Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Global Cash Access Holdings (NYSE:GCA)

Q1 2014 Earnings Call

May 06, 2014 5:00 pm ET

Executives

Todd Valli -

Ram V. Chary - Chief Executive Officer, President and Director

Randy L. Taylor - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Analysts

David Bain - Sterne Agee & Leach Inc., Research Division

Jason Kreyer - Craig-Hallum Capital Group LLC, Research Division

Operator

Hello, everyone. Thank you for standing by, and welcome to the Global Cash Access Holdings, Inc. First Quarter 2014 Earnings Conference Call. [Operator Instructions] This conference is also being recorded today, Tuesday, May 6, 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 first quarter 2014 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 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, the overall growth of the gaming industry, if any; our ability to replace revenue associated with terminated contracts; margin degradation from contract renewals; our ability to introduce new products and services; our ability to execute on mergers, acquisitions and/or strategic alliances; our ability to integrate and operate such acquisitions consistent with our forecasts; gaming establishment and patron preferences; national and international economic conditions; changes in our gaming regulatory, card association and statutory requirements; regulatory and licensing difficulties; competitive pressures; operational limitations; gaming market contraction; changes to tax laws; uncertainty of litigation outcomes; interest rate fluctuations; inaccuracies in underlying operating assumptions; unanticipated expenses or capital needs; technological obsolescence; and employee turnover. 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 am pleased to introduce our President and CEO, Ram Chary.

Ram V. Chary

Thank you, Todd. Good afternoon, everyone, and thank you for joining us today to discuss our first quarter 2014 financial results. In my first 100 days with the company, I have been impressed by the feedback that we have received from our clients. They consistently view us as a strategic partner who helps them to compete in the gaming marketplace. As we move forward, we will continue to shift our focus to providing them full solutions as opposed to individual products. That transition begins with our integrated kiosk. Rather than focus on short-term hardware sales, we will offer kiosk as part of an overall cash support solution. As innovations like QuikTicket, TableXchange and Cash Club make their way from beta to market, we will integrate them into broader, multi-year solution offerings that are consistent with our position as a long-term strategic partner for our clients. Our gaming footprint is unique. To that end, any material investment by our company needs to be gaming relevant. While our recent acquisition of NEWave is small, it is consistent with our objective of increasing the value to our gaming client base. Even though we will continue to pursue other gaming-relevant opportunities, our overall capital allocation approach will remain the same. We will continue to buy back shares and pay down debt in addition to making capital investments in our business. Network security is one specific area where we have and will continue to make investments in 2014. Our segment of the payments industry is clearly not immune to security threats. Correspondingly, we fully intend to maintain our best-in-class leadership position. As we proceed through this year, our financial results will better reflect our market-leading position. We recently renewed agreements to provide integrated solution offerings to several key long-term customers such as the Seminole Tribe of Florida and Pinnacle Entertainment to include the recently acquired Ameristar properties. These renewed and expanded customer relationships, together with expected new business signings, will help to bolster our top line. At the same time, overall efficiency initiatives and incrementally improved new business margins will help us to be more profitable. Randy will now review our first quarter and provide insight on our updated full year guidance.

Randy L. Taylor

Thank you, Ram. Good afternoon, everyone. Let's start by reviewing our 2 primary non-GAAP performance indicators: cash EPS and adjusted EBITDA. Our cash EPS, which is defined as net income plus equity compensation expense, deferred income tax expense and amortization expense divided by diluted shares outstanding was $0.22 for the first quarter of 2014, up $0.03 compared to the prior year first quarter of $0.19. Weighted average diluted shares were 67.4 million for Q1 2014 and 67.9 million for Q1 2013. Adjusted EBITDA, which excludes noncash stock compensation expense, was $19.4 million for the first quarter of 2014, an improvement of $1.5 million or 8% for adjusted EBITDA of $17.9 million for the prior year first quarter.

Now for our segment information. Cash advance revenues, operating income and operating margin were $62 million, $18.1 million and 29% for the first quarter of 2014. Cash advance revenues decreased by $3.3 million or 6% as compared to the same period the prior year, primarily due to an increase in the aggregate dollar amount processed. Cash advance operating income increased by $2.4 million or 15%. This increase includes the refund of a goods and services tax related to prior year commissions paid to Canadian casinos. Excluding the refund, the cash advance operating margin would have been 25.9%, which is consistent with Q3 and Q4 2013. The cash advance operating margin has remained relatively consistent over the last 3 quarters. ATM revenues, operating income and operating margin were $73.3 million, $6.3 million and 9% in the first quarter of 2014. ATM revenues decreased by $1.9 million or 3% as compared to the same period in the prior year. The decrease in revenue was primarily a result of lower transaction volumes at our same-store locations, combined with lost business. Our lost Mohegan Sun business occurred at the end of Q1 2013. ATM operating income decreased by $0.7 million or 10% as compared to the same period the prior year, primarily due to margin compression on new and renewed business and transaction volume decreases.

Check services revenues, operating income and operating margin were $5.3 million, $2.9 million and 55% in the first quarter of 2014. Check services revenues decreased by $0.6 million or 10% as compared to the same period the prior year, primarily due to a decline in same-store transaction volume. Check services operating income decreased by $0.5 million or 15% as compared to the same period of the prior year, primarily due to decline in related revenues. Other revenues, operating income and operating margin were $9.9 million, $4 million and 40% for the first quarter of 2014. Our other segment includes the result of kiosk sales, kiosk parts and services and Central Credit operations, among other ancillary results. Other revenue decreased by $3 million or 43%, and other operating income increased by $0.6 million or 18% as compared to the same period the prior year primarily due to higher kiosk sales. Other operating margin percentage decreased by approximately 9% due to a combination of lower margin on kiosk sales in Q1 2014 as compared to Q1 2013, and the impact of the overall kiosk business margins that are below the margins of the other components within the segment.

Corporate operating expenses increased by $1.6 million or 10% to $18.2 million for the first quarter of 2014 as compared to the prior year first quarter, primarily due to higher noncash stock compensation expenses related to equity award -- related to equity grant awarded to our CEO and the vesting of certain equity grants for terminated executives, as well as increased depreciation expense associated with our investments and technology and the move to our new corporate office in 2013. The other company metrics to note. Same-store cash to the floor, our best indicator of industry trends, increased approximately 1% for the first quarter of 2014 as compared to the same period the prior year, primarily due to both credit and debit card transactions and the cash access segment. Combined credit and debit cash to the floor was up 7% for Q1 2014. ATM same-store cash to the floor and transaction volume decreased by 1% and 4%, respectively, for the first quarter of 2014 as compared to the first quarter of 2013.

Now for the balance sheet. Cash and cash equivalents were $194.6 million as of March 31, 2014. Please note that our daily cash balance fluctuates significantly due to our large settlement receivables and settlement liabilities and the ultimate timing of when the cash is received in the patron's issuing banks and when we reimburse our casino customer. Borrowings were $100 million at the end of the first quarter 2014, and our leverage ratio was approximately 1.4x. Capital expenditures were $3 million for the first quarter 2014, which was consistent with the prior year. We repurchased approximately 0.3 million shares of our common stock for $2.5 million in Q1 2014 and have repurchased an additional 0.4 million shares for $2.5 million since April 1 under our share repurchase program. Since its inception through today, we have repurchased 3.2 million shares of our common stock for $23.2 million with $16.8 million remaining for future stock repurchases under the program. We completed the share repurchases with cash on hand, and we intend to continue to use cash on hand for share repurchases. As Ram discussed in his opening remarks, we completed the acquisition of NEWave in late April with cash on hand. NEWave is a supplier of compliance and efficiency software to the gaming industry.

Now for our annual guidance. We are increasing our full year 2014 guidance. We expect cash EPS will be between $0.87 and $0.91 on diluted shares of approximately 67.1 million, up from prior guidance of between $0.82 and $0.87 on the same number of diluted shares. We expect adjusted EBITDA to be between $76 million and $79 million, up from prior guidance of between $73 million and $76 million. This updated outlook is based primarily on the combination of following assumptions: modest improvement in the company's overall operating margins and modest growth to the domestic gaming industry and operating income from our cash advance segment. We also expect 2014 capital expenditures to be within a range of $15 million to $18 million. This concludes the portion of the call. Now back to Ram.

Ram V. Chary

Thank you, Randy. We will now turn the call back to the operator for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from the line of David Bain with Sterne Agee.

David Bain - Sterne Agee & Leach Inc., Research Division

Can you give us a little bit more on NEWave? Apologize, I'm on the move so I don't see a lot of detail, but if you can provide maybe in terms of size acquisition and strategic fit, if it's accretive or impactful to guidance, maybe just a bit more on the strategy as well.

Ram V. Chary

NEWave is a software provider that gives the capability to our clients inside the cage to better manage AML and task-filing requirements. It's a relatively small business. All in, it's about $14 million to us, which we funded, as Randy mentioned, with cash on hand. It's consistent with our gaming-relevant acquisition approach, in that clearly it's gaming-relevant because it helps our casino operators inside the cage be more efficient with things they're required to do. So your question to whether or not it's accretive, we have an integration plan, identified and in place, and we have to execute against that plan for the remainder of the year. But to the extent we do so, we expect it to be accretive.

David Bain - Sterne Agee & Leach Inc., Research Division

Okay, great. So that -- okay, so that may answer part of my second question. But as it relates to guidance, you know a couple of different things. One is that margins will go higher. I'm wondering if that's a portion of that for Ceasar's contract, credit card cash advance mix or other factors such as this acquisition. And then in terms of your outlook for the domestic gaming industry, if you could speak to anything that led you to the assumption where we're going to see it relatively flat, I guess, is it easing comps, is it something you hear from customers on pent-up demand after weather issues -- any trends on May? Anything there will be helpful as well.

Ram V. Chary

Relative to our increased guidance, we're very focused on continuing to run a more efficient company. So we have some broader house initiatives underway that will help us and translate to better financial performance. As I've mentioned before, we're also very focused on our core cash access business, not just improving the margins that we have today, but as we pursue renewals and do business, pursuing business that would be more profitable to us given our deposit margins. So those are the things that are really driving the guidance. The modest growth in the domestic gaming industry, we believe it won't be flat. It will at least grow even if that's only 1% on a year-over-year basis. But we think that, that growth, consistent with our internal initiatives, will allow us to be more profitable as we go through the year.

David Bain - Sterne Agee & Leach Inc., Research Division

Okay. That's all right. I don't usually deal with 3 questions, but if I could just ask because it's part of this new bundling strategy as to the progress of some of the new products like the QuikTickets, maybe how many customers have it on beta at this point. Any data points in terms of coin-in improvements for customers or usage by customers or their customers?

Ram V. Chary

Well, as I've mentioned in my opening remarks and it applies to QuikTicket, TableXchange and our Cash Club offering, we are shifting to combine those into a more meaningful solution sale that will allow our capability to be fully showcased within our customer's footprint. And so we're starting to move away from talking discretely about individual products. Those are all on the timeline, to time out the next several months in terms of how they're going to be offered in our solutions. But we're moving away from discretely identifying and describing individual products as they relate to our overall solutions.

Operator

[Operator Instructions] And our next question comes from the line of George Sutton with Craig-Hallum Capital Group.

Jason Kreyer - Craig-Hallum Capital Group LLC, Research Division

It's Jason on for George. Just wondering, Ram, if you could clarify, in your prepared remarks, you talked about this individual moving to a suite sale. I'm wondering if that still pertains to the kiosk business if you'll still sell that individually or if that is also moving to a suite sale?

Ram V. Chary

In my remarks, I described the integrated kiosk as being the beginning of that shift. So we are definitely integrating the kiosk as a standalone into a broader solution sale. We're selling that solution in total. Our recent renewals and our expected new business signings that we have in the pipeline I think will reflect that. Again, as I mentioned, that will get us away from a short-term hardware sale into a more sustainable, longer-term revenue flow against that solution.

Jason Kreyer - Craig-Hallum Capital Group LLC, Research Division

Okay. And then just wondering if you can provide any updates to pricing, what you're seeing, if there's any change to your previous commentary and then your expectations for pricing as you move into these suite sales?

Ram V. Chary

Yes. As a market leader, I have mentioned before that we shouldn't be as successful as we have been to the commoditization of our solutions and that we have differentiated solutions that should provide differentiated value to our clients, and, therefore, command a premium in the market. And as we move the solution sales, we're going to be uniquely positioned relative to any possible competitor from providing an integrated solution that no one else can provide. And I think that will translate its inherent value for our clients, and that value for our clients will translate into better results for us. So we are taking the initiative to be proactive about how we describe and ultimately sell our solutions. And I think that will help relative to some of the historical pressures we have been a victim of, frankly, relative to pricing pressure.

Jason Kreyer - Craig-Hallum Capital Group LLC, Research Division

Okay, perfect. And then just last from me. You did talk about the NEWave acquisition. And I'm just wondering if you can maybe provide any thoughts into other areas of the market that you could pursue some M&A opportunities.

Ram V. Chary

Again, as I described in my opening remarks, whatever we do will be gaming-relevant. So I have taken the time, as you would expect, to talk to our major clients and really try to listen in terms to what's important to them both operationally and strategically in terms of running their businesses. And I have, as you might expect, talked to them about some of the ideas that we have internally in terms of expanding our business through acquisition. And those ideas at least conceptually have been received very well in that they resonate with our gaming clients, which would tell you that whatever we do would be gaming-relevant. And I keep describing the term gaming-relevant because I don't want to be pioneering in terms of doing things as being gaming-specific or payment-specific, but instead things that would be relevant to our gaming base. Clearly, we're a payments company, but if we pursue things that are outside of our current payments offerings, they still need to be relevant to our gaming customers. So you'll see us continue whether it's larger or smaller, whatever the time frame may be, we're going to be opportunistic, but we're going to pursue an M&A approach that's gaming-relevant.

Operator

[Operator Instructions] And I'm showing no further questions at this time. I'd like to turn the call back over to management for closing remarks.

Todd Valli

We have no further remarks. Thank you, everyone.

Operator

Ladies and gentlemen, this concludes the Global Cash Access Holdings, Inc. First Quarter 2014 Earnings Conference Call. Thank you for your participation. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Global Cash Access Holdings' (GCA) CEO Ram Chary on Q1 2014 Results - Earnings Call Transcript
This Transcript
All Transcripts