PokerTek's CEO Discusses Q4 2013 Results - Earnings Call Transcript

Mar.12.14 | About: PokerTek, Inc. (PTEK)

PokerTek, Inc. (NASDAQ:PTEK)

Q4 2013 Results Earnings Conference Call

March 12, 2014 11:00 AM ET

Executives

Mark Roberson - Chief Executive Officer

Analysts

Tom Pierce - Van Clemens

Operator

Good day ladies and gentlemen, and welcome to the Q4 2013 PokerTek Incorporated Earnings Conference Call. My name is Darren and I will be your operator for today. At this time, all participants are in listen-only mode. We will conduct a Q&A session towards the end of the conference. (Operator Instructions). As a reminder, this call is being recorded for replay purposes.

And now, I’d like to turn the call over to Mark [Robertson], Chief Executive Officer. Please proceed sir.

Mark Roberson

Thank you, Darren. Good morning. Before we get started, I would like to remind you that today’s call is being webcast, and that certain statements we make constitute forward-looking statements for purposes of the Safe Harbor Provisions under Federal Securities Law. Our actual results may differ from the expectations expressed and the company assumes no responsibility to update forward-looking statements as a result of new information or future events.

Today’s discussions will include non-GAAP financial measures, specifically EBITDAS, a reconciliation of EBITDAS to GAAP net income is included with the earnings release filed this morning on Form 8-K. Also, please refer to our annual report and other filings with the SEC for information regarding the risks and uncertainties inherent in our operations.

Overall, our financial results for the year reflect a strong and stable recurring revenue base that is generating high gross margins and driving improved bottom-line operating results. At the beginning of the year, we established four key objectives for 2013. Those were; one, increased penetration and recurring revenue in our current markets; two, enter new markets to expand our addressable opportunities going forward; three, obtain regulatory approval for our ProCore platform; and four, continue to leverage our cost structure to drive EBITDAS and EPS improvement.

With regard to the first objective, increasing penetration in our current markets our results were mixed. We successfully expanded our installed base in Mexico and in the cruise markets. However this growth was offset as removed gains in other markets, principally Ohio due to local changes and maturity gaming reps. Our expansion in the cruise market was a combination of installations with a new customer, MSC as well as expanding our installed base with Carnival.

With the additions with Carnival, [but from] new ships coming online as well as from adding additional tables to several existing ships. While we grew ProCore on cruise ships that growth was partially offset by net removals of ProCore during the year. We expect that trend to reverse in 2014 however with several new ProCore cruise ship installations already in plan.

We entered several new markets in 2013 to increase the company’s addressable market going forward. First, we entered the Macau gaming market in October at Melco City of Dreams property. With the advantage of not counting towards Macau’s table cap restriction, electronic tables are allowing lower [stick] to games to be offered that would otherwise not be feasible.

While we are still in the early stages and it takes time to build a player base in any market, early game performance has been impressive. Especially in connection with the tournament events which bring large numbers of poker players to Macau.

We also entered South America, which represents an important opportunity for growth going forward. Colombia, Peru and Argentina as well as other areas in the region each have hundreds of properties with limited or no traditional table games. Our electronic tables are ideally suited to provide those operators and players with an alternative swaps in those locations.

Our first game for ship to Colombia in the first half -- in the second half of 2013 and officially it went live in January. So those did not count in our year numbers. It’s been a long process and we are excited about the long-term potential in those markets.

The third objective was to get ProCore approved by GLI, which was completed in September. With that approval in hand our sales team is introducing the product to our existing customers as well as to new prospects in regulated markets. We expect to expand ProCore on cruise ships in Columbia and in Canada in 2014 as well as the installations in the U.S. and Mexico. Four, to those who have been watching PokerTek over the years and recall, we restructured business over recent years, reducing the overhead burden by approximately 75% from its peak level, rightsizing the company to achieve EBITDA profitability.

We continue to remain lean and control our expenses resulting in our third year of EBITDA profitable results. In addition, we acquire and we began working on a project this year, support our current gain content through an HTML5 mobile gaming platform. Working with Las Vegas From Home, our partner in British Columbia, we’ve made significant progress in a short time.

We’ll have more to share about mobile gaming as the year proceeds and we get closer to having a product ready for customers’ trial.

Moving to the financials, total revenue increased 7.1% to $5.5 million for the year with license and service fees increasing 11.1% and sales of systems and equipment decreasing 14.1%.

For the quarterly periods, total revenue increased 4.8%, but the mix was reverse. With license and service fees decreasing 11.3% and product sales increasing 324%. There are several noteworthy factors affecting those comparisons license and service fees from Canada, Mexico and cruise ships increased with new placements generating revenue. Those increases were offset however by reductions from Ohio, Europe and other international markets.

Sales of systems and equipment decreased on an annual basis on lower equipment sales in Europe and lower current year contribution from lease conversions as compared to the prior year. Those decreases were partially offset by increased sales in Asia and France. On the quarterly basis, sales revenue increased 324%, again due primarily to increased activity in Asia and France, where we’re seeing improved demand.

Our overall target revenue mix is 85% recurring license fees and 15% from product sales. In 2013, recurring revenue represented 87% of total revenue, compared to 84% in 2012, which is up from less than 60% in prior years.

Gross profit margins relatively unchanged 72.5% and 72.6% for the annual period. For the quarterly periods, margins declined from 69.7% to 64.8%. The lower margins in Q4 again were primarily due to higher cost of sales in Asia and France. On an ongoing basis, we continue to expect recurring margins to hold in the high 60s to mid 70% range on an ongoing basis.

Operating expenses increased by $100,000 to $4.6 million for the year but decreased by $100,000 for the quarter. Earlier in the year, we incurred higher product approval and bad debt costs. Those increases were offset, offset reductions in employee compensation and professional fees.

Interest and income taxes were significantly lower as we reduced debt levels and were able to reduce the amount of non-recoverable foreign taxes. Overall net loss improved 20.3% for the year and 33.8% for the quarter. On a per share basis, net loss improved to $0.07 per share from $0.11 for the year and to $0.01 from $0.02 per share for the quarter.

2013 was our third consecutive year of EBITDA positive operating results. Overall, our recurring revenue base is stable, our margins are strong and we’re well positioned to expand our footprint in several key markets.

With that we’ll conclude the formal remarks and open the line for any questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). First question is from the line of Tom Pierce from Van Clemens. Please go ahead.

Tom Pierce - Van Clemens

Good morning, guys.

Mark Roberson

Good morning Tom. How are you?

Tom Pierce - Van Clemens

Not so bad. Thanks. How’s yourself?

Mark Roberson

Good, very well.

Tom Pierce - Van Clemens

All right. Well, just a few questions here.

Mark Roberson

Sure.

Tom Pierce - Van Clemens

First of all, when do you think your mobile system will be ready for sale?

Mark Roberson

I would rather not put a specific timeframe on that. We’ve made significant progress in bringing that commercialization over the past 4 months. We think it’s getting closed. However, like with all projects, there are lot of variables involved, a lot of moving parts and other parties involved, other than just ourselves including customers and other service providers. So, to put a timeline on that is a little bit difficult. I would say that we expect to have something more concrete to talk about by the middle of the year.

Tom Pierce - Van Clemens

Okay, very good. How many tables did you end-up putting in Colombia?

Mark Roberson

We ended up -- we didn’t have any that show-up in the table count as of the end of the year for Colombia. We shipped 15 tables down, those tables some of which were sitting in casino properties at the end of the year, awaiting local approvals. And as you know these sales cycles and approval processes can be quite time consuming. So as of the end of the year when you look at our count, there were zero. We started putting tables into operation in January and that really for those tables that were shipped down, that will continue through the first half of the year.

Tom Pierce - Van Clemens

Okay. So by the end of the first six months, we’ll have 15 tables installed?

Mark Roberson

That should be about right, yes.

Tom Pierce - Van Clemens

Okay. Can you give us any progress report on situation of Ohio Charity Gaming or our New Hampshire?

Mark Roberson

Yes, we’re monitoring the political actions and discussions in both of those jurisdictions. We remain optimistic about those outcomes. However, as we’ve said before, we’re dealing with politics and political processes or hearing favorable things. It’s difficult to qualify what that means when it involves political processes. So, I can’t give any real confidence or assurance levels that the timing or outcome other than to say that we continue to feel good about the feedback that we’re receiving from those markets.

Tom Pierce - Van Clemens

Very good. Well, I will just get back in the queue and let somebody else ask a question.

Mark Roberson

Okay.

Tom Pierce - Van Clemens

Thank you.

Operator

So, we have no more questions at this time. (Operator Instructions). We have no more questions at this time. So I would now like to turn the call over to Mark Roberson for closing remarks.

Mark Roberson

Thank you. Thanks Darren. Thanks to everyone for joining the call. Thank you and good day.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. And have a good day.

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PokerTek (PTEK): Q4 EPS of -$0.07. Revenue of $5.5M (+7.1% Y/Y).