditures to be between a range of $15 million to $18 million.

That concludes my portion of the call. Now I will turn the call back to Ram.

Ram Chary

Thank you, Randy. With that let me turn the call back over to the operator for questions.

Question-and-Answer Session

Operator

Thank you, sir. We will now begin the question-and-answer session. (Operator Instructions). And our first question is from the line of David Bain with Sterne Agee. Please go ahead.

David Bain - Sterne Agee

Great, thank you. Ram, have you done any customer collaborations at this point to your concerns or otherwise that may cause you to make any technology or other changes to the core business?

Ram Chary

The answer to your question is, yes I’ve reached out to several of our clients and been fortunate to have several meetings, got a great feedback relative to our capabilities, our position in the market. No real point of concern although we have got a lot on our place to execute against, but we’re (inaudible).

David Bain - Sterne Agee

Okay. And then you also spoke briefly about capital allocation in terms of strategic acquisitions, maybe if we can get a little bit more detail from an accretion basis, looking for those things to be additive within 12 months or are you looking for more tuck-in, something more transformative, anything like that? And then are you satisfied with the current buyback policy in place right now?

Ram Chary

Well, as far as the buyback policy goes, clearly both Randy and I inherited the current repurchase program. So that’s something we are evaluating going forward. Relative to your broader question on capital allocation, we are going to be opportunistic. A lot of that is market driven and opportunity driven. And we are going to keep our eyes on the market and see how potential opportunities might fit into our strategy. And we will adjust accordingly. But in the few short weeks I’ve been here, I think it would be premature to specifically identify an acquisition.

David Bain - Sterne Agee

Okay. And then just one more if I could, can we get a little bit of specifics on the quick ticket product? As far as we know it’s in one California casino, can you discuss any further proliferation, any data points such as player acceptance, more (inaudible) on the floor since they install it and then any potential twist to the product?

Randy Taylor

This is Randy. I think what we can say is that we’ve identified another locations that it will be going live in. I think we’re still working through some of the folks with it and still working through the -- by itself but it’s not at a point where it’s going to be released floor though our products. So right now we’re just really in two locations. And I don’t think we really have a lot of data to share at this point in time.

David Bain - Sterne Agee

Okay. Thank you.

Operator

Our next question is from the line of George Sutton with Craig-Hallum. Please go ahead.

Jason Kreyer - Craig-Hallum

Hey guys, good afternoon. It’s Jason on for George. Ram, just wondering if you can maybe talk broader about any pivoting of the strategy that you would expect? I know David had more of a focus, sorry more of a background in the gaming industry, your background is more so payments and just talk about anything that you’ve learned or any plans that you have in the month or so that you have been there?

Ram Chary

As I suggested in my opening remarks the fact we have a very dominant position in the gaming space, it’s something that I’ve embraced and will continue to embrace as a company and we’re not going to get away from that core. So when think about potential acquisitions or acquiring capabilities if you will, they will be in directions that ultimately help us in the gaming marketplace. So, we’re going to do things consistent with gaming, as we go outside of gaming, I would hope and intend for us to be able to bring those things back into our gaming footprint. So yes by contrast I think previously the company had a very gaming centric view. I view us to be in the gaming market, but we’re clearly a payments company.

Jason Kreyer - Craig-Hallum

Okay. And then you mentioned in the press release about pricing pressures and just wondering if you can give an update, if you have seen changes there or if it’s mostly in line with kind of the commentary that we’ve had in the past about pricing pressures. And any expectations as far as 2014, if you expect further changes or just to be flat line from the last two months?

Ram Chary

I think the description we previously provided is in line with where we see the market today. I would maybe say the obvious by saying the larger the client commitment and the large the volume that we’re dealing with, sometimes we experience a more compression than with some of the smaller ones. And so as you kind of connect the dots through some of our renewals and key opportunities going forward, you might be able to draw that conclusion. But otherwise, I think it’s very consistent with what we have told you.

Jason Kreyer - Craig-Hallum

Okay, thanks. And then just last from me, when you were running through the numbers or I guess when Randy was running through the numbers, I think it was cash advance, you’d said, there was more -- there was some growth there from international markets. And just wondering if you could talk about specifically what you’re doing in internationally and what the plan is going forward?

Ram Chary

Well to-date, our international focus has been very targeted to a few specific regions, the UK and Canada in particular we’ve had great success, we clearly dominate the markets in UK. And I think our results show that. I think we’ll continue to be very targeted and optimistic in terms of how we try to expand that focus going forward, that is where we’ve been, we have been very successful.

Jason Kreyer - Craig-Hallum

Any opportunities in Asia? I know we’ve talked about in the past, maybe pursuing that market, I was just wondering your thoughts…

Ram Chary

Well, without going to a ton of detail, the Macau market clearly is a gaming market; it’s very large, very significant, the largest in the world. It’s a place we have played and we’ll continue to need to play. There are certain dynamics in that market, that are very, very different that are meaningfully different than the U.S. market. So as you kind of peel those back, our opportunity is not as large and obvious as you would think, but still place we need to be, we intend to be and we’re making meaningful investments to have a presence there.

Jason Kreyer - Craig-Hallum

Great. Thank you.

Operator

Our next question is from the line of Jeff Bronchick with Cove Street Capital. Please go ahead.

Jeff Bronchick - Cove Street Capital

Good afternoon. How are you? Just general question, so obviously it’s very early days, but maybe just some general comments on what you know today about this company versus what you thought you know when you came in and just more of a general as you start formulating longer term strategies, maybe some updated comments on that? And then the second issue would be just maybe some help or just some of your thoughts on your methodology for people and the team and some of the changes you’ve made recently and sort of what you see as things you may need in the future?

Ram Chary

Yes. I tried to highlight a couple of key ones in my opening remarks, but I’ll go back through them. I mean in the few weeks that I’ve been here, it’s different from maybe my impressions one, very, very impressed with the depth of talent we have in the company. And I think there are lot of great smart capable people here. And that’s very encouraging for me because it’s the great base to build off of. And two, I’ve been surprised that our market dominance and how deep our client relationships are. Again that’s a great foundation to build off of and it’s not that I thought it was poor previously, but it seems to be much more substantial than I’ve thought, so those are great surprises and positive surprises as I entered the role.

Relative to how I think through people, that starts from the Board and the Board’s recruitment of me that they wanted to take a different approach relative to being more aggressive about growth and growth opportunities. And fundamentally, I just needed a team around me who embrace that shift in focus.

So I think I have a team around me or I should say I strongly believe I have a team around me that embraces that go forward, understand how we are going to do some things different from the past and understand how we are here to grow our business and expand our share. A lot of people think because we have dominant share, it can’t be expanded, but in the last few year it’s eroded and I intend to bring that back.

So the team around me I think embraces that. It’s a team that I think will fuel our growth and it’s a collaborative team which is really essential for being successful.

Jeff Bronchick - Cove Street Capital

And just my last part, so when you talked about the share repurchase plan you inherited, I mean obviously this company does not have a share repurchase plan, it’s just a mop-up option plan. Is your sense that the big opportunity is to grow in our adjacencies and therefore that is a preferred method of capital allocation or is you’re suggesting that I inherited this plan and it’s ridiculous we’re really going to do something about share repurchase?

Ram Chary

I think when you talk about paying down debt and repurchasing shares however you describe the plan, you’re talking meaningful actions any company and organization can take, but not necessarily ideal relative to the real investments whether they would be internal or through acquisition. So I was suggesting that we are really going to take a hard look at those internal and acquisitive steps and alternatives relative to what we have been doing. Okay. Thank you.

Operator

Next question is from the line of Matthew Kempler with Sidoti & Company. Please go ahead.

Matthew Kempler - Sidoti & Company

Thank you. I wanted to circle back to the commentary on pricing. I just wanted to clarify, is this commentary similar to what has been made by GCA in the past or is the company seeing negotiations getting tough or competitors more willing to go more aggressive on pricing?

Ram Chary

No it’s similar.

Matthew Kempler - Sidoti & Company

Okay. And then in the guidance, we made the comment obviously the challenging business environment, we’re looking for flattish industry growth. Outside of the kiosk spending, can you elaborate on any particular areas that you might be focused on or the company is focused on to drive growth without waiting for industry recovery?

Ram Chary

Yes. Again, and maybe premature to getting some specifics from my perspective, but I think the kiosk rollout will certainly enable our presence, yes, more products and more capability into our gaming footprint. But I think relative to being specific about products, it might be a little bit premature for me to talk about that, but yes, I believe we will be able to grow in our existing footprint.

Matthew Kempler - Sidoti & Company

Okay. And then circling back to the commentary about the potential for GCA to move beyond gaming to a payments processing company at the core, are there other markets that are particularly well suited for GCA’s approach or is this more about looking at in the serve markets that you’re identifying?

Randy Taylor

I think when you look at our capabilities, our capabilities often around cash access and handling of cash. So, there are places in the macro economy that lend themselves to that more easily than others. And I think kind of at a high level and a broad level those are the places we would have a natural adjacency that potentially could bring something relative back in the gaming for us.

Matthew Kempler - Sidoti & Company

Okay. Thank you.

Operator

(Operator Instructions). Our next question is a follow-up from the line of David Bain with Sterne Agee. Please go ahead.

David Bain - Sterne Agee

Thanks. I just had two follow-ups one relates back to that guidance question. Are you guys including any growth for the new product proliferation or any noticeable ramp in the lottery? And then -- months of the year, it’s been tough on the regional gaming side on the same-store basis especially, obviously much weather related stuff has been going on. But any thoughts behind the flat to slightly up language in the guidance would be helpful, what customers are telling you, what you’re seeing in the data looking at consensus reports or things like that, how you get to that?

Ram Chary

From a lottery standpoint, there is really nothing material in this guidance, it still very -- stage, for there is not any material numbers in the guidance as far as the – the impact estimate kind of talk about the impact of the East Coast with weather that would had, still have a couple of months -- I haven’t seen anything really material in our numbers to have impact there. So I don’t know if that answers your question, but that would be the two areas we haven’t seen anything dramatic at this time.

David Bain - Sterne Agee

Okay. That’s fine. And then just one last one, Ram, have you seen any or heard of anyone in the organization fielding questions from customers on the recent executive changes, I know competitors in this segment of gaming especially like to shake the tree a bit, anything they may be saying that you have to clarify with customers?

Ram Chary

No, we haven’t. I mean I think they are all aware of the changes, but nobody has really made any comment one way or the other.

David Bain - Sterne Agee

Okay, great. Thank you.

Ram Chary

From our perspective, it’s been non-event.

David Bain - Sterne Agee

Okay. Thank you.

Operator

At this time there are no further questions in queue. I’d like to turn the call back over to management for closing remarks.

Ram Chary

Well, I appreciate everyone joining us this afternoon, Randy and I are excited to have received the first step what we expect in many calls going forward and I appreciate your attendance. Thank you.

Randy Taylor

Thank you.

Operator

Thank you. Ladies and gentlemen that does conclude our conference for today. Again we would like to thank you for your participation. And you may now disconnect.

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