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PokerTek, Inc. (NASDAQ:PTEK)

Q4 2011 Earnings Call

March 13, 2012 11:00 AM ET

Executives

Tracy Egan – VP, Marketing

Mark Roberson – CEO and CFO

James Crawford – President

Analysts

Thomas Pierce

James Noel – Private Investor

Operator

Good day ladies and gentlemen and welcome to the fourth quarter 2011 PokerTek Incorporated earnings conference call. At this time all participants are in a listen-only mode.

(Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference to Tracy Egan, Vice President of Marketing. You may proceed.

Tracy Egan

Thank you and good morning. Welcome to PokerTek's investor conference call for the year ended December 31st, 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 call is being simultaneously web cast 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 under federal securities laws. 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 as earnings before interest, taxes, depreciation, amortization and share-based compensation which represent a non-GAAP financial measure. A reconciliation to the GAAP financial statements can be found in today’s press release, and we also ask that you refer to our public filings with the SEC for additional information.

Now, I’ll turn the call over to Mark.

Mark Roberson

Thanks Tracy. Good morning and thank you all for joining us today. We have a lot to cover, so jump right in. 2011 was a year of strong operational performance for PokerTek. We grew revenues for the year, margins increased to over 70% and we continue to reduce our operating expenses. As we exited Mexico in September due to changing regulations, we refocused our efforts in other markets and took steps to further reduce our expenses. As a result, fourth quarter profitability improved over prior year, despite the reduction in revenue for Mexico and we posted our first full year of EBITDA's profitability.

A key element of our strategy and the strength of PokerTek's business model is the ability to balance growth and license and service fees which generate high margin, predictable recurring revenue with hardware sales which also generate high margins with significantly improved ROI and cash flows. Combined with the focus on targeted product development and controlled operating expenses, PokerTek's financial performance has demonstrated a trend of continued improvement.

Entering 2012 we are focused on increasing market penetration to drive revenue and profitability while positioning ourselves to take advantage of the improving economic and legislative climate for gaming. We have a dominant position in electronic poker where we have limited competition, with superior product and expect to increase market share as we execute in our target markets. The pro four platform for house bank blackjack and specialty games all separates new opportunities for growth and product diversification.

We are continuing to expand blackjack on crew ships and are beginning installations on land based properties. Based on identified demand in non-geo jurisdictions, we're delayed (inaudible) jurisdictions, we're delaying ProCore submission to conserve resources and focus on upcoming installation opportunities while developing new gains for the platform. We successfully completed field trial on Ontario and expect additional placements in 2012. We made changes to our distribution in France and expect to start capitalizing on opportunities in that market as well. We're in the latter stages of the sales cycle with a number of other markets and customers that we're excited about and expect to drive performance in the current year.

James Crawford will now provide additional information regarding our progress in several of those key markets.

James Crawford

Thanks Mark. In 2011 we made real progress in several new markets that we've been working on and we're able to execute on many of these opportunities in Q4. We are expecting strong growth in 2012 with meaningful opportunities in several domestic and international market. Poker Pro was approved for field trial in October by the Ontario Lottery and Gaming Corporation and we installed 20 player positions at western fair district casino in London Ontario. The trial concluded successfully in December and the site immediately added 10 more player positions to do to the success of the product. LLG operates 27 gaming sites across Ontario, many of which offers slots and electronic table games. This is an idle market for PokerTek's products and we've now submitted our ProCore platform to their lab for approval. We are expecting several additional Poker Pro installations this year and see Ontario quickly becoming an important contributor to our growth for 2012.

In Europe, we continue to expand in Romania where we've added 50 player positions to new properties operated by one of our existing customers in Q4. This gives us a total of 130 player positions at three sites in Romania where there is little manual competition and the security of Poker Pro's cashless electronic platform is appreciated and preferred by the operators. We are seeing the same types of opportunities developing in other parts of Eastern Europe and expect to see similar growth prospects as we progress into 2012.

We recently changed our distribution model in France allowing us to sell directly through our new sales agent to operators and properties there. This change is already resulting in solid activity for us in 2012 and has given us the momentum we've been striving for in this region where electronic table games have found success with players and operators.

Poker Pro is already approved in France and we are working with interested properties to submit applications to place the product on the floor. ProCore has been approved to start field trial in Q1. France has over 200 casinos and is one of the biggest opportunities in Europe for us in 2012. In Latin America we expect the Mexico market to reopen to electronic gaming although we have received no clear indications as to when that might be. We are also actively working to clear final regulatory and distribution hurdles in Central and South America.

In December we completed the fourth annual carnival Poker Pro challenge aboard the carnival of dream; this year's tournament awarded $150,000 in prizes and recorded the largest turnout yet with 312 players in the field. The continuous success of this event highlights our strong partnership with Carnival Corporation. And speaking of Carnival similar to the success of Poker Pro, ProCore Blackjack has found success meeting their need to offer a new product with the same game offering at lower limits which reduced that. In 2011 we installed 84 ProCore positions on the Carnival playing Blackjack and Fun 21. By comparison we have 600 Poker Pro positions installed across the Carnival fleet of corporate wire.

We plan for the installation of 54 more ProCore positions on three more Carnival branded ships in Q1 as we continue to roll. Mark?

Mark Roberson

Thanks James. I'm trust that everyone has had the opportunity to review the earnings information released this morning as well as the announcement that we will be revising our prior full year results. This information is available on our website as well as the SEC.gov.

Now let me start with the restatement of our quarterly financials first. At the beginning of the year we adopted several new pronouncements dealing with revenue recognition for multiple element arrangements. At the time of adoption we evaluated interaction of those new pronouncements with contracts where we sell gaming systems containing embedded proprietary software accompanied by various services including installation, training and post contract product support.

At the time of adoption at the beginning of this year, we concluded that our products were no longer subject to self or revenue recognition rules, however due to the complexity of our server based systems and the reliance of most customers on PokerTek for services to support those systems, we initially concluded that revenue from the sale of gaming systems with embedded software and services should continue to be deferred and recognize over time as our related services are delivered.

At year end, we revisited those pronouncements that have been adopted during the year and determined that in most cases the hardware embedded software should be treated as standalone units of accounting resulting in earlier recognition of revenue in most cases. As a result, the restatement increased revenue in earnings from the previously reported periods.

I would emphasize a couple of points regarding the revision of the numbers. We take our financial reporting obligation seriously and this revision was identified in the operation of our normal internal and disclosure controlled processes and was recommended to the audit committee and to the auditors by management. The restatement did not impact cash flow for any period. It did not impact the financial statements of any audited period and it did not impact the total amount of revenue or profit that would be recognized for any given contract.

It did however change the manner in which revenue was allocated to the various deliverables and accelerated the timing of revenue recognition resulting in an increase to revenue and profit when compared to the year to date numbers previously reported in our third quarter reports. I'll be happy to take any questions you may have regarding this after discussion of annual and fourth quarter financial results.

For the year revenue increased 10% to 6.5 million. For the quarter revenue decrease 16% to 1.3 million. Revenue comparisons were affected by the reduction in revenue from Mexico, increases from other markets and changes in mix. During the year, we expanded our gaming positions by 10% in the United States, Europe and other international markets. The increase resulted from growth in net placements of Poker Pro in those markets as well as the initial placements of ProCore on cruise ships during the year.

Excluding Mexico, total revenue increased 21% on an annual basis and 7% on a quarterly basis. Gross profit increased 18% to 4.6 million for the year and margins increased to 70.1% from 65.6% in the prior year. on a quarterly basis, gross profit decreased 16% to 900,000 while margins are relatively flat increasing to 70.2% from 69.7. margins have been steadily increasing for the past three years on improved product performance and cost reduction. We believe that the high 60 to low 70 range is a reasonable target range for a business although the quarterly numbers wont fluctuate depending on product mix and other factors.

We've continued to focus on operating expenses which declined 7% for the year and 14% for the quarter. We've taken actions to lower cost significantly over the past several years and we've set further action in response to the loss of revenue from Mexico. As a result, our operating results continue to show improvement with net loss from continuing operations improving 42% on an annual basis and 6% on a quarterly basis. On a per share basis, we reduced our net loss by 50% on annual basis and 14% for the quarter.

EBITDA was positive, 456,000 for the year and negative 45,000 for the quarter. On an annual basis this was the first year's EBITDA's profitability for PokerTek.

In summary, we continue to expand penetration in domestic and international markets and manage costs to drive improved financial results and achieved our first year of positive EBITDA. We have specific opportunities in our sales pipeline that are progressing through the sales cycle and expect placements of Poker Pro and ProCore to grow in 2012.

Based on preliminary results through the first two months of Q1, licensing and product sale activity are strong and we expect operating results to show significant sequential improvement driving positive cash flow from operating activities at the start of the year.

I'm excited about the business prospects for 2012 and we look forward to taking any questions you may have.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Our first question is from the line of Thomas Pierce. You may proceed.

Thomas Pierce

You currently look decent with Mexico out of the scene, you still did well. So in fact the whole year looked good. Just a question for you. a while back you started quite a run and there is talk about internet gaming being legal or legalized and wondered if you could comment on that at all.

Mark Roberson

Yes, I can comment and then James could also comment probably as well. We're obviously closely monitoring the changing legislative landscape. Both with regard to legalization of internet gaming and expansion of brick and motor gaming in that several states throughout the country right now. Currently it's unclear whether internet legislation will take place at the federal level or the states are going to bail out to enact their own interest rate rules. So currently there is a lot of activity, a lot of movement in that area and it's certainly in transition.

In either case, we believe the expansion of gaming and particular of internet poker is good for PokerTek in a lot of ways and we also believe that at that time we are uniquely positioned to benefit brick and motor opportunities converge in the future. So it's an area that we're defiantly monitoring very closely.

James Crawford

Yes and another thing I would add of that as the technology company already in the gaming space with licenses and many jurisdictions. We already basically have a server based platform that we deliver content to hardware and I think it puts us in a unique position to leverage what new opportunities develop out in the unknown world of what will become online gaming in the future.

Operator

(Operator Instructions). Our next question is from the line of James Noel. You may proceed.

James Noel – Private Investor

I am looking at an ad in the Poker Player magazine for February 13, regarding inflation of tables that the (inaudible) could you speak to that?

Mark Roberson

Sure. We could speak to that. We were working with station for installation at one of their properties earlier this year. they were looking to put in two Poker Pro tables in their Fiesta Henderson property in Nevada. As we progressed through the project planning for that installation, they elected not to proceed with the installation due to internal control complexities and dealing with getting the products into their location through their internal controls requirements. So that an installation that was in planning but that we're not proceeding with it at this time.

James Noel – Private Investor

Looks like a future item or not?

Mark Roberson

I don't think so at this point. Nevada, as we migrated our business strategy over the last several years, Nevada really has not been a primary driver of our gross strategy. Obviously we're always looking for opportunities where they exist to put product in. But at this point, Nevada is a highly competitive gaming market with lots of poker. It's primarily over saturated with poker at its current level. There were opportunities within Nevada for specific installations and specific utilizations of our product. There is a lot of low hanging fruit elsewhere, so it's not an area that we are spending a lot of time targeting today.

Operator

And at this time there are no other questions in the queue. I’d like to turn the call over to Mark Roberson for closing remarks.

Mark Roberson

Okay. Thank you very much for participating and everybody have a great afternoon.

Operator

And ladies and gentlemen this concludes your presentation. You may now disconnect and have a good day.

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