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WPT Enterprises, Inc. (WPTE)
Q2 2007 Earnings Call
August 7, 2007 5:30 pm ET

Executives

Andrew Greenbaum - Investor Relations
Steven Lipscomb - President and Chief Executive Officer
Peter Hughes - Chief Operating Officer
Scott A. Friedman - Chief Financial Officer

Analysts

Clinton Morrison - Feltl & Company

Presentation

Operator

Good day ladies and gentlemen. Welcome to the WPT Enterprises, Incorporated, second quarter 2007 earnings conference call. At this time, all participants are in a listen-only mode. Following the presentation we will conduct a Question and Answer session. Instructions will be provided at that time for you to queue up for a question. As a reminder, today’s conference is being recorded. And now, I would like to turn the conference over to Mr. Andrew Greenbaum of ICR. Please go ahead, sir.

Andrew Greenbaum – Investor Relations

Thank you for joining us today to discuss WPT Enterprises second quarter financial results. With us on today’s call are Steven Lipscomb, President and Chief Executive Officer; Peter Hughes, Chief Operating Officer, and Scott Friedman, Chief Financial Officer. By now everyone should have gotten access to the press release which went out at 4:00 eastern time. If you have not received it, it is available on the Investor Relations portion of the World Poker Tour’s website.

Before we begin today, I would like to remain everyone of the Safe Harbor Statement under the Private Security Litigation Reform Act of 1995. All our prepared remarks contain forward-looking statements and management may make additional forward-looking statements in response to your questions. These statements do not guarantee future performance, therefore undue reliance should not be placed upon them. For additional discussion of the factors that could cause actual results to differ materially from those projected, and any forward-looking statement, we refer you to WPT filings with the Securities and Exchange Commission, including the most recent annual report filed on Form 10K, the Quarterly Report filed on Form 10Q, as well as the company’s current reports filed on Form 8K.

With that I’d like to turn the call over to Steven Lipscomb.

Steven Lipscomb - President and Chief Executive Officer

Thank you all for joining us this afternoon. With me on the phone are Peter Hughes, our COO and Scott Friedman, our CFO.

I’ll start by discussing our business strategy and update you on the progress we’ve made on the key initiatives that we set out at the end of 2006. Scott will then give you a review of the second quarter and provide our third quarter outlook. We’ll then open the call for your questions.

For 2007, we set several key initiatives that we felt were critical for the continued success of the World Poker Tour. As a reminder, these goals were: obtaining a new broadcast rights agreement for Season Six of the World Poker Tour, continuing to expand our brand and business internationally, and successfully relaunching our online gaming business.

As of the midpoint of the year, we’ve made significant progress on all three.

Let me start with our online gaming site, which as expected we launched in late June, followed by an official kickoff and media tour in London during the first week in July. In nonrestricted territories, WorldPokerTour.com offers real-money playing opportunities including No Limit Texas Hold ‘Em, Omaha, Seven Card Stud, and Hold ‘Em Blackjack, as well as “play for fun” options.

And just this last week, CryptoLogic delivered ten casino games to us, which are now offered to our customers. The casino games include multi-hand blackjack, European roulette, and multiple interactive slots, including their most popular, Millionaire’s Club, Bejeweled, and The Hulk.

We’re pleased with the site and the initial feedback that we’ve received. As you remember, we signed an agreement with CryptoLogic in late April to move the World Poker Tour online gaming site to their network. Our experience with CryptoLogic has been very positive. With them, we were able to develop and launch the new site in just two months, and as mentioned above, the casino project is now online and was delivered to us ahead of schedule.

Finally, we expect to include our first unique WPT feature into this site by September. As part of the relaunch, we began migrating players from our prior site in late June, and we’ve been acquiring players on a daily basis since.

In early July, we launched a You Play, We Pay promotion, where players can receive up to $1500 bonus, which is one of the industry’s largest bonuses. On July 9, we sponsored a live Poker in the Park event, which took place in London’s Leicester Square. Hundreds of poker enthusiasts took part in mini-tournaments or honed their game with a complimentary poker workshop. At the event, a Member of Parliament accepted an award that named London as the Number One Poker Destination in Europe, 2007, making it an ideal event for our online debut.

We used this opportunity for our board member, Mimi Rogers, and myself, to meet with print, radio, and television media to spread the word about WorldPokerTour.com in one of our top territories.

In the upcoming weeks, we plan to focus our marketing efforts on the following: Affiliate deals and search engine optimization marketing, television distribution and marketing, and land-based WPT tournaments in gaming territory.

Our international tour stops will begin in late September in Turks & Caicos and then take us to Spain and Canada in October. We have begun airing WPT Season Four with on-air advertising around the show on Challenge TV in the UK and Season Two and Three on AXN in Germany. Television distribution agreements were executed for Canada, the Netherlands, Denmark, and Australia, which will hit the air in the third quarter.

All of these agreements fall into the party gaming sponsorship agreement, adding even more value for the company.

It’s too early to start talking about site and traffic statistics, with only six months of activity—six weeks of activity. However, our goal is to acquire between 3% and 5% of the online poker marketplace within 18 to 24 months, which we believe will make us a top-ten online poker room.

We intend to provide key performance indicators in the future, and look forward to updating you on that progress.

Turning to our international businesses and brand. I am currently in China, where we just signed an exclusive five-year agreement with China Leisure Sports Administration Center, or the CLSAC, to build the first national poker tour in China. The CLSAC is the government-sanctioned body that’s authorized to oversee poker and other leisure sports throughout China. The five-year partnership is a landmark agreement in Chinese leisure sports history, and will focus on growing the sport of Tractor Poker, known as Tuo-La-Gi, a popular version of Chinese poker.

In 2002, the CLSAC officially declared Tuo- La-Gi poker an official sport in China and adopted new national rules to unify the many local styles of play to allow for fair competition between all cities and provinces around China. Coincidentally, the same year, the World Poker Tour began production of its television series, reinventing poker as a sport and igniting a global television phenomenon.

The unprecedented with WPTE will help CLSAC organize the sporting aspect of the Tractor Poker Tour while leveraging WPTE’s experience in sports marketing, television production, media sponsorship and merchandise. The agreement marks the first time CLSAC has agreed to organize a nationally sponsored poker tour in China.

WPTE and CLSAC will immediately launch the first season of the tour in mid-September, which is anticipated to visit up to 15 locations around China, culminating in the national championship in Beijing. Under the agreement, CLSAC and WPTE will develop unique television production platforms and secure television network distribution. We believe that China has great potential; we’re honored to be chosen as the exclusive partner of the CLSAC, and look forward to partnering with the government to maximize all opportunities surrounding the tour.

We also continue to strengthen the World Poker Tour brand through our television show in the US. As many of you are aware, early in the second quarter we signed an agreement with GSN to broadcast 23 individual WPT Season Six episodes, filmed at our partners’ world famous casinos and card rooms around the globe. In May we began filming Season Six, which kicked off with the Mirage Poker Showdown at the Mirage in Las Vegas, and also filmed the Mandalay Bay Power Championship at the Mandalay Bay in June. We will begin airing Season Six episodes in early 2008 as part of GSN’s Monday night lineup.

Before I turn the call over to Scott, I want to express that while we were satisfied with our progress with the online gaming site and international expansion, we still have a lot of work ahead of us. However, we feel that our objectives are clear and well-defined.

With that I’ll turn the call over to Scott.

Steven Lipscomb - President and Chief Executive Officer

Thanks, Steve.

Revenues for the second quarter of 2007 were $7.7 million compared to $11 million in the same period of 2006.

The decrease was primarily a result of the delivery of fewer domestic television episodes. Specifically, nine episodes of Season Five of the World Poker Tour television series were delivered in the second quarter of 2007, versus the delivery of 10 episodes of Season Four of the WPT and nine episodes of the Professional Poker Tour, in the 2006 period.

We reported a net loss for the quarter of $3.3 million, or $0.16 per share. Included in this loss is a $2.3 million write-off of online gaming assets which resulted from ceasing development of our previously planned stand-alone online gaming platform. Excluding the effect of the write-off, our net loss was $1.1 million, or $0.05 per share.

This compares to net earnings of $2.6 million, or $0.12 per fully diluted share, in the 2006 period.

Domestic television license revenues were $4.3 million in the second quarter of 2007, a decrease from $7.3 million in the second quarter of 2006. The decrease was due to fewer episodes of our television series having been delivered in the second quarter of 2007, versus a year ago.

Online gaming revenues were $0.3 million in the second quarter of 2007, compared to $0.8 million in the second quarter of 2006. The decrease was due to lower levels of player activity versus a year ago, as well as the company ceasing operations in the WagerWorks Network in June, while transitioning its online gaming operations to CryptoLogic.

Product licensing revenues increased to approximately $1 million in the second quarter of 2007, compared to approximately $0.8 million in the second quarter of 2006. The increase was due primarily to higher interactive gaming revenues from Take Two.

The cost of revenues declined to $3.1 million in the second quarter of 2007, from $4.2 million in the second quarter of 2006. The decrease was primarily a result of lower television production costs, as we delivered fewer episodes during the second quarter of 2007 compared to the 2006 period as previously mentioned.

Overall gross margins were 60% in the second quarter of 2007, compared to 62% in the second quarter of 2006. Domestic television licensing margins were 40% in the second quarter of 2007, compared to 51% in the same period of 2006. The decrease was primarily because of the delivery of nine episodes of the Professional Poker Tour series in 2006, for which the production costs had been expensed in an earlier period.

The lower domestic television margins in the 2007 period were largely offset by increased margin contribution from product licensing, international television, and sponsorship.

Selling, general and administrative expenses increased $6 million, compared to $4.4 million in the second quarter of 2006. The increase was primarily due to the company’s efforts to develop its own online gaming software and support prior to entering into an agreement with CryptoLogic in late April, 2007.

At July 1, 2007, we had no debt and total cash, cash equivalent and investments in marketable securities of approximately $34.6 million. We are pleased with our strong balance sheet and particularly our cash position as it has given us tremendous financial flexibility to further focus on the initiatives that Steve discussed.

And now, turning to guidance for the third quarter of 2007.

Revenues are expected to be in the range of $4 to $4.5 million. Regarding the outlook for 2007, we expect the following:

We expect to deliver the remaining three episodes of Season Five of the WPT television series to the Travel Channel during the third quarter of 2007. We expect to deliver five episodes of Season Six of the WPT television series to GSN in the fourth quarter of 2007.

We expect to recognize additional hosting and sponsorship revenues, including party gaming related revenues, as WPT episodes are aired during the third quarter of 2007. And we expect to increase sales and marketing efforts for online gaming beginning in September.

At this point, I would like to turn the call back to the operator for questions.

Question and Answer

Operator

(operator instructions)

We will go first to Clinton Morrison, Feltl & Company.

Clinton Morrison - Feltl & Company

Hey, guys.

Quick question. You indicated your goal was to get 3% to 5% of the market; I think you said 18 to 24 months. Define what 3% to 5% of the online market means to you.

Steven Lipscomb - President and Chief Executive Officer

Well, I think that if you go and you look it’s fairly easy now in the marketplace to view this. There are a number of public companies out there that share their information. So I think what we’re trying to do is give some sense of, given the size of the market, where we think we’ll be, and aren’t really trying to put too many constraints on it.

Scott may be able to add a little bit of color to give you some more comfort, although I think we’re trying to be pretty specific, not to make too many promises, or be too specific, because we’re not sure that makes sense. The broader goal, I think anyone who looks at that market and defines the 3% to 5% percent, understands that even with that modest and conservative outlook, it’s a very healthy business for us.

Scott, do you want to add anything?

Scott A. Friedman - Chief Financial Officer

Yeah, I’ll just add a few other things. Clint, I know that you’ve been on Poker Site Scout, sites likes that, you can see the top ten sites, have been companies like CryptoLogic, which is a network, but if you look at the traffic that’s been on there, the percent market share that they have has been around there.

So Crypto’s been up there, the Ladbrokes of the world. So if you look at companies of that size, I think that’s a fairly good comparison. And where we would hope to be within 18 to 24 months.

Steven Lipscomb - President and Chief Executive Officer

Meaning really the size of the whole network. I have said before that, that one of our big goals is to reach in that similar timeframe a thousand concurrent users, and I think those numbers, also, when you look at them, are pretty significant.

Clinton Morrison - Feltl & Company

OK. So you saw, a thousand concurrent users you think translates to 3% to 5% of the market?

Steven Lipscomb - President and Chief Executive Officer

Right. And because you can’t directly equate them, it’s difficult to have those numbers and have them line up with everybody’s assessment of what the size of the market is. I think that’s why we’re being careful not necessarily to define what people seem to define in the way of the market, in a specific way. So but I would say that’s another significant goal in the same period of time for the company.

Clinton Morrison - Feltl & Company

And then, following on obviously the revenue from your online dropped off quite a bit this quarter. Clearly you were in a transition, which is understandable. I’m juts trying to get my handle around how much of the drop-off in the previous quarter was the transition, versus it would have dropped off anyways?

Can you maybe give us some kind of sense as to what the run rate is now? Or, how much of the attrition – because you had been pretty flat for a couple of quarters and now all of a sudden we’ve dropped down.

Steven Lipscomb - President and Chief Executive Officer

Well, I think the reality really was the software that had been having trouble for quite some time. Our previous partner simply was allowing to let the sprockets fall off, simply because the incentive for them to continue didn’t exist. They had pretty much lost all other clients, prior to our leaving, and we, it, we left later for a number of reasons. But that I think is what you saw, is just issues having to do with that software as we ended our relationship.

I think if we had talked, and if we did things like give you real projections for what we expected to happen in that last quarter, that’s exactly what you would have seen.

From a timing perspective, if you understand that literally at the exact end of the second quarter is when we announced anyway that we had transferred over, and it wasn’t until a few weeks after that that we continued transitioning players, you’ll understand that particularly at the end of that period of time, we were already transitioning players, or working on transitioning players, over to the new site.

So it’s natural that you would see drop-off on that front.

And then as far as the question as what our current run rate is, I think we’re being very careful not to announce in the early phases what those exact numbers are, and I think you won’t find any online company as they begin the build of that market, that announce.

So I think as Scott may have mentioned, we’re looking at certainly fourth quarter end of the year being a time where we can start sharing that information, simply because there will be some meaningful data. The big issue is, when you start you have to have a number of months even to look at your information to understand what it means. We’re in the process internally, as we’re watching our numbers in the current new site, of really being able to evaluate it, so we’ll be able to give what I would consider to be meaningful information to the Street.

Clinton Morrison - Feltl & Company

Should we be comfortable that online revenues will be up in the third quarter over the second? Can you give us that much help?

Steven Lipscomb - President and Chief Executive Officer

Oh yeah, I would say without a doubt.

Clinton Morrison - Feltl & Company

OK. I’m just saying because I’m trying to get some handle of what happened in the quarter. The quarter definitely is a transition and we will see an improvement over this quarter.

Steven Lipscomb - President and Chief Executive Officer

I certainly – I’m sure that you’ll see an improvement over this quarter. And again, my best explanation is that the software, we had tremendous challenges with, or for some time, but this was all of that coming to a head. Literally we were grinding down that business, and at the same time we began transitioning players over at the end of the quarter.

Clinton Morrison - Feltl & Company

OK. In the last quarter you talked about a sort of a $2 million a quarter promotional budget. Can you give us a sense of as to when you really start spending that, and when do we really get at that kind of a spend run rate?

Steven Lipscomb - President and Chief Executive Officer

Well, I would say that the numbers are, that’s pretty similar to what we will continue to say our numbers are. My guess for the third quarter is it may be a little bit less than that, and the reason predominantly is, in Europe summer is a time that we’ve been advised by our various PR and media partners, in some particular areas you don’t want to spend because everyone is on vacation.

So likely, we will weight some of that more toward end of third quarter and more towards fourth quarter, but u would say that actual run rate is pretty similar. Unless, Scott, do you want to somehow modify that? I still think that number is a pretty good number.

Scott A. Friedman - Chief Financial Officer

No, that’s a pretty good number.

We’ve said in the release and the script here that we look at September is really starting to pick back up some of the activities, and some of the things to add to that are really – in the coming weeks there are a lot of things happening. We now have our casino products. We’re going to have our international tour stops, hitting Canada and Spain. Our show will be on air in multiple territories in the third quarter.

So it just seems a lot of things are going to be moving at one time, where it really makes sense to start picking up the marketing.

Going to your $2 million amount, that’s still very – I would leave that in there, I think, and those were minimums, $2 million for the third and fourth quarter. I think what we said in the past quarters is, the information that we get, we can get it very quickly, where we see if certain marketing is working or is not working. So if we see that certain things working we may ramp up a lot quicker and spend more to get more players on the site.

Steven Lipscomb - President and Chief Executive Officer

OK. The one thing, the other thing I was thinking about that I wanted to go back to, Clint, was, where the way (inaudible) in June, where you saw numbers fall off. In June there was very, very little online gaming activity, because the site, the WagerWorks site pretty much officially shut off in early June. So you’re going to see for the second quarter, it’s really almost only two months of activity. So I think that’s another explanation for the drop.

Clinton Morrison - Feltl & Company

OK, thank you.

Steven Lipscomb - President and Chief Executive Officer

Thank you, Clint.

Operator

(repeats instructions)

At this time, we have no further questions in the queue. I’ll turn the conference back over to Mr. Steve Lipscomb for any additional or closing remarks.

Steven Lipscomb - President and Chief Executive Officer

I think when you look at the things that are going on in our business, we really do understand that there’s a lot of work for us to do in order to grow to be a significant force in the online poker space, where online poker revenues are accepted.

But we continue to see the strength or our brand be recognized in places that surprise even us, and that makes us extremely excited about being in this business. And then when you , when I sit here in Shanghai looking out over an opportunity that we have, because of the path that we’ve taken with the World Poker Tour to be a sport, and really to be a legitimate sport. That makes it possible for us to really benefit from the restrictions that are in territories that we always pay attention to, and work with the groups and partners in those territories in order to grow legitimate sports league revenues, at the same time that we’re looking at this other business.

So it’s very exciting to have had the experience that we’ve had this last week, and look forward to being able to share more and more information in the third and fourth quarter.

With that, I’ll turn the call back over to the operator.

Operator

That does conclude today’s conference call. You may disconnect at this time. We do appreciate your participation.

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