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PokerTek, Inc. (NASDAQ:PTEK)

Q3 2012 Earnings Call

November 6, 2012 11:00 am ET

Executives

Mark Roberson – Chief Executive Officer, Chief Financial Officer and Treasurer

James Crawford – President and Board Member

Operator

Good day, ladies and gentlemen and welcome to the Third Quarter 2012, PokerTek Inc., Earnings Conference Call. My name is Keith, and I will be your operator for today. At this time, all participants are in a listen-only mode. Later on we will conduct a question-and-answer session. (Operator Instructions) As a reminder, today’s conference is being recorded for replay purposes.

And with that, I’d now like to turn the conference over to your host for today, Mr. Mark Roberson, Chief Executive Officer. Please go ahead, sir.

Mark Roberson

Thank you and good morning. Before we get started, I’d 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 or forecast.

Our discussion will include non-GAAP financial measures, including EBITDA. Please refer to our periodic filings with the SEC for additional information regarding forward-looking statements, as well as the risk and uncertainties inherent in the business.

As reported this morning, our bottom line financial results for the third quarter and the first nine months continue to improve as we grow margins and cut our costs.

During the year, we refocused on growing a North America, while continuing to reduce our operating costs. Emphasis on placements in the U.S. and Canada, have effectively replaced the Europe and Mexico. In addition we streamlined operations including operating expense, reducing operating expenses by over 30% and forcing operating income improvements of greater than 30%.

With our high margin recurring revenue based reestablished, we’re now poise to accelerate our growth strategy. In the coming months, we’ll increased penetration in the U.S. and Canada, initial placements are expected in South America. New products are in development and new opportunities are emerging in Asia and other country for the markets. I am confident that the business momentum is sustainable that we’re poise to grow recurring revenue more meaningfully and that sustainable EPS profitability is near.

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

James Crawford

Thanks Mark. In Q3, we continued to our expansion into Ontario. Opened our first room in Ohio and begin project planning for our first placements in South America. We have a strong pipeline and expect to see increased growth in both PokerPro and ProCore replacements over the next several quarters. The growth in gaming positions for Q3 included the following the key markets. At the end of Q2, we had 90 PokerPro positions at three sites in Ontario.

In Q3, we had an additional 62 PokerPro positions at two sites bringing the total to 150 gaming positions. We are currently installed at six sites including an expansion of 110 PokerPro positions at the OLG Slots Woodbine property in Toronto, Ontario in October. This brings our total number of PokerPro gaming positions in Ontario today to 260.

In addition, we’ve just received BlackJack Pro-approval after initial installation in field trial at OLG Slot at Western Fair, and you have the just installed our second table at Woodbine. We expect orders for additional sites before the end of the year. We entered the Ohio marketing in Q3 with the charity room outside of Cleveland.

We believe Ohio will prove to be a very good market for both PokerPro and Blackjack Pro-table and expect to have additional installed in December, January timeframe. We continue to pursue new markets and we will begin our push into South America before the end of the years starting with Colombia and Argentina.

Those two markets each have 100s of electronic gaming venues and represent excellent opportunities. We expect to be able to announce our first installation soon. And we will expand to prove and other countries in the region. We also believe that Macau is becoming a real possibility.

Regulations that limit the number of table games allowed in the region are beginning to impact operators ability to meet demand for poker, ProCore another games. Because our tables are electronic, we believe the situation is ideal for PokerPro and we are in preliminary discussions with several operators into optimistic that we will see PokerPro in Macau in 2013.

We also plan to submit poker platform with Blackjack and Baccarat for GLI approvals in the first quarter, opening up additional markets for the product-line that will drive additional growth in 2013. We have generated a lot of momentum throughout 2012 and we’ll continue with a strong finish in Q4. We’re very excited about the possibilities that strong finish will deliver us in 2013.

Mark Roberson

Thanks, James. Moving to the financials, when you compare our results to the prior year, there is several obvious things. Revenues decreased due to the temporary regulatory changes in Mexico, as well as the impact of economic conditions in Europe. We reacted to those conditions by lowering costs, refocusing on North America and we improved our margins and improved our bottom-line operating results by greater than 30%.

Those actions have strengthened our business and we’re now seeing significant momentum that bodes well for the next quarter and for 2013. After refocusing our business, recurring revenues started growing again. Revenue grew 21% sequentially from June to December to September. That growth was primarily due to new placements in Canada and the United States that James spoke about earlier.

We view Poker as a niche market, where we have little competition and the realistic potential to grow at least three to four X over time as we execute our plans and increase penetration in our target markets. Near-term catalyst for growth includes the following. We have additional installations planned in the United States and Canada. We will be making our first installation in South America starting with Columbia and Argentina and then following with Peru and other countries in the region.

We’re expecting additional orders from France soon that should drive installations for 2013. Macau is a large market that has eluded us up to this point. We’re now seeing positive signs and are optimistic that we will see PokerPro Macau in 2013.

In Mexico, signals from the new government coming into power are encouraging and we’re becoming much more confident that we’ll be able to reenter this market soon. With ProCore, we’ve been focused on unregulated markets and gaining initial approvals for Blackjack in France and Ontario. As we’re nearing completion of Baccarat development, we plan to submit the platform in both games to GLI in early 2013.

GLI approval open much larger markets for ProCore and Baccarat will provide a tail with appeal to the larger Asian markets. Our target for revenue growth is to increase the top-line by 20% on a sequential quarterly basis going forward. From the perspective of sales mix, we’ve been trending towards a much heavier recurring revenue in recent periods, which provides a high margin annuity like revenue stream and a solid base on which to growth profitably and predictably.

Recurring revenue increased 80% of the total revenue in 2012, which compares to 74% last year. In the third quarter, our revenue was almost entirely recurring with recurring revenue at 98% of total revenue. A reasonable expectation is for product mix to continue to be predominantly of recurring nature in the 80 plus percent range going forward. I should also note that even when we sell hardware, we also create future recurring revenue through our service and support programs.

Margins have exceeded 70% in every quarter of 2012. I expect margins to continue in the 70% or greater range going forward and also have some opportunity to improve margins by reviewing gaming positions in underperforming markets like Eastern Europe and reallocating some of those games to higher performing markets where we can generate better ROI with higher recurring revenue and margins per unit.

Operating expenses decreased 6% from June to September even as we grew recurring revenue in the same period. [Resilient] and scalable and expect operating expenses as a percent of revenue to continue to decline as we grow.

Overall, we have solid momentum with new installations planned that will drive recurring revenue growth. As we near the close of 2012 and prepare for 2013, I’m looking forward to generating profitable growth and value for our stakeholders.

Now, we will now take any questions that you may have.

Question-and-Answer Session

Operator

(Operator Instructions) I think we have no question today. I’ll turn it back to the management team for any closing remarks.

Mark Roberson

Yeah, thank you, operator. Thanks for those listening today. We appreciate your support and look forward to a strong finish to 2012 and as well as a profitable 2013. Thank you.

Operator

Ladies and gentlemen that will conclude today’s conference. Thank you very much for joining us. And you may now disconnect. Have a great day.

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