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Executives

Mark Roberson – Chief Executive Officer

James Crawford – President, Secretary

Analysts

PokerTek, Inc (PTEK) Q2 2012 Earnings Call August 8, 2012 11:00 AM ET

Operator

Welcome to the PokerTek Second Quarter Earnings Conference Call. My name is Sandra and I will be your operator for today’s call. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session. Please note that this conference is being recorded.

I will now turn the call over to Mr. Mark Roberson, Chief Executive Officer. Mr. Roberson, you may begin.

Mark Daniel Roberson

Thank you and good morning. Before we get started, I would like to remind you that we will make forward-looking statements on today’s call. Actual results may differ and we undertake no obligation to update those statements.

Our discussion will also include non-GAAP financial measures, specifically earnings before interest, taxes, depreciation, amortization and share-based compensation. For additional information and a reconciliation of EBITDA we ask that you refer to our earnings release that’s filed on Form 8-K today and to other SEC filings which can be accessed from our corporate website, www.pokertek.com.

As reported this morning, our bottom line financial results for the first half and for the second quarter continue to improve as compared to the prior year period. Those improvements were driven primarily by our focus on reducing costs and improving operational efficiency.

What is less readily apparent from the reported financial results is the momentum we are seeing in the impact that new gaining positions will have on recurring revenue growth and financial performance in the second half of the year.

Sales cycles tend to be long in our industry with new installations occurring only after regulatory diligence, contractual and project planning hurdles are cleared. June was one of the busiest months we have ever experienced, resulting in 262 net new gaining positions at 13 distinct locations for the quarter. Those installations will begin to contribute more visibly to our financial results starting in the third quarter.

In addition, our visibility into the second half has improved with over 225 new gaming positions already booked and scheduled for Q3, plus additional installations working their way through the planning process. The expected growth in these gaming positions will further enhance our market position, driving recurring revenue growth and financial performance for the second half and into 2013.

Over the past three years we have demonstrated a continuing trend of improvement in margins, expenses and bottom line results. We achieved our first quarter of EBITDA profitability in 2010, our first full year EBITDA’s profitability in 2011.

In the first quarterly period with positive EPS our first quarterly period with positive EPS on a GAAP basis.

Based on the current pipeline, we expect growth and recurrent revenue to accelerate in Q3 and Q4. Our goal is to grow recurring revenue while lowering operating expenses, resulting in sustainable EPS profitability on a recurring basis by the end of this year.

James will now provide an update on the recent installations, product performance and key market initiatives that we expect to drive revenue growth.

James Crawford

Thanks Mark. As Mark mentioned, Q2 was one of the busiest quarters in the history of the company with 262 net gain positions added. We also have good visibility into the second half with a large number of installations already planned and scheduled. These projects which we expect to install over the next several months will include an expansion of both PokerPro and ProCore.

The growth in gaming positions for Q2 including the following key markets. First, we added 70 gaming positions in the U.S including 50 additional positions in Harrah's Cherokee's New Poker Room, bringing the total at Cherokee to 150 gaming positions. This is [inaudible] noteworthy as it comes just after the proudly received approval off of manually dealt games for the first time. Both the operator and players have come to appreciate the advantages of PokerPro and prefer electronic poker over manually dealt games. The decision to make PokerPro the heart of their new expanded game environment speaks volumes.

We also continued to expand in Ontario where we added 60 PokerPro gaming positions at two additional sites and added six ProCore positions. This brings the total number of PokerPro player positions installed in Ontario at the end of the Q to 90 positions at 30 sites. As we continue to roll out PokerPro to additional sites in Ontario, early indications show phenomenal player adoptions from both casual and experienced poker players making these some of the highest performing PokerPro tables ever installed.

The ProCore blackjack installation marks the beginning of field trials for that product in Ontario. We expect to complete field trial in Q3 with additional installations expected to begin in the second half of 2012.

We also installed games at locations in the Caribbean, France, on cruise ships and other parts of Europe. Looking ahead to the second half of 2012, we have a robust pipeline of product installations planned and expect the installations currently scheduled, especially those in Canada and the United States, to drive recurring revenue growth.

In addition, we are also planning new installations in South America and expect to expand our presence in France. ProCore blackjack will complete field trials in both Ontario and France during the second half and we expect installations to begin immediately upon approvals in those markets. France has good market potential but it comes with long sales approval cycles.

We are now near the end of the cycle and expect to expand both PokerPro and Blackjack Pro in France in the fourth quarter corresponding with the timing of the capital expenditure approval cycle. Overall we closed the second quarter with a lot of momentum and expect that momentum to continue in the second half. Mark?

Mark Roberson

Hey James. Moving to the financials. For the first half in the second quarter revenues decreased due primarily to lower recurring license and service teams. The change in recurring revenue is due to three factors. One, prior comparison reflect decrease revenue from Mexico while we remove get lease product in September of 2011 due to regulatory changes in that market.

The macroeconomic conditions in Eastern Europe have also negatively impacted casino performance in that region, and the conversion of gaming positions from lease to sale in the United States earlier this year resulted in low recurring license fees in the second quarter.

Revenues from the sale of systems and equipments decreased a $157,000 for the first half and $143,000 for the second quarter. The prior year was favorably impacted by demand from eastern Europe and higher recognition of deferred revenue. While the current year was favorably impacted by the conversion of gaming positions from lease to sale in the U.S. We saw increased recurring revenue from the cruise market and from the new installations in Canada while [inaudible] gaming positions was robust, again the majority of those installations occurred nearly into the period.

Accordingly recurring revenue from those installations will begin to contribute more meaningfully in the second half. Margins increased to 74.7% for the first half of the year compared to 71.1% for the same period in 2011. Margins remains consistent between the quarterly period coming in at 71.1% in the second quarter of 2011 compared to 71.3% in the prior year.

The changes are primarily driven to the revenue mix as well as reductions in product cost and depreciation in periods. Our operating expense has decreased 25% to $2.3 million for the first half and 24.6% to $1.1 million in the second quarter. Cost reduction initiatives initiated in 2011 and prior years have resulted in lower spending of personnel related costs, regulatory approvals, and professional fees and both the quarterly and the year-to-date periods. We are continuing to scrutinize our operating cost and regionally implemented additional cost reduction initiative to further stream line our organizational structure and increase our operating flexibility. Those initiatives are expected result and further operating expense savings starting in the second half which will increase operating leverage as we grow the recurrent revenue.

Net loss from continuing operations improve 53% for the first half and 12% for the second quarter, including results from discontinued operations the net loss improved 61.5% for the half and 23.4% for the quarter. EBITDA was a profit of $283,000 for the first half which compares to a profit of $357,000 in 2011.

For the quarter EBITDA was a loss of $112,000 compared to a profit of $57,000 in the prior year period. Cash use in operating activities continued to improve, improving 52% for the first half based on improved profitability which was partially offset by increases in inventory and working capital.

As of June 30th, our cash balance was $720,000 and our line of credit with slow comparatively bank remains intact. Subsequent to the end of the quarter we entered into several transactions to further strengthen our balance sheet and position the company for growth.

In July, we modified the terms of our founder’s debt moving the maturity date from March 2013 out to December 2017 with a four year amortization beginning in January. We also satisfied 100,000 of bad debts to the issuance of common stock reducing total long term debt to $600,000 and increasing our equity in capital. We have also received subscription agreements to raise approximately 240,000 of additional capital in the third quarter.

With good visibility end of the second half a lean operating structure and a strengthened balance sheet were well positioned to executive our growth plans. We look forward to increasing our market penetration, lowering recurring revenue, and achieving our goals, sustainable EPS profitability by the end of this year.

We will now take any questions you may have.

Question-and-Answer Session

Operator

Thank you. We will now begin the question and the answering session. [Operator Instructions]. At this time there are no questions.

Mark Roberson

Thank you Sandra. Thanks for listening today. We appreciate your investment and look forward to a busy second half.

Operator

Thank you ladies and gentlemen. This concludes today’s conference. Thank you for participating. You may now disconnect.

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