NTN Buzztime, Inc. (NYSEMKT:NTN)
Q2 2014 Earnings Conference Call
August 13, 2014 4:30 PM ET
Jeff Berg – Chairman and interim Chief Executive Officer
Kendra Berger – Chief Financial Officer
Good day, ladies and gentlemen, and welcome to the Second Quarter 2014 NTN Buzztime, Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. (Operator Instructions) As a reminder, this conference call is being recorded.
I would now like to introduce your host for today’s conference Kendra Berger, CFO. You may begin.
Thank you. Before we begin, let me remind you that during this conference call management may make forward-looking statements about future expectations and plan. Such statements are subject to known and unknown risks, uncertainties, or other factors that may cause the Company’s actual growth results be materially different from historical results or any results expressed or implied during the call. Potential risks and uncertainties that could cause actual growth results to differ materially include, but are not limited to the rapidly changing and competitive nature of the interactive entertainment and game industries, customer and consumer acceptance and adoption of the Company’s products, platform, and technology, ability to successfully introduce new revenue stream based around consumer games and services, the ownership and enforcement of intellectual property, and others more fully described in the Company's public SEC filings.
The information in this conference call related to projections or other forward-looking statements is based on current expectation. Except as required by law, the Company undertakes no obligation to revise or update publicly any forward-looking statements for any reason.
Now, I’d like to turn the call over to our CEO, Jeff Berg.
Thank you, and thanks for joining our call. Since reporting our Q1 earnings, we continue to focus on, number one, converting BWW, Buffalo Wild Wing location from the Classic platform to the BEOND platform. Number two, rolling BEOND out to the broader marketplace. Number three, piloting or point of sale integration with Buffalo Wild Wings and testing our premium content as a prelude to its broader distribution in generation of consumer revenues. And number four, realigning our organization to fulfill our objective of entertaining consumers in ways that create long-term value for our merchants.
On the first point, number one, we’ve now installed the BEOND platform in 470 Buffalo Wild Wing locations, up from the 317 we reported on the last call. On the second point, the BEOND platform is now installed in 295 non-Buffalo Wild Wing locations, which includes installations and locations it doesn’t change. Regarding point three, point of sale our POS integration, we continue to work with partners Buffalo Wild Wings and NCR to roll out various phases of POS functionality. We are currently testing paid entertainment in five locations and are rolling that to other locations as we speak.
The good news is that we are very encouraged by conversion rates we are seeing so far in the incremental revenues that result. We remain very excited by the opportunity. Nonetheless in Q2 there were partner delays and rolling out additional payment enabled stores.
We’re not in nearly as many locations as either we or they had anticipated and accordingly we are both leaving money on the table so to speak. However, our partners rolling out payment enabled locations to a new DMA this week and if it goes well as it is appears to be we’ve both expect to pay some market roll outs to accelerate. After premium entertainment will be piloting menuing the second half.
And finally point 4, we are well into our reorganization of our product development efforts that enhanced our capabilities on developing new consumer experiences quickly and efficiently. This reorganization included switching to a multi-channel game development platform called unity. That will enable us to develop and distribute gains more effectively. As a result it was necessary for us to write our prior development efforts usable only on the old game platform. We think adapting unity makes a lot of sense then we’ll be launching our first new game on it in Q4.
To reiterate much of what we described over the past years or beyond entertainment platform significantly changes the features functionality and service we provide our merchants. The entertainment options for consumers are significantly enhanced beyond their traditional trivia and poker routes with single-player game arcades and new sports apps complementing these historical buckets with more entertainment features coming as we integrate new content into the platform in 2014.
We’ve also continually mention the opportunity with arcade games in bars. This is a market that was historically served by the counter top machine one would normally find on the corner of the bar. The incumbents in this market had video game machines in over 200,000 locations and according to Vending Times; the videogame segment generated some $750 million last year in the hospitality space. We believe that is one of several markets ripe for disintermediation as new technology comes to this market. Instead of one or two of these devices at a traditional location in a Buffalo Wild Wings, with BEOND there are now up to 50 of these devices that enable a lot more features, functionality, and interaction.
In line with the notion that the BEOND platform will continue to evolve to accommodate new content and games, we’ve been creating an organization that can more quickly develop and iterate on great entertainment experiences.
Getting the organization and product roadmap right is critical to our business machine of entertaining consumers in ways that create long-term value for our merchants, as well as our long-term business objectives scaling into more than 10,000 locations, and growing revenue per location.
Our growing leadership and team, led by Bob Cooney as Chief Operating Officer has continued to gel especially on the game and entertainment side. In the product arena last quarter, we announced a number of key new hirers and promotions in this area led by Rob Burnett. Rob has been in the social gaming space for more than a decade having worked on game franchises by Madden Football at EA Sports in FarmVille and Zynga.
Our new product development structure creates teams around category that essentially become their own business units such as trivia, casino and arcade led by producers who own these categories in our fully accountable for their business results. Also as mentioned on previous calls in 2013, I’ve continued keeping my eyes open for the next qualified CEO to take the vision in platform we have developed, and build on to that next level. And I’ll discuss more on that topic later.
Regarding our content development efforts, the traditional game development approach has not historically been applied to our core trivia offerings. For QB1, a predictive place sports game that the company was founded around every 25 years ago.
Is there fundamentally the same games they have always been. with the latest key addition to our team, our product development reorganization and new game development platform that paradigm has changed. with that, those core consumer experiences are something will begin changing later this year and early next and that prospect is exciting.
Capitalizing on the opportunity with premium entertainment is important for us, and receiving a lot of attention, successfully adding transactional consumer revenue streams on top of our existing B2B SaaS model and it’s historically high reported gross margins, gives us confidence about Q3 EBITDA expansion in the years to come, although as I’ve mentioned on the last two calls, that would not be the case in 2014, as we invest heavily in product, platform and BEOND proliferation.
As mentioned earlier, we are also behind where we want to be on rolling out payment for premium entertainment. In the short-term, this negatively impacts our P&L, and we’ll continue to do so in the second half of 2014. Nonetheless, the incremental average revenue per location is there, in our pilot stores. And we look forward to realizing that increase as more stores get rolled out with our partners. And make no mistake; consumer revenue from premium entertainment is a big opportunity for us, and features heavily into our business model.
There’s still lots of heavy lifting to do in 2014. and accordingly we’ll focus on the following: 1) executing on the opportunity with Buffalo Wild Wings, 2) optimizing the BEOND platform in proliferating it out to the marketplace, 3) growing consumer revenues by growing audience game play in premium engagement and 4) keeping churn in check.
As mentioned on previous calls, optimizing BEOND means improving the quality and quantity of the content and services on the platform, we expect to be piloting two new consumer experiences around our growing pillars of trivia and sports by year-end 2014, proliferating the platform means just that. We expect to have the BEOND platform representing a bigger part of our network by the end of 2014, and we’re very focused on getting this new platform to market.
Although sales were softer than we would have liked in Q2. We believe this is largely due to issues with our marketing funnel. What that means is that the yield on our content marketing channel is tapered relative to expectations and more engaging in outside agency to assist us with additional channels.
Nonetheless we believe BEOND is the superior consumer experience than engagement tool versus the classic product. And the sooner we convert the network, the more delighted our merchants and their consumers will be. Nonetheless prioritizing conversions of our new installs will impact in that side at in 2014 and was a drag in Q2, when coupled with weakness in the marketing funnel. It will remain so for the balance of 2014.
Growing consumer revenue is an important opportunity for us later in 2014 and the years BEOND. To do this requires a certain level of engagement from the locations traffic, with the platform and compelling premium entertainment that consumers will pay for once they do engage with the platform.
On the registration front, we continue to register new players at a rapid rate and registration is one key to a digial relationship that allows for re-marketing messaging based on player behavior. So as we ramp registration of new players, we ramp our ability to communicate with consumers on behalf of our merchants and drive ROI for them through marketing services.
In addition to games and entertainment, we continue development of our live platform and roll that our new style game called the OpinioNation. This team-based social game is a family feud style game based on popularity more than facts and so appeals to a more casual audience that might attribute us. Then now joins our live event raster of Live Trivia and Live Texas Hold’em as we build out our Live Events platform.
The borrowing restaurants base remains a bus with new developments around online ordering, mobile ordering, table side ordering and check closed out. The casual dining change realized that where they can add automation and self-service that can better compete with SaaS casual. Tablet technology helps bridge the GAAP and we intend to be a participant in these important trends. We also continued to work on improving enterprise solutions we provide for merchants, complementing our digital signage in marketing services, the better registration, payment and POS integration.
Having said that, we believe that entertainment will always be a differentiating factor for significant thesis at the borrowing restaurant space and that’s the special size we’ve been providing to the sector for many years. Accordingly, we believe our solution will remain attractive to brands and merchants that are more focused on upon guest experience.
Our long-term goals are ambitious, but we think eminently doable. We believe that our total addressable market is large and our five-year goal of getting into 10,000 locations is a reasonable one to aspire too. In addition to scaling units, another important part of the revenue story as growing average revenue per location as we develop premium entertainment services that monetize the consumer.
This is the first for the company in terms of complementing our B2B SaaS model with a B2C revenue stream, and in addition to growing our average revenue per location pulled out to promise of lowering the total cost of ownership for our merchants as we begin to generate revenues that we share with them. That remains very early stages for these services and nothing is guaranteed. however the pilots were running, look very promising in the early going and we’re eager to roll out payment enabled premium entertainment to more stores, especially with Buffalo Wild Wings. The opportunity with B-Dubs alone remains very significant. We’re of course, a brand standard in B-Dubs in all 1,025 corporate and franchise locations and as new locations open up.
The company has a publicly stated goal of 1,700 locations in North America and 500 locations overseas. so there is lots of plugged-in unit growth with them from 1,000 units to 2,200 units. More importantly, we share a common vision of providing the best guest experience possible by consolidating all entertainment services on the BEOND platform, adding features, functionality and services, while integrating with a point of sales systems that we enable table side ordering and create a digital economy around third beverage and premium entertainment options.
We believe that by doing this we can achieve our goals enhancing the guest experience and creating shared revenue opportunities that raise average revenue per location and lower the cost of ownership for B-Dubs. The opportunity is to enhance guest experience is large, and we have a lot to execute on for B-Dubs. We’re now in over 470 B-Dub locations with BEOND, and the company is committed to migrating all corporate-owned stores by year-end and to support the conversion of franchise location this year and next. In addition to B-Dubs, we continue roll out BEOND other chains in the independent market.
On the chain side, we’ll only report chain wide deployments in the sales cycle as long. We are piloting locations with a number of chains, but we’ll only report those that turn into chain wide wins. Additionally, the independent market is the need of entertainment and marketing services, it allows them to complete with chain technology and we believe the BEOND platform feels a real void there. Accordingly, we’ll continue to pursue this market. Proliferating BEOND into the marketplace requires the capital we use the balance sheet strategically. And as reported in last call, we [budgeted] (ph) our balance sheet with the additional equity raise in April, $6.4 million of equity through an underwritten offering, resulting in a cash balance of $11 million at the end of the Q2.
And now, I will turn the call over to Kendra for the financial commentary.
Thanks, Jeff. For the second quarter of 2014, revenue totaled $6.9 million, up 24% from $5.5 million in the second quarter of 2013. The increase in revenue was primarily due to increased equipment lease revenue under sales-type lease arrangements, as well as increased advertising revenue, offset by lower subscription revenue due primarily to lower site count.
We ended the quarter with 3,103 sites compared to 3,352 sites at the end of the second quarter last year. As of June 30, 2014, our site count includes 676 BEOND locations, 496 of which are Buffalo Wild Wings. Our customer churn for the second quarter of 2014 was 4.4% compared to 4.9% for the same period last year. Direct costs for the second quarter of 2014 were $2.8 million, compared to $1.5 million in the second quarter of 2013. This increase was due primarily to increased equipment related costs incurred with deployed BEOND platform.
Selling, general and administrative expenses were $4.5 million for the second quarter, compared to $4 million for the same period last year. This increase was primarily due to increase in payrolls and consulting expenses from additional headcount, and due to decrease in the amount payroll spent, subject to capitalization, compared to the prior year period.
During the quarter, we recorded a non-recurring impairment charge of capitalized software to nearly $639,000. This non-cash charge was related entirely to our strategic decision to switch to the unity game development platform that I mentioned previously.
This switched required right of prior development efforts that are usable only on their old own platform. Net loss for the quarter was $1.3 million or $0.02 per share, compared to the net loss of $99,000 or zero cents per share in the second quarter of last year. Excluding the impairment charge, our net loss stood at $0.7 million or $0.01 per share. For reconciliations to GAAP measures please see the earnings release we issued earlier today which can be found on our website.
As of June 30, 2014 our cash and cash equivalents were $11.2 million, compared to $5.5 million at the end of 2013, increasing our working capital to $10.1 million from $4.3 million.
I will turn the call back over to Jeff for his closing remarks.
Thanks, Kendra. And our investor calls at the past year, I made clear that our aim over the near term was not to grow the network to maximize profitability. We had to reset the product platform first and get it into the marketplace. Past calls have also stated the notion that with the commercial launch of BEOND, we would be in a position in 2014 to start to grow site count again. Although, that wouldn’t happen until later in the second half as we focused on migrating existing B-Dubs locations.
Conversion of the network to BEOND for B-Dubs remains aggressive, however, that conversion coupled with some issues in our marketing funnel have impacted new site sales and therefore site count growth may be more likely starting in Q1, 2015. We haven’t given up on site count growth in Q4, but it partly depends on how aggressive we want to be in front of the next generation of BEOND, what we call BEOND 2.0 for now. So with the balancing act in 2014 between conversion of Classic locations to BEOND sites, versus just selling new locations on the BEOND platform.
However, as we get through many of the Buffalo Wild Wings and other classic migrations we’ll be in a position to focus more of our efforts upon new locations and accelerate site count growth in 2015 and beyond. I would also reiterate, however, the ARPU growth opportunity that we hope to see later this year as we further develop and head towards a broader roll-out, the payment-enabled sites later in the year to monetize premium entertainment.
So we continue to invest aggressively in product and platform as we strive to launch the next iteration of the BEOND platform in the marketplace by year-end that includes better content, payment and other features. Key investments in 2014 will better enable us to create BEOND 2.0 and as we do so, we’ll be generating operating losses this year. However, we feel like we have the balance sheet available to allow for execution of an aggressive plan, a plan that’s focused on scaling into a much bigger network over the coming years driving average revenue per location higher and creating the best guest experiences for consumers and the best platform for merchants.
Commission remains to entertain consumers in ways that create long-term value per merchants. If we do so we think the rewards for shareholders are significant. I appreciate your support as we execute against this plan. I mentioned earlier the notion of seeking a CEO to take division in platform. We’ve developed and build on that to the next level. (Indiscernible) the search has been an informal process, one which nonetheless has been productive in connecting myself and our Board to CEO candidates. Once these efforts have been exhausted, which we’re close to, then we’ll initiate a more formal process with an executive search firm.
Now, let me answer some of the questions that came to us via e-mail. The first question is follows: I live within in two miles of two of your clients; Buffalo Wild Wings and BoomerJack. The user experience is very different as Buffalo Wild Wings staff is much more proactive and asking if I’m interested in getting a tablet. The BoomerJack’s people didn’t seem to know a lot about it. What do you do ensure special staff training i.e. that the non-Buffalo Wild Wing clients are getting the most out of your system?
By the way the same question was effectively asked by another investor who said, what are NTN Buzztime’s marketing strategies for promoting and stabilize within the stores they are installed. From my observations, mitigates to Buffalo Wild Wings don’t seemed another capabilities.
So, those great questions and ones that have challenged this company for a decade. The system demands a certain amount of interaction from merchants and their staff to make the product successful and give them the return, the ROI that they’re looking for. The TVs are tuned into Buzztime. Tablets are not handed out or prominently displayed and promotions and/or events are not planned. The value proposition is not as strong for the merchants because less of their patrons are exposed to it.
Historically, you get out of the system what you put into it and Buffalo Wild Wings clearly has operationalized the best over the years and shown just how much the system can do. So we try and work with most all our merchants to ensure that they operationalize that as effectively as possible. However, at the end of the day it still takes engagement by the merchant and their staff. There needs to be internal champions that utilize and promote the system.
The consumer experience also plays a role. It needs to be really fun and super engaging. And let’s face it. The consumer experience over the past decade has not been as strong as it should have, especially in light of what’s available to the consumer on the smartphone. Having said that, we have new experiences piloting in Q4 that we feel like fundamentally change the consumer experience and hence the engagement factor and we’re hopeful that will make a big difference.
Question number two is as follows. Chile has a competing system, which I have used it couple of times; they have a tablet on every table. Is that what you think it will be with Buffalo Wild Wings the tablet on every table?
So our answer is, Chile has rolled out the (indiscernible) is the tablet on every table because it’s used first and foremost as a menu in ordering device. Depending on a merchants objectives there is potential advantages and disadvantages to that. The advantages that for menu and ordering the single tablet on each table make table dynamic easier for ordering and there is a lot of engagement, because it’s on every table. From an entertainment point of view, it might limit to many ways that players can enjoy the games and in our opinion provides a less satisfying consumer experience.
In this context mobile tablets if you will make a lot of sense and their chains that are perhaps more experienced from the nature such as Buffalo Wild Wings like that approach. So it really comes down to the customer, it depends on the customer and their objectives and in the case of Buffalo Wild Wings they are very much focused on guest experience.
Question number three, Chile system incorporates the point of sales terminals to pay the bill. How far away are you from implementing that technology?
We expect to have that available at Buffalo Wild Wings in Q1 of 2015. We will be – of course as I mentioned our releasing menuing in order menu and ordering here in the second half. So menuing in the second half and then closed out in the first quarter.
We also had other questions relating to recent stock price volatility and future levels of inside our buying?
We don’t comment on what the stock does in the short-term and nor do we comment on potential future inside our buying. Those are the bulk of the questions we received. I’d encourage everyone to please send questions in for the next call. as for now; we’ve patterned our calls after the (indiscernible) that Netflix uses in terms of handling its Q&A.
Thanks again for your consideration and support. We will chat soon when we report our third quarter results in November.
Ladies and gentlemen, thank you for both sitting in today’s conference. This does conclude today’s program. You may all disconnect. Have a great day, everyone.
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