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PokerTek, Inc. (NASDAQ:PTEK)

Q1 2011 Earnings Call

May 4, 2011 2:30 pm ET

Executives

Tracy Egan - VP Marketing and Product Management

Mark Roberson - CEO and CFO

James Crawford - President

Analysts

Jeffrey Hwang

Martin Kramer

Operator

Good day, ladies and gentlemen and welcome to the PokerTek Incorporated, First Quarter 2011 Earnings Conference Call. My name is Amecia, and I will be your coordinator today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of the conference. (Operator instructions)

I would now like to turn the call over to, Ms. Tracy Egan, Vice President of Marketing. Please proceed.

Tracy Egan

Thank you and good afternoon. Welcome to PokerTek's investor conference call for the first quarter ended March 31, 2011. The purpose of today's call is to provide our investors and other interested parties with information about the Company’s operating results and to communicate other business developments.

Joining us today are Mark Roberson, Chief Executive Officer and Chief Financial Officer, and James Crawford, President. Today’s conference call is being simultaneously webcast and will be also be archived for replay purposes.

Before we get started, I would like to remind you that certain comments about future expectations, plans and prospects for the Company constitute forward-looking statements for purposes of the Safe Harbor provision and the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from these expectations and we undertake no obligation to update those expectations.

We will also be discussing certain financial measures such EBITDA, which represent a non-GAAP financial measure. The importance of this measure to investors as well as reconciliation to those directly comparable GAAP measures can be found in today’s press release announcing our first quarter results.

Now I will turn the call over to Mark Roberson.

Mark Roberson

Thanks Tracy. Good afternoon and welcome to the first quarter earnings call. By now you should have a copy of the press release detailing our performance for the quarter that was released earlier this morning. In the first quarter PokerTek generated positive cash from operations. Earnings before interest and taxes, depreciation and amortization, and share based compensation were positive for the second consecutive quarter.

Gross margins continue to expand, exceeding 70% and operating expenditures remain stable even as we launched a new product line. Our net loss from continuing operations improved by 43% on a year-over-year basis compared with the first quarter of 2010. This is our ninth consecutive quarter where results from continuing operations when compared to the prior year period have improved by greater than 25%.

This trend of continuous improvement demonstrates our focus on strengthening our recurring Poker business while controlling costs, entering new markets and adding new products to accelerate growth. Last quarter, I discussed our strategic plan for 2011 and today I will briefly reiterate those key elements and comment on our progress through the first quarter.

First, we will continue to expand poker penetration in our target markets. PokerPro is the established market leader in electronic poker generating sustainable recurring revenue with greater than 70% margins. During Q1 we placed our first tables in France on a competitive RFP to supply tables to the Croatian Lottery and expanded our presence in Tanzania.

Looking ahead in 2011 I expect to see further international expansion as we increase our penetration. We also plan to enter new markets such as South America and other parts of Europe and Africa, which offer substantial growth potential.

Second, we are expanding our product line and becoming a more complete electronic table games company. We launched Blackjack Pro this quarter which is our first house-banned game. We play six tables initially and I am pleased with both the player and the operator response thus far. I believe that expanding beyond poker to other electronic table games will significantly increase our opportunities for growth. I look forward to providing more substantial details and update as we proceed through the year.

Third is, our focus still remains to accelerating growth and expanding our product offering. We will stay lean and leverage our cost structure. Our operating expenses have been stable for the past several quarters and we expect to control expenses tightly even as our international footprint expands and our business becomes more diverse.

I’ll now turn the call over to James, who’ll provide more detail on our sales and marketing plans.

James Crawford

Thanks Mark. Let me first begin by giving you an overview of our poker business and then we will discuss Blackjack.

PokerPro remains the industry’s leading electronic poker product and we continue to leverage our leadership position as we expand into new markets. France is a great example of a new market with tremendous opportunity. PokerPro is the only electronic table game approved there and our first placements have found a solid base of players.

There are approximately 200 casinos in France, of which 60% have between zero and two tables, which makes an easier target when you are displacing labor. Labor is very expensive in France; when you combine these facts you have environment that is ideal for PokerPro.

We were able to add tables into sites that don't currently offer poker and convert smaller rooms to become entirely electronic.

We believe that PokerPro's market penetration will increase as we gain exposure from our first two installations in the market.

We entered the African continent for a second time with an installation in Tanzania in 2010, only seven months after our initial installation, the customer success with PokerPro led the operator to order two additional tables for their poker room in Q1.

The PokerPro account based system is ideal in this market where security and audit ability are key operator concerns. We are leveraging this site's success as we seek to identify other opportunities on the continent.

We are still seeing opportunity in Mexico for PokerPro as operators open casinos that include poker. We add tables into new regions and the popularity of poker continues to grow.

Our total gaming positions now exceeds 700 at the end of Q1 and we see ample opportunities to continue to expand our penetration in this market. With regards to the recent launch of Blackjack Pro, as Mark mentioned, we placed our first six tables during the first quarter as planned and are impressed with the initial result.

Product performance has exceeded our expectations. We have had no significant hardware or software issues and player feedback is overwhelmingly positive. Since the initial rollout, we've made some enhancements to improve graphics, enhance reporting and improve the player experience. In the first 10 weeks, 7000 unique players have played on our table, averaging about 700 new players per week.

Our initial focus is on placing games in markets where our PokerPro experience tells us that electronic games excel and where we can enter the markets easily and cost effectively from the start.

We will also deploy a [kit ] of blackjack table later this year, which opens up more traditional gaming markets like the US. We believe the market for Blackjack and other house-banned games that we may add in the future is significantly broader than the market for electronic poker alone and we will expand PokerTek's addressable markets and grow its potential.

As we look at our near-term prospects for Blackjack Pro in 2011 customer interest is strong and we are currently constrained by availability of inventory from our additional production run and expect to accelerate placements in the second half of the year as we receive additional shipment allowing us to better facilitate anticipated customer demand. Mark?

Mark Roberson

Thanks, James. Our operating results for Q1 represent significant progress as we proceed to profitability. Total revenue for the fourth quarter was $1.7 million compared to $1.6 million for the first quarter of 2010. Revenue has increased primarily due to higher number of revenue producing PokerPro tables in our target markets, particularly Mexico and Europe. These increases were partially offset by reductions in revenue from Canada which were particularly strong in the comparable quarter of 2010.

Revenue generating gaming positions increased to 2610 which is comprised of 259 PokerPro tables and six Blackjack tables. This represents an increase of 21% from March 2010 and 4% from December. During Q1, we added six Blackjack tables representing 36 positions and six PokerPro tables representing 60 positions.

Pace of Poker's shipments was a bit slower in Q1 than it had been in prior quarters primarily due to the timing of the sales cycle and we were just beginning to gain exposure in markets like France. I expect table growth to improve through the rest of 2011 for both Poker and Blackjack.

Gross profit increased 28.2% to $1.2 million for the first quarter as compared to $0.9 million for the first quarter of 2010. Our gross profit margins as a percent of revenue increased to 72% compared to 60% in the prior year period. Our margins have steadily increased over the past two years as a result of improved asset utilization and reduced product costs.

Operating expenses were $1.6 million for the first quarter compared to $1.7 million last year. Even as we continue to control expenses and stay lean, we've been investing in product development and we've been increasing our market penetration around the globe. I believe that our operating structure is appropriate for the business and that we will be able to scale the infrastructure as we grow to minimize cost growth even as our top line expands.

Net loss from continuing operations improved 43% to $0.4 million or $0.07 per share from $0.8 million or $0.14 per share for the comparable period of 2010. Including the results of discontinued operations, quarterly net loss improved 46% to $0.5 million or $0.07 per share from $0.9 million or $0.15 per share in the prior year.

EBITDAS from continuing operations and non-GAAP financial measure improved to a profit of $119,000 for the first quarter of 2011 compared to a profit of $102,000 in the prior year. Overall we are pleased with the progress. Revenue growth, margin expansion and lean expense management combined to drive significant improvements in our bottom line operating results over the past several quarters. Margins continue to strengthen operating expenses as appropriate for the business and scaleable.

Looking at here, we are more focused than ever on growing the top-line driving increase penetration of PokerPro and expanding our product line with Blackjack Pro. PokerTek is well positioned and we’re expecting operating results to continue to improve as we grow and evolve as an electronic table games company.

Operator we’ll now open the line for questions.

Question-and-Answer Session

Operator

(Operator Instructions) And the first question comes from the line of [Jeffrey Hwang]. Please proceed.

Jeffrey Hwang

Hi, gentlemen.

Mark Roberson

Hi, Jeffrey how are you today.

Jeffrey Hwang

Very good. I’ve got a couple of questions I just wanted to clarify. The first one was just on the gross margin and the improvement; I know you had talk about the fact that you have been lower the cost of production, but I just wanted to know is do you think that the gross margin rate at that 70% or so level is sustainable? And I guess as you look at both the poker table production and the Blackjack table production?

Mark Roberson

Yes, Jeffrey. As we look ahead we’ve been able to lower the manufacturing production cost of our product line as we mentioned really significantly as we rollout the new Pro core product which is the hardware platform on which Blackjack was developed and on which future PokerPro tables will be deployed.

Looking ahead, we’ve been able to improve gross margins fairly significantly over the past eight or so quarters to get to the 72% level. As we project ahead, we don’t give specific guidance on earnings, but looking at ranges of margins and our expectations based on product costing, building materials and cost to deploy tables, we expect margins to be sustainable in the high 60% to mid 70% range.

Jeffrey Hwang

Okay. You and I have spoken before and I just wanted to make sure I understood the deferred revenue component which I see again has gone up and again I like that because obviously that seems some where down the road, you’re going to recognize and I saw it going from about 800,000 to over 1 million most currently.

Can you tell me again what it is that the deferred revenue component has and I also want to understand again what the recurring revenue component of the table is or tables are for both Poker and Blackjack?

Mark Roberson

Right. We have really three sales models, three revenue models for our customers at PokerTek. The predominance in our business has been leasing either on a participation basis or on a fixed monthly licensee basis.

We also offer customers two other options; one of which is the ability to buy the hardware outright with no-recurring fees whatsoever at an obviously higher price. We have very few sales that are constructed as an outright sales model under that scenario, although we do have one or two from time-to-time.

As we enter international markets, we’ve seen a little bit of a movement towards more of a hybrid model that we also offered all our customers, which is the ability to purchase the hardware at a reasonable margin along with a monthly recurring software licensing and maintenance fee.

When you are looking at deferred revenue growing on the balance sheet, what that represents is where we’ve sold hardware to customers and the revenue related to those hardware sales which is bundled under GAAP with the software licensing arrangement and the support maintenance fees that will be recognized overtime.

The revenue related to those hardware sales are deferred on the books and recognized basically over the period under which PokerTek would provide the services related to the software licensing and maintenance.

So when you are looking at our balance sheet and seeing deferred revenue of $1 million, it’s fair to conclude that over the next 12 to 18 months, depending on the blended term of various contracts that you would see that deferred revenue flow through the P&L as revenue during that period.

Jeffrey Hwang

And so when you look at the type of monthly license fees, or the monthly fees which you are getting, once you sold one of the tables, are any of them where you are participating in the amount of usage in the table or is it all more like a fixed software maintenance type fee?

Mark Roberson

The majority of our monthly licensing fees are tied to participation and variable based on the customers’ revenue performance.

Jeffrey Hwang

Okay. And I don’t know if you can reveal this or not, but of the 265 tables of both Poker, and Blackjack combined what percentage would you say are generating a recurring revenue versus having done an outright sale?

Mark Roberson

I don’t have the exact precise number for you off the top of my head here, Jeffrey, but looking at 265 tables all with exception of a very small handful of generating recurring revenue, that percentage is going to be 90% or better.

Jeffrey Hwang

I will ask one more question then I will step back in case there are other questions behind me. Just in terms of the churn where you had some tables coming out I guess was in Canada.

Mark Roberson

Right.

Jeffrey Hwang

At this point when you look at and I am assuming that most of the churn is happening in North America and I don’t know that’s correct or not, but if it is at what point are you are feeling that that churn may slow down, so that as you are adding new sales you are not netting down, you are not netting not the full amount of sales because you have still got losses going on wherever they maybe occurring whether it is in the US or Canada?

Mark Roberson

If you look at our, the trend of our PokerPro or Table Count back through 2009 and into early 2010 we had a substantial amount of repositioning of tables that we talked about on prior calls. As we really looked at our portfolio and moved a lot of our product from highly competitive or highly saturated gaming markets into markets that are better positioned for electronic gaming, which in a large case represents international markets.

At this point as we look at the portfolio of the 265 tables at the end of this quarter well over 90% of those tables are in markets that we consider our target markets that are favorable for electronic gaming. So we think certainly that the majority of that churn is behind us. However, I would add to that that in the gaming business some amount of churn is just a normal part of the business.

So, I would characterize that we’re always going to have some repositioning of product; we’re going to actively manage the portfolio and even within markets that are good markets we’ll look at the performance of tables at specific operations, at specific locations. And we’ll continue to move tables around and that’s just whether it’s electronic table games or shufflers or other gaming equipment; that’s kind of a normal part of the business.

Jeffrey Hwang

Right.

Mark Roberson

Certainly, at this point we got to a stage where the heavy lifting of repositioning is done. And the churn looking ahead will still be there underneath the surface but it’ll be at a formal minimal rate, such as we add tables we should start seeing more net table growth as opposed to when you look back at Q1, Q2, Q3 of 2009 when we were doing a lot more churning and cherry picking and repositioning of tables.

James Crawford

Yeah, this is James Crawford, the other thing I’ll add is that in the new markets like Mexico for example, when the door is opened everybody rushed in and everybody wanted is, of this or that they could get.

Tables went in and we were competing and one of the environments where we were actually competing against ourselves, because we had casinos that were operated by different operators and they kept tables. They wanted – rent one of the tables so we had tables across the street from each other and it was really, you rob Peter to pay Paul because whoever had the best casino in that area really did the most business.

So, since we were on revenue share model with a lot of those customers, we wanted to move those tables to more advantageous locations for us. So we slowed down a little bit, including in Mexico, until we could reposition tables to get some really high earners in more diversify throughout the market as opposed to just putting as many tables as you can put in, is not necessarily a good thing. You know, we’d still earn revenues though, except I'd say that that was probably just piece of I wouldn’t touch on.

Mark Roberson

And you've already gauged it, what is the ability of recurring revenue base at this point as you look at the portfolio of revenue producing tables? And I can tell you definitely I feel much better about the sustainability and the reliability of what is now, 1.7 million of recurring revenue than I did a year ago because of the activities of moving tables around and getting them where we think they need to be at this point.

Jeffrey Hwang

Just, I guess, just two follow-ups to this and I promise I will step back out into the queue again. But as it related to this what we were just talking about, it would seem to me that even though, James, you were talking about how you could be competing against yourself with the casinos across a street from each other wouldn’t it be the case that you would prefer to at least have competing against yourself versus having a competitor table come in who would be somebody other than you? I don’t know, is that going on right now?

James Crawford

Well, I mean, we're really the dominant player in that market and everybody that want poker wants us. And even other companies that have come in, there was a big, pretty big operator that was operating a lot of one of our competitors' tables and we came in and displace some 20 or 30 of our competitors' tables with PokerPro table. What I would say is that if that we moved the table from across the street, it was generating very little revenue and because we have expenses getting those tables into Mexico, we have to pay duties and fees and the cost to support those tables.

It needs to make sense from and are a last endpoint for us to put any table in. So if I can move a table that's generating $1,000 in revenue a month to another spot that’s generating $3,000 in revenue. Even if the competitor came in to that other and picked up a little piece of it, it’s still the return on investment.

Now over the long haul, you are right. It is slightly better just to have inventory, if you have it available to just put it on the floor and generate whatever dollar you can, but at this point because we are limited with capital, we very cautiously look at the opportunity, both and in a casino in the United States, it has to test and meet certain criteria where if it doesn’t fit, no live poker in a certain geographic area around that venue, we won’t even talk to them, I mean we will talk to them, but we won’t consider them s a viable opportunity.

Same thing in Mexico. It has to be, it has to look right. We do have a very diverse offering there now. We are all over the place, we are almost in every state and we are happy with the placements that we have.

Jeffrey Hwang

I will step back for a minute, then I will follow up after.

Operator

(Operator's Instructions). And the next question comes from the line of [Martin Kramer]. Please proceed.

Martin Kramer

It sounds like when you do the placements it’s like, you have the choice of removing it versus the casino itself having any control over this, is that the way it goes.

Mark Roberson

Yes, it’s a two-way street, I wouldn't say that unilaterally that we always have the choice of removing tables and we generally don't remove tables unless in working with an operator that we both may look at a location where we put a table in initially and say after six months or a year of performance, say that's just really not a poker venue that has a poker market and it would be a joint decision as to whether to move that table to another location that they may have. So it’s certainly not unilateral. It’s made in concert with working with our customers.

Martin Kramer

So it’s a mutual decision when you are pulling a table out. What if you are pulling it out all together, this isn't working or are you just going to remove it?

James Crawford

I would say that our experience has been that if it’s not working for us, it’s not really working for them. I mean you got to remember that poker itself is not the biggest money generator in the casino to begin with. So if they have the ability to put unlimited slots on the floor and you have a slot machine, I mean a poker table takes up x number of slot machine positions. If they just don't have a market for poker which is usually the case that we would pull the tables out where it is just generating less revenue than it cost to me to support that table.

The customers usually aren’t bored with it. I mean it's very in your face, this is obvious. And we actually have a list of customers that we keep, that have, okay, we are concerned about this customer, we send somebody into that marketplace. If it is in Mexico we have a girl there that goes in there and she evaluates the casino on her own and she talks with the management and the staff and just observes the product in the venue and then comes back and gives us her recommendations and then we just keep watching those tables and if they fall below on certain thresholds, we actively look at those installs and then make decisions to work with them.

Mark Roberson

I think it's worth elaborating just a little bit too that Poker is a little different than Swats, indifferent than Blackjack and other games. It’s much tougher to build a Poker business with kind of casual players, people who play Poker generally play Poker for a long period of time when they sit down to play. They may leave the house knowing exactly where they going to play Poker.

So if a venue is not generating a strong Poker business, it's not really like Blackjack where we can put a table in or a Swat machine where we can put a table in and generate a reasonable amount of business without actively working to build that business with casual players coming into play for 20 minutes or 30 minutes of time.

Poker you just got a little harder from an operator standpoint and some locations build a Poker business and some locations don’t. And that’s kind of what when you are managing a portfolio of Poker tables when you participating in the revenue that you have to actively manage and actively look at the performance of the portfolio as you would with any other revenue producing least assets.

Martin Kramer

Until you probably have access to all the performance of each table, you can tap into that, can you not?

Mark Roberson

Absolutely, we get all kinds of reports regarding daily, weekly stats on performance of the tables and we narrow that.

James Crawford

We actually have hourly stat, we can see when the peak markets are happening, when they generate the most revenue, we do dive into it; even with cargo ships that we have poker tables on, we evaluate that information monthly.

Mark Roberson

Yeah, with a lot of operators there is a change in performance of the table, we’re able to look at that data and in some cases, make recommendations about changes in game mix or game player promotions that can impact the performance of the table as well. It’s definitely a lot of data at our fingertips and we keep a pretty close watch on performance on a weekly and a monthly basis.

Martin Kramer

Got it. And I know you haven’t revealed where the Blackjack tables are? Is there a reason for that?

Mark Roberson

At this point, it’s fair to say it’s in an unregulated market. The customer is there so we not specifically name them as yet for competitive reasons and yeah we’re going to the sensitive to the customer’s request and not publicize their name at this point.

Martin Kramer

Got it.

Mark Roberson

We expect to do so in the near future.

Martin Kramer

Okay. Okay, thank you very much.

Mark Roberson

Okay. Thank you, Marty.

James Crawford

Thanks Marty.

Martin Kramer

Thank you.

Operator

And we have a follow-up question from the line of Jeffrey Hwang. Please proceed.

Jeffrey Hwang

You guys going to get tired of hearing my New York accent.

Mark Roberson

We are glad to hear from you Jeffrey.

Jeffrey Hwang

I want to just follow-up on the prior callers just kind of questioning on the Blackjack tables. I’m kind of new this whole kind of industry, but is there – do you need to get regulatory approval so the Blackjack tables like you did for the poker tables?

Mark Roberson

Yes, it depends on the markets in which you’re deploying the tables. There are markets, cruise ships, Mexico, other international markets that are very lightly regulated or unregulated where aside from electrical approval, UL approvals that there really is no product or company licensing process that you need to get it through.

As you move through the different types of markets, there are markets or you need approval by a gaming laboratory. So you need the product tested and approved by someone like Gaming Labs International. There are other markets such as Nevada, New Jersey and others who even have their own labs and you have to have the product approved, not by GLI or some central lab, but by the laboratory of the individual jurisdiction that you are potentially talking to.

Our approach at this point is, we are taking a staged approach. We've identified where we believe is good opportunity within very likely regulated markets initially, that we're focused on for the majority of 2011 as we rollout the first Blackjack tables. Contemporaneous with that effort, we are submitting and we’ll be getting approvals from folks like GLI for the Blackjack tables so that we can also go after more traditional U.S. markets and other markets around the world that do require that sort of regulatory stamp.

James Crawford

And I would add too that there even where there is regulated markets, in the United States for example, they go from on a scale one to 10, there are zeros and there are 10s; I mean the level of – and so it has.

The good news is that as a company, we've already gone through the process for the PokerPro table, but you don’t have to get it through the company licensing which is a big piece of that. And then you still have here as Mark said huge opportunities in the unregulated or just lightly regulated marketplace.

France is, basically, you submit the product before a group of the French Police and they would get it and two weeks later, if they are happy, they would just sign the piece of papers saying, you are in.

Mark Roberson

Well, I would say that in France it could be two weeks or it could be….

James Crawford

Two years.

Mark Roberson

Two years. But we believe it will be on the shorter side of that spectrum. What took us a long time in say France with PokerPro was not product approval so much as getting company approval. So we are through the company approval process in France. So we would expect to be able to get the – and the PokerPro product has been approved, the Blackjack products built on a similar platform, we would expect that the approval process in France will be relatively short, but we certainly can't provide any assurance of that today.

Jeffrey Hwang

I guess, the thing that sounds exciting to me is as you listen to what you are saying and all the approvals now that we’ve gotten, and all the hoops you have gone through on the PokerPro side, it would seem like the Blackjack rollout is only limited by capital. It seems like you should be able to roll this out a lot quicker now to the existing markets where you have gotten the approvals and people are already familiar with your company?

Mark Roberson

Very certainly we believe anyway, a larger market opportunity for house-banked games, as you look out longer term, then necessarily for poker as a player-banked game. Our limitations are; capital is certainly a limitation that affects the speed of our rollout and our committing to inventory and working capital to fulfill the anticipated customer demand, and also with speed of moving through the regulatory cycle.

We are taking a fairly paced approach, because we believe there is good opportunity in unregulated and lightly regulated markets. We’re not going to run and put a Blackjack table in Nevada or Alvington for instance or in other labs because we think we can stage this out and conserve capital and do it in a very cost efficient way by staging the markets that we go after. In relation to number one, the addressable market and the addressable demand in those markets combined with the regulatory burden in terms of both cost and time to get approved in those markets.

Jeffrey Hwang

Can you just go over if you don't mind again what you think is the size, the potential size of the poker table market, the blackjack table market and just the level of hardware competitor or table competitor on those two markets?

Mark Roberson

Yes, let me start with poker. When we look at the addressable market for electronic poker, there's a couple of different ways to slice that. One metric is there are a little over 10,000 manual or otherwise poker tables in existence in the world today in various gaming markets. About a little over 60% of those or more are in the United States and the rest are international. We believe the US market is over saturated.

We believe the international markets are underserved at this point with poker. So we believe there's much more demand in growth potential in poker in general in the international markets that we are targeting. The other way that we look at is, we look at the markets in poker where, one way to look is a replacement, how many of those 10,000 are going to go out and replace, and what percentage of that you are going to get and we do look at it that way.

We also primarily look at it in terms of identifying those markets again, particularly international and within the US based on levels of saturation geographically around different areas of the different markets and quantifying as we look at our marketing plans, the addressable market in each of those markets. When we roll that up by market and look at Crew ship industry, Mexico, France, Europe, parts of Africa, potentially parts of Asia, South America.

This number changes a little bit from time to time, but generally we believe that the addressable market that we have identified so far for Poker is around a 1000 tables. And we may be off a little bit on the low side or the high side, but roughly over time we believe that the electronics table games market for Poker is roughly a 1000 tables.

Jeffrey Hwang

And your competitors there would be beside yourself, would you say there is any legitimate competitors in that arena?

Mark Roberson

There are some competitors. We certainly have by a large factor, a dominant market share and I would say that from an industry reputation standpoint, we are sort of perceived as being a little bit of a class by ourselves in terms of quality of product, quality of support, reliability et cetera.

There are a handful of other companies out there that produce an electronic Poker table that have a much smaller foot print than we do and I don’t believe that they are nearly focused on that product as we are. I would say that our nearest competitor has about 20% of the footprint that we have in terms of tables installed in the world.

And in the markets that we enter, for the most part we see knock-offs of our product that have been developed in Eastern Europe or South America that enter these markets, but they just don’t really work that well. And like in Mexico as we enter the market, when that market become open for US manufacturers, when we entered the market we were able to displace much of that product.

So I would say that in poker, I would say we definitely have competition and we definitely bump into that competition from time to time, but we have a very distinct lead on the competition advantage and quite frankly, we may be the only company that takes the Poker market as seriously as we did.

In Blackjack, there are a number of companies who make electronic blackjack tables, besides that and we’re not first to market like we were in poker. However, the size of the blackjack market, when we look at it, we believe it’s at least four to five times the size of the electronic poker market. We’re still evaluating that market, but that’s our preliminary indication.

So number one, we think there’s room for a lot more competitors in the electronic blackjack market and we believe we have come in to the table not as the first movers we were on poker, but coming to it afterwards that we have some advantages by looking at the competitors products and looking at the things that they did well, and the things that didn’t do so well, talking to customers about what they want to see and a new product coming to market and building our product around those, around that feedback. So we think that blackjack is a much bigger market. We think we’ll share it with a few other competitors more so than in poker, but we do believe it’s a sizable opportunity for us.

Jeffrey Hwang

I mean, obviously the competitors already have something out there and you have already kind of assessed that, so would you say that you now have kind of the best breed for blackjack table?

James Crawford

I wouldn’t say that.

Mark Roberson

I think we would definitely say that, I think our competitors may say otherwise, but I do believe that we’ve built a product that is very tight, very compact. It looks like a traditional Blackjack table, much more so than some of the competitors. It's very intuitive in terms of player interfaces and graphics.

Quite frankly, we took a lot of the things that players and operators liked about PokerPro that made it work where it worked and incorporated that into our Blackjack design. So yes, I would say that we do believe we have developed a better product in a lot of ways.

James Crawford

Yeah. I think I would add is that interestingly, one of the customers that we’re currently working with had an opportunity to place any of those other previous manufacturers products in their venue for years. And while they might have tried one or two, they didn’t go with that product and so they came to is and said, hey, this table needs to be built that works like a Blackjack table and there was nothing else in the market that they thought was worth using.

Jeffrey Hwang

Just as, I am curious, the financial side of it, the recurring revenue piece of Blackjack versus Poker. I don’t know what the size of money, the amount of money that goes through in your piece of the action on Blackjack versus Poker, but how did they two stack up if you compare how well Poker has done for you and I realize you’ve only now got six tables out. I don’t know how long they've been out for; but what are you expecting the financial side of that to be as compared to the PokerPro side?

Mark Roberson

I would characterize it in really two ways at this point. It is little pretty premature on our side with six tables out to go too far with it. But one thing I would say is that, in general, Blackjack for operators generates a lot more revenue than Poker. It's just been much more lucrative part of the casino. It's a much bigger part of the – much bigger, more profitable part of a casino operator's business. So from that standpoint that’s certainly a positive.

However generally, usually, you know leveraging net revenue over the larger number of tables. At this point, we don't know for sure exactly what our revenue per table is going to average out in Blackjack when we have 100, 200 of amount of [world or more].

The way they were looking at in now from modeling purposes internally is we’re taking a very conservative view of it saying, you know, if Blackjack performs only as good as Poker, is that a good business. Do we have a good ROI and can we build a business on that and be a very price competitive by doing so.

And by looking at it that way we – I believe that we’ll outperform that expectation, but that allowed us to take a, as opposed to taking a view of the world that is inflated and then you are building our models around it and building our ROI expectations around it. I think we can be very aggressive with pricing, generate sustainable nice margins and generate some penetration.

Jeffrey Hwang

Just, because you have alluded this a couple of times about being somewhat constrained by capital, and I am not an expert here, but is there a way at least to somewhat finance some of your AR. If you have got this recurring revenue stream, it would seem like there should be some kind of way you can borrow against that to try and finance the equipment build; have you explored some of the, I guess some debt type of financing alternatives?

James Crawford

Yeah, actually Jeffrey what we have, we have a line of credit in place with Silicon Valley bank. We have had this facility in place for some time and we have not have that in the past, so we have it, and as basically as you described a facility that is collateralized by our accounts receivable that we can use for working capital borrowing.

So that facility is in place as untapped. Now that we are EBITDA positive, our operating performance is much more stable than it was a year ago. If we need to access that facility to borrow small amounts of money for short periods of time to finance working capital, we have it in place and can do so.

Jeffrey Hwang

How big is that line?

James Crawford

The availability under that line varies based on the composition of our receivables from time-to-time. Our most recent availability under the line was approximately $300,000 to $400,000.

Jeffrey Hwang

Okay. Gentlemen thanks very much. Good luck, it sounds really exciting.

Mark Roberson

Thank you Jeff, we appreciate it.

James Crawford

Thanks Jeff.

Operator

Okay and there are no audio questions at this time.

Mark Roberson

Okay. Thank you for joining everyone. We appreciate your time. Have a good afternoon.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect.

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