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PokerTek Inc. (NASDAQ:PTEK)

Q1 2012 Earnings Call

May 01, 2012 11:00 AM ET

Executives

Tracy Egan – VP, Marketing

Mark Roberson – CEO and CFO

James Crawford – President

Analysts

Thomas Pierce – Feltl & Company

Jeffrey Link

Operator

Good day ladies and gentlemen and welcome to the Q1 2011 PokerTek Inc. Earnings Conference Call. My name is Rachel and I will be your operator for today. At this time all participants are in a listen-only mode. (Operator Instructions).

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

Tracy Egan

Thank you and good morning. Welcome to PokerTek's investor conference call for the quarter ended March 31st, 2012. 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 for joining us today. Obviously we are pleased to start the New Year with strong EBITDA and cash flow performance of as well as posting our first quarter of positive earnings-per-share on GAAP basis.

On our year end conference call we discussed several steps we had taken to refocus our sales efforts and further reduce overhead. For Q1 our gross margins improved to 77% and our operating expenses declined by 26% from the first-quarter of 2011. As a result PokerTek increased its cash position and strengthened its balance sheet better positioning the company for growth.

Entering 2012 we are focused on ramping up market penetration for both local PokerPro and ProCore. We have clear lead with PokerPro which is the dominant product in its category and we have opportunities tied up to drive market penetration more aggressively over the next several quarters. The ProCore platform which expand our reach into the market for house bank blackjack and other specialty games continues to perform well and it's creating new opportunities for diversification and growth.

Achieving a profitable quarter is an important milestone and worthy of a few moments of celebration however our focus not on the quarterly ups and downs but instead on growing more meaningfully over the next several years. In this industry the sales and regulatory cycle can be arduous and opportunities take time. We have worked hard over the past several years to solidify PokerPro's market position, to develop the ProCore platform, to streamline their operations and to focus our sales and marketing efforts. I'm excited about the progress and expect to see increased growth in our gaining positions as we proceed through 2012.

James will now provide some highlights regarding our current marketing initiatives and opportunities.

James Crawford

Thanks Mark. Q1 was a busy one as we began planning several new PokerPro projects which we expect to install over the next several months and we continue to roll out the ProCore platform. We installed 54 additional ProCore positions in the quarter if which 48 were added as kind of a crew shifts. This brings the total number of ProCore player positions on Carnival to 132 positions on eight ships. As we continue to roll out ProCore to additional ships player adoption from both casual and experienced blackjack players continues to be excellent. We are working closely with Carnival to enhance the product, add promotional features and deepen our integration with their slot systems to enhance the player experience and further integrate our products with Carnival's goals and strategies.

We also installed in our first ProCore table in France at the casino in Toulouse and expect to expand the roll out to more land based properties. PokerPro was already installed at the property in Toulouse and the players have quickly embraced the ProCore blackjack. We also added 10 more PokerPro positions at another property in France in the quarter. We changed our distribution strategy in France at the beginning of Q1 signing up a new independent representative to help drive sales in the market.

Based on the feedback we expect the second half of the year to be busy as new capital budgets are approved for the operators there. We previously announced that PokerPro field trial was successfully completed and the product approved in Ontario. The field trial was at OLG's Western Fair Property where we originally installed 20 positions, then added 10 more on the exceptional results. We expect to build on the success of this initial installation and are currently planning projects to install PokerPro at four additional sites.

We expect the contract to be completed and tables added over the next few months. Additionally we recently submitted ProCore blackjack for approval in Ontario. We look forward to beginning field travel with that product soon as well.

We continue working with customers in the U.S. Latin America, Eastern Europe and are in final stages of the sales cycles. We expect to see initial installations in several new markets in Q2 and Q3 which will also help grow our penetration. Mark?

Mark Roberson

Thanks James. I trust that everyone has had the opportunity to review the earnings release issued this morning. That information is also available on our website as well as at the SEC.gov. For the quarter revenue decreased to $1.7 million from $2 million in the first quarter of 2011. Revenue from the sales of systems and services were both strong and both furious and both quarters included approximately $600,000 revenue from system sales.

Licensing and service fees declined by $273,000 due to the regulatory changes in Mexico. Historically the first quarter produces seasonally strong revenues from our crew ship business and despite the negative publicity that the industry has endured this year crew ship performance was quite strong in the first quarter of this year as well.

Revenue comparisons were also affected by changes in mix and geography. Excluding Mexico total quarterly revenues increased by 5.7%. Gross profit was $1.3 million and margins increased to 77% from 71% last year. Margins have been steadily increasing for the past three years on approved product performance and cost reductions. Margins will fluctuate up and down on a quarterly basis depending on product mix, seasonality and other factors. We continue to see high 60s, the low 70s and a reasonable range going forward.

Our focus on operating expenses continue to boost financial results, operating expenses declined 26% to $1.2 million for Q1 of 2012 from $1.6 million last year. We have continually focused on reducing operating expenses and we took additional cost reduction actions in Q4 following the reduction of business from Mexico.

Compared with the prior year we saw reductions in operating expenses in almost every area of the company. As a result we generated positive operating profit, positive net income and positive earnings per share for the first time in the company's history. Earnings per share came in at $0.01 per share positive compared with negative $0.04 in the prior year period.

EBITDA was positive $394,000 compared to positive $290,000 last year. Cash from operating activities from continuing operations was positive $249,000 compared to positive $36,000 in the prior year. From a balance sheet perspective cash increased to $969,000 and the current ratio strengthened to over 3:1 due to increases in cash and a reductions in current liabilities.

In summary we reached positive earnings for the first time and strengthened the balance sheet. We started off the year strongly with cost cutting and margin expansion. We are now poised to start growing the build on that foundation. I'm excited about the pipeline for 2012 and look forward to taking any questions you may have.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Thomas Pierce from Feltl & Company. Your line is now live. Please go ahead.

Thomas Pierce – Feltl & Company

So a couple of questions. First question is can you sustain this. How is the second quarter looking?

James Crawford

We traditionally have not provided specific earnings guidance or revenue guidance, specific numbers looking forward and we are not really prepared to do that today either. Looking forward, cores are going to be up and down, we believe we obviously had a good quarter in Q1, had strong performance in lot of areas. We have cut cost, improve margins and we think based on that we built a good foundation to continue to post good results going forward. I can’t tell you that every quarter is going to be as good as the first quarter but we do have a good feeling about the pipeline.

We have a lot of good things coming through in Q2 that we believe will either feed Q2 earnings or help position the company better for the second half of the year.

Thomas Pierce – Feltl & Company

I knew you were going to answer me direct if I try.

James Crawford

And I know that I will add is that you know the sales cycle as we know and from the history of PokerTek is just being very, very long for almost every major project that we have every worked and it's been while some of the projects that we have been working on for a very long time are just now starting to come to fruition and as I think as Mark said whether those projects come together in Q2 or help feed the rest of the year remains to been seen but you know I think we have put everything in place that we need to be successful throughout the rest of the year.

Thomas Pierce – Feltl & Company

Very good, well I also have to ask you about two areas, Ohio there and again I have to ask you about Mexico and what your feeling is there.

James Crawford

Mark why don’t you give a little commentary on Mike’s take?

Mark Roberson

Yes let’s start with Mexico, obviously I think everyone is aware that in the end of Q3 we ended up removing tables for Mexico because of the regulatory interpretation changes there by (inaudible) the government regulatory authority. So we removed close to 80 tables at the end of Q3 which were generating over $300,000 per quarter in revenue. We are continuing to monitor the situation there. It still is unclear as to what’s going to happen to Mexico in terms of regulatory changes in terms of regulatory changes but we are optimistic. We do see some size or maybe able to put tables back in the Mexico before the end of the year but quite frankly it's just too early to give you a whole lot of confidence in Mexico other than to say we see enough to be optimistic but not enough to give you credible information regarding the outcome in Mexico yet.

James Crawford

And as far as Ohio goes I will say we closer than we have ever been, I think Ohio obviously is going through some major changes but then race tracks, casinos, the charitable laws, the gaming laws are working their way through the legislature now. So, you know just like everybody else we are waiting for those laws and rules to become effective so that we can participate but I believe that I mean our goal and again as I said at the very beginning that this stuff takes a long time to come to fruition. I believe that Ohio is finally worked its way through the cycle but we do believe that not giving guidance but we do believe that Ohio will be part of our plan in 2012.

Operator

Thank you for your question. Our next question comes from the line of Jeffrey Link. Your line is now live, please proceed.

Jeffrey Link

Couple of thing, I want to follow-up on the prior callers question with regard to Mexico. Is it I guess the question is what, is there a way to do something with the tables that are currently not been used that had been used there, where you may be able to redeploy them.

Mark Roberson

Jeffrey there are opportunities for us to potentially redeploy the product in Mexico with modifications. We are exploring that and working on a couple of a different angles there as we speak. I can’t give you assurances as to whether that strategy will work or not work but we are really working on this in two different angles, one is can the product be changed or modified to fit the regulatory environment as it exists today. And then obviously we are obviously also monitoring the regulatory environment to see if it will change to allow the product that was previously configured back in the market as well. So the answer is yes there is the possibility that either due to regulatory changes or due to product changes that Mexico can come back into play.

Jeffrey Link

My question was can you move them to a different country, can you since it is just sitting there collecting dust right now, can you move them to another Latin American country, can you move them to Canada, can you just simply redeploy them outside of Mexico?

Mark Roberson

Sure and I am sorry misunderstood you question but the answer is absolutely yes, actually in light of what we see coming in the pipeline from Ontario, potentially Ohio some of the opportunities James talked about as well as others. We have already moved about third of the tables from Mexico back to the U.S. in preparation to be deployed elsewhere both in the U.S. and in another parts of the world. We are continuing to monitor the situation Mexico and over the rest of the year as Mexico either comes back online with the significantly volume and as we need tables to deploy elsewhere we will probably bring another container of tables back of the U.S. that can be deployed elsewhere.

Jeffrey Link

And so I guess your accounts, I am going to defer to you on this. Since that cost, the cost of that table is already been already eaten or you are not going to have to lay out additional money to move the table to a new country. How does that get accounted for in the cost of goods?

Mark Roberson

I mean the tables that are were in Mexico, they are not the cost of those haven’t been fully eaten from on an accounting standpoint. They have been depreciated, not fully depreciated so those tables do have some basis left on them although it's obviously much less than you would have on a brand new table or a table that had not been deployed and depreciated at this point. You know as we move them to a new venue again whether it's in Mexico or outside of Mexico elsewhere those tables can be redeployed with very little outside cost other than the transportation and some minor refurbishment.

Jeffrey Link

And have you relieved or have you spoken in the past as to how many tables you had in Mexico?

Mark Roberson

Yes we had little over, right around 80 tables when we at the end of Q3, we have since removed a little over 20 tables and brought those back for redeployment elsewhere. So we continue to have and they were just under 60 tables continuing to sit in Mexico at this point.

Jeffrey Link

Okay and just kind of a house keeping question with regard to the stock being below a $1 now it's just at that $1, where do you stand in terms of you know the compliance on a potential delisting?

Mark Roberson

The rule is that we have to have 10 consecutive days where the closing bid price is at a $1 or above to regain compliance. I know we have had a number of days recently where it's been above and below a $1 and then over the past week to 10 days we have had a pretty good string of closes right at the $1 mark or slightly above. So, we are probably if our stock price pulls where it is we probably need two to three maybe four more days to regain compliance.

Jeffrey Link

And how many months have you been out of compliance?

Mark Roberson

We have been out of compliance about four to five months, there is a six month window to regain compliance, that window ends in late May. At that time if our stock had not closed above a $1 for 10 consecutive days, by the end of May or middle to end of May. At that point we would have to go to the Nasdaq and ask for an appeal or a hearing as we have done in the past to provide more time to regain compliance.

Jeffrey Link

Okay. I just got a couple other quick questions here. The SG&A coming down as greatly as it did close to 300,000 year-over-year for the quarter, were was the bulk of those cuts coming from?

Mark Roberson

I will tell you when I look at the P&L and put them side by side there was almost not a single line that didn’t have a reduction in it from some personnel related cost to spending on trade shows, spending on travel, spending on professional fee. It really was not one signal area, it was insurance, it was across the board tightening of the expenses and cutting.

Jeffrey Link

James on the maybe you can answer this on the pro core platform, is it mostly Blackjack that it's being rolled out on his carnival cruise lines and wherever else the platform is been done or are there other games that are also being implemented?

James Crawford

Yes currently the only game that we have rolled out is Blackjack, I will take that back, Blackjack in a variation of Blackjack that is proprietary to Carnival actually. But there are other games of course that will be developed for that platform, but today the main focus has been to put out of many of the ProCore tables as possible and the demand has been for blackjack and so that's what we've been working on and the future will hold new games and in a way we talk about it every day and there will be a list of games as demand decides.

Jeffrey Link

And in terms of, I guess the venue is obviously always dictating in extent how well a table does, but if you did a side-by-side in Carnival, if you looked at your poker tables and you looked at your ProCore blackjack tables, in terms of revenues that are generated, what's the enthusiasm level for the blackjack versus the poker?

James Crawford

Well first of all, I would just remind you that blackjack is a house bank game and poker is a player bank game. So two different piece completely, but I think to answer the question that you probably meant to ask, I would say that our tables compare very favorably when put side by side with a manually dealt table that deal the same limits. If it’s a $3 table or a $5 table or a $10 table, I think we will compete there favorably just because we deal more hands and then percentage, the hold on the blackjack table would be based really, most only the players that are playing that table and the quality in that, that's not going to change too much.

Mark Roberson

And there are couple of other dynamics. When you look at poker versus blackjack, and the installations that we've done, the cruise ships. On most of the cruise ships, you're going to have one poker table on the ship, and it’s the only poker on that ship. When we install blackjack on the ship, we're generally putting in three tables, sometimes two tables of blackjack and that instance you have our table as well as anywhere from five to six manual blackjack tables on the floor as well. So you have a situation where in poker, there is no other place to play poker if it's sort of a monopoly on the cruise ship. With blackjack, its three out of six to nine or so tables on the floor, players have a lot more choice. There are a lot of variation in limits between tables, some variation in game rules, whether doing blackjack or fun 21 or face up blackjack or other things that are variation. And what we are seeing is that player adoption has been really good on the electronic blackjack table, we're seeing both, experienced players to some degree migrate over from the annual tables to our tables. That takes a little more time, sometimes to get that player adoption but we've been happy with what we've seen so far. We're also seeing a lot of the casual player, the novice player, people who might not walk in and play $10 per hand blackjack on the manual table on a cruise ship but will come in there, all day long and play $3 blackjack on an electronic table and obviously the cruise ship couldn’t afford the deal, $3 blackjack on the manual table. So it's opening up, incremental revenue streams from that regard.

Jeffrey Link

If you look at the pipeline for the blackjack tables, as you look out for the year, what kind of visibility do you have?

James Crawford

Well first I would say, blackjack is a whole where we just and in fact we announced in the release that we just put a blackjack pro in field out actually for approval, IGCO and Ontario. We were in a field trial and France right now and we're working another venues as well that do not require GLI or other regulatory requirements to place the table. So it would be very hard to just guess as to what the opportunity is for the remainder of 2012 but I would say that is we're a successful as we have been with PokerPro and the venues that we've put in the end that we should have a pretty successful year with ProCore placements.

Jeffrey Link

And you seem to have a decent amount of cash on the balance now. Is this going to be enough to do the build out that you need to do with these tables or do you think they may need to be some additional money raised at some point?

James Crawford

Like always, it depends on how fast we end up rolling. Do you want to turn up the dial? We need to consume a little more cash to fund inventory purchases in a working capital with a slow growth strategy with the cash on the balance sheet may be enough. So really can't physically answer the question of would we ever raise money, is there money enough for any given period of time. Well certainly in much better financial condition than we've ever been. We've reduced our cost significantly. We're EBITDA positive. So really it depends on how fast we've grown second half of the year, both right now we're certainly not raising capital at this point.

Mark Roberson

And the other thing I would add to that is that one of the other main contributing factors could be how quickly can we place the PokerPro inventory that paid for (inaudible) that we have in United States and then what happens in Mexico or how fast can we place that inventory in Mexico to generate revenues as well.

Jeffrey Link

My final question, is just with regard to the internet gaming opportunities when the stock four months ago had that big run-up because of the whole legalizing internet gaming. Are there any initiatives that you are working on, that can somehow take advantage of what you are doing and tied into internet gaming?

Mark Roberson

We are obviously aware of what, for one, the run up for sure, but we believe that there are opportunities for the PokerPro platform or some variation thereof to interact with online gaming in different venues across the world and even in the United States. And we continue to explore those. We have explored. We can obviously speak to anything that we're working specifically. It's obvious. We're basically…

James Crawford

[Multiple Speakers] on our system. We're a server based game. We have a game that runs on a server, that's delivered on a platform.

Jeffrey Link

Because I don't need to tell you that if you guys can come up with something that ties into this space, it would do wonders to the stock price.

James Crawford

We agree with you 100%. I mean it's an obvious play in exploring every opportunity.

Operator

Ty for your question. There are no further questions. (Operator Instructions). Thank you. I would now like to turn the call over to Mark Roberson for the closing remarks.

Mark Roberson

Thank you. Thank you everyone for joining the call today and have a good afternoon.

Operator

Thank you ladies and gentlemen. That concludes your conference call for today. You may now disconnect. Thank you for joining and enjoy the rest of your day.

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