NTN Buzztime, Inc (NYSEMKT:NTN) Q2 2016 Earnings Conference Call August 3, 2016 4:30 PM ET
Becky Herrick - LHA
Ram Krishnan - Chief Executive Officer
Allen Wolff - Chief Financial Officer
William Gibson - Roth Capital Partners
Good day, ladies and gentlemen. Welcome to Q2 2016, NTN Buzztime, Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] And as a reminder, this call is being recorded.
I would now like to introduce your host for today's conference, Becky Herrick of LHA. Ma'am, you may begin.
Thank you, Jamie. And thank you all for joining us today for NTN Buzztime's second quarter 2016 results conference call and webcast. Joining us today are, CEO, Ram Krishnan and CFO, Allen Wolff. After the prepared remarks, we will open the call for questions.
Before we begin, let me remind you that during this conference call, management may make forward-looking statements about future expectations and plans. Such statements are subject to known and unknown risks, uncertainties, or other factors that may cause the Company's actual growth results to be materially different from historical results or any results expressed or implied during the call.
Potential risks and uncertainties that could cause actual growth and results to differ materially include, but are not limited to, the rapidly changing and competitive nature of the interactive entertainment and game industry, customer and consumer acceptance and adoption of the Company's products, platform, and technology, the ability to successfully introduce new revenue streams based around consumer gains and services, the ownership and enforcement of intellectual property and others more fully described in the Company's public SEC filings. The information in this conference call related to projections or other forward-looking statements based on current expectations, except as required by law, the Company undertakes no obligation to revise or update publicly any forward-looking statements for any reason.
Now it's my pleasure to turn the call over to Ram. Please go ahead.
Thank you, Becky. And thank you all for joining us today. As projected, the first half of this year continued to be a building period for Buzztime and we're making progress on a number of fronts. We've had several quarters of increased site count attributable to improved sales.
However, this quarter new growth was outweighed by attrition impacted by our Gen-2 system in classic locations, and our site count decrease. That said, we are pleased with several other metrics. Q2 revenue is roughly flat sequentially and our overall ARPU is improving. Our Gen-3 tablet system is being well received.
In the second half of 2016, we will focus on the sales and marketing to improve our net site count growth.
Financially, our hard work over the past 18 months in transforming the company is paying off. With fewer sites and flat revenue, this quarter we delivered EBITDA of $38,000 and generated $517,000 of cash flow from operations.
As for the second quarter and the past nine quarters that we've achieved positive EBITDA, and we expect improvement as the team continues to get smarter about investments, efficiencies in our delivery and makes better decisions.
So let's jump into updates from our chief priorities of the year. First, completion of menu and payment. Last quarter, we began our proof-of-concept work with Buffalo Wild Wings, and we are live at two stores with a plan move into market testing.
Now we are live at 15 stores including two franchise locations testing everything from technology to training to operations.
Ultimately, the goal is to improve operations and deliver an enhanced guest experience. Along the way, we're delivering powerful insights through our new data platform. We are pleased with our efforts related to this deployment, and while order and payments is new to software functionality for us, deployment, support and client management is our bread-and-butter.
Our team has leveraged strength and performed well. They have a great relationship with our long time partner and we continue to make changes to our software, as we learn new things within their operational environment.
Today, we process more than 30,000 transactions at these 15 stores and are pleased with the results. Tablet usage in general has increased four-times and the entertainment usage has increased three-times.
Tip improvements were strong across the board. The pilot is scheduled to continue until the end of September and we expect a decision in the fourth quarter. We are excited about the deployment and proud of our teams. For a company that has been focused on entertainment for 30 years, this represents a massive shift in capability.
We've created competencies around payment and point-of-sale, menu management and consumer data and have quietly built a platform that significantly improves our capabilities and our overall market value, all at a time, when labor and commodity costs are rising.
Competition is growing and consumer expectations are shifting. We believe that we have more closely aligned the company to deliver value where the market needs it most.
In addition to the menu and payment for B-Dubs, we just helped them with the launch of their fast-break lunch guarantee promotion. This promotion is built around increasing traffic at lunchtime. B-Dubs is attracting patrons by offering free lunch if they are unable to deliver select items in under 15 minutes.
Rather than clock this with physical stopwatches, our platform delivered a digital timer to visualize the speed of the service. Our tablets gather a great deal of data through our data platform and provides insights about which sites are executing the program, how they are performing operationally and how that changes by day of the week or time of the day.
We are thrilled to help B-Dubs deliver an excellent lunchtime experience. We are live at over 900 locations and lunchtime tablet usage at that lunchtime period has seen an increase of 30%.
Our second focus has been on improving value and price for independents. Entertainment continues to be a key source of value to our independents, and we are nurturing our strategic partnerships. It takes time to right, but we are pleased with our progress. The Redskins have been an engaged partner and we are in season two of our program.
We are focused on improving our game mechanics and continuing to tie the experience into as many touchpoints as possible. It will be a live component to our experience as well as an in-stadium game experience. So Buzztime will be available to get before, during, and after the game at FedEx Field.
Our game – our work with other partners such as Fanduel and Fandango continue to evolve as well. We had a very successful run with Fandango and plan to use that as a model we continue to repeat in the future. Typical Buzztime promotions see about 20% of registered players play more than once in a 30 day period. With Fandango, we performed even better.
We saw 31% of players who played once, play a second time in a 30 day period, which is 50% better than other promotions we’ve run in the past. These are important, because they demonstrate to our customers how Buzztime helps generate traffic and delivers value to the stores.
Each of these opportunities is just that, an opportunity, cultivating, learning, and growing with each partner. We want a unified consumer experience to weave together our patron and venue marketing, social platforms and game experience and sponsors and to a repeatable engine for growth.
Dave Miller has come on Board and has made this player experience in lieu of his primary focus. Increased player engagement should drive venue adoption and retention, and ultimately, having a strong loyal player base is a competitive advantage, like none other.
On the cost front, we are also progressing very well. We are executing on our plan to reduce platform costs by eliminating components, lowering the cost of our bill of materials, reducing our product complexity, while improving the overall quality. We expect to see continued improvement in gross margins over the next few years from these efforts.
Our third area of focus is on commercial execution. As stated before, getting a national referencable account is still critical to our chain efforts and our progress at B-Dubs is critical to that effort as well. To that end, we expect to go out strong in the fourth quarter and into next year's trade show season with a renewed focus on change.
On the independent side, we continue to model and test for go-to-market efforts. We are focused on improving people, process and technology on our sales teams. This helps us build a more predictable sales model that should be more forecastable and scalable. These changes take time.
Hiring entry-level sales personnel for example, takes time to recruit, hire, and onboard and even then, with an inside sales team, you end up turning most of them over. This remains our focus for the back half of the year and I'm confident we'll get this right.
We continue to work with our new distribution partner in Digital Dining, who is now part of the Heartland Payment. We've been preparing for a formal launch at their dealer meeting, which happened this past weekend in Dallas.
Digital Dining sells primarily to smaller venues and sells only through a dealer network. We are now with the product at dealer channel will sell as table side, order, pay and entertainment platform.
With over 50,000 hospitality customers, we are excited about this partnership and know that it will take time, patience, and commitment to make this partnership blossom. We are in the early days, but we've made progress with both Digital Dining and Heartland, who acquired them by share, as I said before.
Our fourth focus has been on expanding revenue opportunities. We made a lot of progress this quarter in getting our premium games offerings out to the market. We were able to deploy quickly once we got started and are currently at 465 locations.
Our first step was to get the software and integration deployed and we accomplished that quickly and cleanly. With a mixed breed of play and paid arcades, our conversion won't be as good as a pay-only solution, which we are now evaluating the content, layout, and other actions we can take to continuously optimize conversions.
We won't expect to see a material impact this year, but we've laid the foundation in the way for a very strong future potential.
Finally, our local ad partner continues to perform and has been a great fit. Complemented by a few national sponsors that we have in the pipeline or have sold early in the year, we are pleased with the potential to leverage our network to deliver revenue growth. But we’ve always desired it and now we are achieving.
Now onto our financial results, I’ll turn the call over to our CFO, Allen Wolff. Allen, please go ahead.
Thank you Ram. For the second quarter of 2016, revenue was $5.4 million, relatively flat compared to $5.5 million in the first quarter of 2016. Compared to $6.2 million in the second quarter of 2015, revenue declined year-over-year, primarily as a result of lower equipment revenue due to fewer installations of customers under sales type lease arrangements during the quarter partially offset by an increase in subscription revenue.
We ended the quarter with 2,859 total sites, compared to 2,942 at the end of second quarter in 2015 and 2,903 at the end of last quarter. We continue to anticipate site count to fluctuate as there are many factors affecting overall growth.
In addition to expected attrition on a classic platform, the independents we serve are small businesses, naturally having shorter sales cycle, coupled with shorter contract terms.
These two factors together with the projected short-term increase in tablet churn, largely related to the negative impact of the Gen-2 hardware are affecting site count in 2016.
That said, as of June 30, our Next-Gen BEOND platform grew to 1,922 sites, up from 1,879 last quarter. BEOND now represents just over 67% of our install base. We will continue migrating classic sites to the BEOND tablet platform as one of our operational focuses.
Second quarter direct costs were $1.8 million, 46% lower than the $3.4 million in the second quarter of 2015. As a result, second quarter gross margin was 66%, up from 45% in the year-ago quarter and 63% in the first quarter of 2016.
The increase reflects our efforts to improve product quality and lower production cost of our Gen-3 platform combined with the decrease in our equipment expense commensurate with less sales type lease revenue.
As you know, we continue to support the Gen-2 platform and began rolling out the Gen-3 platform in the second half of 2015. Looking ahead, we expect gross margin to fluctuate based upon the ratio of sales type lease revenue. Given the current mix sales type lease revenue, I continue to anticipate a gross margin in excess of 60%.
For the quarter, SG&A expenses were $4.2 million, compared to $4.9 million in the prior year period. The decrease is primarily due to lower payroll and related expenses of $785,000.
As an organization, we peaked at just under 140 full-time employees in early 2015. We closed the second quarter operating with 105 full-time employees. Both Ram and I are extremely pleased with our focus in how the more empowered, leaner team is prioritizing and executing; yielding better results and improve financial performance. This progress is key for building the right foundation for scalable growth in the future.
For the second half of 2016, we may experience a small increase in our SG&A spend to capitalize on several growth opportunities. For the second quarter, net loss was $850,000 or $0.46 per share, a $1.8 million improvement, compared to the $2.6 million loss or $1.43 per share on a comparative number of shares outstanding in the prior year period.
We are pleased to report EBITDA with a positive $38,000, compared to an EBITDA loss of $1.7 million in the prior year quarter. Cash and cash equivalents were $3.6 million, up from $3.2 million at year end 2015.
This reflects continued inventory release helping us to realize positive cash flow from operations of $517,000 for the quarter and $13,000 year-to-date, up from negative $1.1 million in the same period last year.
We are pleased with delivering positive cash flow from operations, for the first time in early 2015. However, please note that our cash flow from operations may fluctuate quarter-to-quarter in the future. Our working capital decreased from $4 million at year end 2015 to $1.6 million, primarily due to recognition of the short-term capital we received from our primary lender. We continue to remain confident in our balance sheet and liquidity to fully fund our operational plans.
To reiterate, we aim to grow responsibly with respect to our balance sheet and capital structure. We continue to execute on the commitment we made with our banking partner. We are excited about the business and growth opportunities and continue to work through a variety of financing and vendor structures, while maintaining a keen eye on the capital markets.
Finally, we've successfully completed the reverse forward split, simplifying our capital structure. It is our intent to build long-term value for the company and its shareholders.
I will now turn the call back over to Ram.
Thanks, Allan. This has been a good year for us and we expect it to continue to improve and get better. We've made leaps and bounds with our platform and the results are solid. We expect to leverage our new capabilities and stay focused on completing our pilot of B-Dubs. I am confident that this will be the cornerstone to expanding our chain business.
Our new distribution partnership with Digital Dining is in its early stages, but we are excited that it will generate new sales leads for independent and small chain businesses in a way we've never done before with this company.
We continue to work with our strategic partnerships to mitigate churn and we expect they will grow to be added at the top-line over time. And finally, we deployed our paid arcade at scale and are now focusing on that conversion.
We appreciate you for joining the call today. Thanks for listening and we hope to speak with you again soon in November.
Operator, we are ready for Q&A.
Thank you. [Operator Instructions] And our first question comes from William Gibson with Roth Capital Partners. Your line is now open.
Hi Ram. I think you touched on this just at the closing there. But in terms of the Dealer Dining, is that basically their role is to generate leads and then you turn that over to the people you are working with to go after independent locations and half the - what do they get out of it? I mean, do they get a split off of that?
Yes, without getting into the full details on the economics, thanks for the question first and foremost, Bill, with Digital Dining is a point-of-sale company like I think I've said in the call that the sells only through dealership.
So, these dealers sell Digital Dining point-of-sale system in a reasonably competitive market and every piece of value they add on top of the point-of-sale delivers and generates value for the clients. And so, what’s been interesting for us is this is a partnership where clients of theirs in the field have been asking for tableside, but no one has been serving the independent market.
And so what we've enabled their dealers to do is, broaden the depth of value they offer their clients and anchor Digital Dining as a point-of-sale partner more strongly into the market that they serve.
So, we are essentially leveraging that feet on the street that has really strong, close relationships with the customers in each of the markets they serve, in essence present and promote our product whenever the need and desire comes up for their clients and its helping them secure their base of business and there will be a small share in that pie along the way.
Okay. Now, that makes sense, and when you were discussing that test at the 15 Buffalo Wild Wings, did I hear you say that entertainment transactions were up three-times?
Yes, I think I said – ye, the overall usage of the tablet is up four-times and, as we put tablets on the table with the operational goal of order and payment that gets our tablets on every single table, it gives operational – really to put a tablet on every single table in the venue.
That just by default having it in front of everybody increases the engagement between patrons and our tablets. So that’s had - even if someone doesn't want to order and pay they are playing the games lot more.
Okay. Now that makes sense. And then, where - in terms of the premium game locations, do you have a target for year end or I mean, would you be disappointed if you only added 200?
200 premium game locations? Is that’s the question?
Well, what I said on the call and I maybe - I said it little quickly in the call, we are at 465 locations right now.
Which we rolled out in the quarter. And so, what we are doing with the 465 that we have is, we are going to let them run for a little while, collect a good amount of data from them as we see where guests are behaving, where they come in, in the funnel, what they click on, what they go through and until they convert and pay and we will be looking at optimizing the software to increase our conversion as well.
Okay. So, basically it's in a sense you are testing with the first units out there or the first premium games out there, before you really go a full-blown rollout?
Yes, we're at 465. That’s a pretty - I'd say we are well beyond pilot. We are not testing functionality. We are not testing whether things work. We are more like in your digital web world, you are testing whether your buttons are in the best place, whether you are advertising or promoting it properly and working out a handful of awareness through operational support you might need from the location itself and those are things we are working on now.
Okay, good. Thank you.
You got it. Thanks for the questions, Bill.
Thank you. [Operator Instructions] And I am showing no further questions at this time. I would like to turn the call back over to Ram Krishnan for closing remarks.
Thanks, Jamie and thank you all for joining us today. We are excited for the rest of the year and we look forward to updating you next quarter. Have a great day.
Ladies and gentlemen, thank you for participating in today's conference. That does conclude the program and you may all disconnect. Everyone have a great day.
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