Everi Holdings Inc.
Q4 2007 Earnings Call Transcript

Published: 7 Mar 2008

[Operator:]

Good ladies and gentlemen and welcome to the fourth quarter 2007 Global Cash Access earnings conference call. My name is Tawanda and I will be your coordinator for today. (Operator Instructions) We will facilitate a question and answer session towards the end of this call. As a reminder this call is being recorded for replay purposes. I would now like to turn the call over to Mr. Scott Betts, president and chief executive officer, please precede sir.

[Scott H. Betts:]

Good morning everyone and thank you for joining us. I trust that everyone has seen the press releases for this morning’s call, so let’s take care of some housekeeping first. I’d like to remind everyone that during the course of this conference call and the Q&A we may make forward-looking statements on matters such as financial trends, customer contract, the recruitment and retention of key personnel, new products, development of business in new and existing markets, plans for existing products, acquisitions and their anticipated benefits, and industry trends. You can identify forward-looking statements by the use of words like

[Operator:]

(Operator Instructions) And your first question comes from the line of Mr. Jim Kissane with Bear Stearns.

[Analyst for James Kissane:]

In the quarter what was your breakdown in new signings, renewals and customer losses? Thank you.

[Scott H. Betts:]

We don’t disclose the losses and wins and so forth at a customer level. What I’ll tell you and what I’ll reiterate is what I said in there is we lost no major customers during the quarter because of the investigation or otherwise.

[Operator:]

(Operator Instructions) Your next question comes from the line of Tien-Tsin Huang with J.P. Morgan, please proceed.

[Tien-Tsin Huang:]

I have a few questions I you don’t mind. I’ll start with the CGS acquisition, definitely like that deal. Can you talk about the growth profile and the margin trend in this business to the extent that you can and are there any unusual cost that we should consider that you might need to incur as you integrate or cut over the business?

[Scott H. Betts:]

Yeah, I can’t get that deep into the acquisition on your first part of it, they’re no major cost that we anticipate in the integration or our ability to generate the synergies as we move forward. We obviously like to acquisition for all the reasons you do, it gives us a great opportunity to increase all of our businesses, both check as well as cash advance. It also gives us access to important customer profile and we expect its growth rate and our opportunities to cross sell our products and services to work in synergy with the rest of our businesses over the next couple of years.

[Tien-Tsin Huang:]

Have you talked to some of their major clients to try and get a sense to what kind of revenue attrition you might see, and your ability to retain some of those customers?

[Scott H. Betts:]

We have a high confidence in our ability to retain and maintain the extra relationships that Certegy had as we move it over to our business. We have not, obviously, been able to talk to any of the customers yet, as we just announced it today. Obviously very high on the list of Steve Lazarus work to do over the next week or two.

[Tien-Tsin Huang:]

Good. I guess also, did you, we like the acquisition, I’m just curious, did you contemplate the benefits of buying back stock instead of doing the Fidelity acquisition? Obviously share repurchases by our math would be highly accretive here as well. Maybe you could talk about the reauthorization if there is one down the road.

[Scott H. Betts:]

We certainly continue to, we do as a team and I do with our board, revaluate the best use of cash for the company long term and we’ll continue to do that in terms of whether or not we start another program of stock repurchase here. With respect to the Certegy Gaming Services acquisition, that’s a unique opportunity that was in front of us, we feel very confident about the acquisition and what it can do to our long term growth so we felt that was the best thing we could do at the time and in the best interest of the company long term.

[Tien-Tsin Huang:]

Very good, I have two more quick questions if I could. Gross margins came in better than expected and I was happy to see that commissions were actually flat. Is this level of gross margin sustainable here as we think about the near to mid-term?

[Scott H. Betts:]

We’re certainly going to work real hard at making that happen, as we talked last time, there is certainly a trend of slightly declining margins year-over-year. That’s an issue with the business, we’re acutely aware of, that’s why it’s the number one objective we’ve got as we look forward to 08 so we’ll be working hard to make sure that happens.

[Tien-Tsin Huang:]

The lower volumes the lower same store should actually ease up the commission pressure, correct?

[Scott H. Betts:]

Yes.

[Tien-Tsin Huang:]

Okay. I guess Arriva, how should we expect it to flow through the P&L going forward as you look to wind down the portfolio and I guess will you also move this to discontinued operations going forward?

[Scott H. Betts:]

Yeah we would, one of the things that you’re just going to have to give me a little bit of a break on is we just don’t know enough. It was so highly depend on how we exit and what strategies we used to exit that, and we’re obviously looking at a range of those based on what’s best for our customers, you know the consumers as well as the company. That’s why I say until we get into the next call we’ll have a lot more definition on how we do that and be able to give you a little more flavor on how that’s going to impact our financials for 08.

[Tien-Tsin Huang:]

Okay. It is safe to say, can we move this to discontinued operations the next time we see the P&L?

[George W. Gresham:]

We still need to consider the implications, the decision the Board level decision related to our announcement today was made very recently. My off the cusp response is it’s unlikely to be a disc op, it’s likely to flow through the statement of operations as a onetime non-cash P&L adjustment. We haven’t quantified the size of that, but you should see that in Q1 possibly Q2 depending on the resolution of various uncertainties around the accounting.

[Tien-Tsin Huang:]

Okay very good. Maybe if I could just sneak in one more, the check losses. We’ve heard I guess Global Payments and FIS had some problems on the check guarantying verification side. What kind of exposure do you have there? If things continue to weaken is there some potential pressure in that business? Thanks.

[Scott H. Betts:]

We see nothing unusual in that business over the last quarter.

[Operator:]

Your next question comes from the line of Mr. Daniel Perlin with Wachovia, please proceed sir.

[Analyst for Daniel Perlin:]

A couple of questions that are somewhat follow-ups. First, in terms of the gross margins, can we look at the fourth quarter as kind of a pretty good base level meaning now that we’ve gotten the investigation behind us we got sort of the commission issue behind us that this is a pretty good level to think about going forward?

[Scott H. Betts:]

Yeah, that’s probably fair, again I’ll just caution you and give myself a little flexibility when we talk again next time that we’re really pulling together our plans for 08 and what we see including the integration of the Certegy Gaming Service business given that yeah I would look at it that way.

[Analyst for Daniel Perlin:]

And then when we think about the acquisition, I guess when Fidelity bought it, it was kind of 70% cash advance, 10% ATM, 10% check. Is it still running at about that kind of breakdown?

[Scott H. Betts:]

You said it was 70% cash advance?

[Analyst for Daniel Perlin:]

Yeah we had in our notes going back to when Certegy bought it I should say it was 70% cash advance, about 10% ATM and about 10% check. I just wanted to see how it sort of changed over three and a half years, four years now?

[Scott H. Betts:]

Call it 60-30-10 right now against those numbers.

[Analyst for Daniel Perlin:]

Okay. Obviously those will move around a little bit. And then two more questions if I might. The add back for the non-cash stock comp is there any way of backing out the charges from previous management and things like that to kind of get a fourth quarter sort of ongoing run rate? Don’t know if that question made sense?

[George Gresham:]

It’s about 2.4 a quarter going forward right now.

[Analyst for Daniel Perlin:]

Okay thank you, and then the final questions, and you may not have this data yet. The EBIT by segment. Do you happen to have that given that the K is not due out until I think you said middle of March?

[Scott H. Betts:]

No Matt not yet.

[Operator:]

Your next question comes from the line of Mr. James Taylor with Banc of America Securities, please proceed sir.

[James Taylor:]

I guess first on the Certegy acquisition, was the $6.9 million EBITDA number that you cited, that was after expected synergy, or was that the actual EBITDA?

[Scott H. Betts:]

That includes the synergies.

[James Taylor:]

Okay. I was going to say that would be a very good multiple if that was the actual number. Have you guys finalized the vault cash agreement , I guess with us, with B of A?

[Scott H. Betts:]

Yes.

[James Taylor:]

It obviously included the flexibility for the Certegy cash?

[Scott H. Betts:]

Yes.

[James Taylor:]

And what’s the rate on that?

[George Gresham:]

LIBOR plus 25.

[James Taylor:]

L plus 25, very good. Could you tell us what the receivables are for Arriva right now or just how we should think about when you’re winding the business down if there’s any potential cash costs and how much is on your balance sheet versus how much you sold?

[George Gresham:]

Well, the current receivable balance is close to $16 million as far as cash costs. We don’t expect significant severance in those types related shut down costs. In terms of you know what’s on the balance sheet versus you know what we might move off that plan is still in the works.

[James Taylor:]

Alright very good. Then just finally can you just give us a sense for the size of the Macau opportunity, I guess I’m still trying to get a sense for how much of the cash on the gaming floors there are customers bringing with them, especially from Mainland China? So what sort of, I guess, legal or currency restrictions how that kind of dictates what you can and can’t do and then sort of what your strategy is going forward there?

[Scott H. Betts:]

That’s an obviously a very early business for us, we’re just in that market. I really can’t predict how that’s going to play out. There’s certainly an awful lot of building going on there, awful lot of new properties, we like the fact that we’re there and operating today. We’ll just all have to see how that grows over time. Sorry I can’t be any more specific than that today.

[James Taylor:]

That helpful, just one last thing. Is there a restriction in the bank agreement on the amount of stock you can buy back?

[George Gresham:]

Yes there is.

[James Taylor:]

Are you guys at that limit right now?

[George Gresham:]

Yes.

[Operator:]

Your next question comes from the line of [Reiche Parik] with KBC Financial, please proceed.

[[Reiche Parik]:]

I was wondering if when you guys are talking about some softness going into the first quarter if you could comment on any regional impacts that you’re seeing? Any place that you’re seeing that are weaker or stronger than others?

[Scott H. Betts:]

I don’t have the breakout by jurisdictions with me right know, I’d suspect you’d see our business pretty much track that of the differences within all of the reporting jurisdictions from a current standpoint.

[[Reiche Parik]:]

There’s some observers out there that might try to suggest that this is isolated sort of weather impart or that it is largely confined to jurisdictions like Atlantic City. Would that be consistent with what you’ve seen sort of observational?

[Scott H. Betts:]

No we’ve seen it broader than that.

[[Reiche Parik]:]

Okay. And in terms of contracts historically you’ve been able to give us a sense of what you market share was and what your targets were. It’s probably hard for you to do that internationally, but maybe in the US you could tell us sort of what you think your market share of transactions are and where you think that could go over time?

[Scott H. Betts:]

No I can’t, I have no way of doing that. There’s no recorded number I know that would give me that number.

[[Reiche Parik]:]

Okay, and are you able to say how much the synergies were that you’re putting into that $6.9 million for the CGS transaction?

[Scott H. Betts:]

No we did not break that out at this time.

[Operator:]

And your next question comes from the line of Greg Smith with Merrill Lynch, please proceed sir.

[Analyst for Greg Smith:]

I was just wondering if you could comment on the UK business, you mentioned that you’re still working on it. It there any possibility that it actually comes back? And what type of efforts are you putting into the whole initiative?

[Scott H. Betts:]

You know we’re continuing to work over there to see what our opportunities are with a business we like, it was a great business for us. You know we’re going to continue to stay close to how things change over there for opportunities we can exploit in the future. It’s really about all I can tell you right now.

[Analyst for Greg Smith:]

Okay, and then we understand that tough industry trends you’ve seen slowing same store sales growth. Do you have any new contracts that are coming up that are going to begin ramping in the next quarter or two that could help your growth be better than the 2% that we saw on the top line this quarter?

[Scott H. Betts:]

To the extent that major contracts come on or get signed, we’ll always evaluate whether or not we even want to announce those. Again, we’re very pleased with our ability to maintain our customer base through this last quarter, continue to sell and be aggressive in the market place and I’d just have you think about it as we’re going to be doing about what we’ve been doing in the past.

[Analyst for Greg Smith:]

Okay. And then we’ve seen LIBOR come down. How does that affect your 2008 numbers with all the cash that you have in your ATMs?

[George Gresham:]

As LIBOR goes down interest expense goes down.

[Analyst for Greg Smith:]

Can you quantify that?

[George Gresham:]

We give you the average balance, you can look at our average balances per quarter whenever you think LIBOR is going to go down times our average balance is probably your best model.

[Analyst for Greg Smith:]

Can you remind us what the average balances were?

[George Gresham:]

I think we said in this call 292 is your average in the fourth quarter, I don’t have the other quarters in front of me to tell you. But in all of our filings in our Qs and MD&A we typically have been reporting that number so you can go back to look at it.

[Analyst for Greg Smith:]

Okay great. Last question, on the Q that you filed recently, on the front cover you had 83 million shares. Did you actually issue shares from the end of December to the end of January or what’s the discrepancy there?

[George Grisham:]

[Inaudible] of treasury stocks that we have with restrictive stocks and common stocks out there.

[Analyst for Greg Smith:]

So the 83 includes that.

[George Gresham:]

Yes. And the option exercises that happen from time to time would also be in that number there.

[Operator:]

Your next question comes from the line of Christopher Mammone – Deutsche Bank Securities, please proceed sir.

[Christopher Mammone:]

I know it’s a relatively smaller part of the overall pie, but just wondering if you’re seeing some of the same types of slowing conditions in international markets that you’re in today? And I guess as a follow up to that should we expect you to enter any new international markets in 08?

[Scott H. Betts:]

No on your first question, we do not see the same similar trend internationally, and you’re right it is a smaller part of our business. We’re going to continue to be smart about where we choose to look at our business opportunities, not only where there are casinos but where there are card basis and where our business model works. So we’ll let you know when we start to enter any new markets.

[Christopher Mammone:]

Okay and then any notable changes in the competitive environment? Recently, I know that [inaudible] recently got GLI approved for the power cash and seems to be gaining some momentum at least in the travel markets. Are you seeing anything competitively?

[George Gresham:]

No, they certainly have, we’re very pleased that we’re in that same process with EDITH right now and in our phase two roll out at Foxwood we expect to continue to move that. I think those are both important initiatives in the market place. But other than that no it’s always been a very competitive business and it’s going to continue to stay a competitive business.

[Christopher Mammone:]

Okay, and maybe just as a last question, with the new CTO on board maybe you get a sense for the new CTO’s early views on what holes may be exists on products today that can be addressed in the future?

[Scott H. Betts:]

You know, we’re in the process of developing a strategy now for really three major areas, not only our information systems, but also our network and operations and hardware part of it and are looking closely to with the right types of platforms and areas where we thing we can enable faster and better innovation. That’s really what the focus is going to be. And again, all these individuals has just recently kind of joined the team so we look forward to laying out our strategy and our plans in more details as we move through the year.

[Operator:]

Your next question comes from the line of Paul Carpenter with Semaphore, please proceed sir.

[Paul Carpenter:]

Can you answer a few strategic questions please. For Arriva could you talk with what EBITDA loss is for that business and if you did decide to shut it down, what you would recoup?

[Scott H. Betts:]

We did mention in the prepared remarks that the operating loss for the year was $5.5 million. As far as what the loss could be again, it’s a function of a number of factors, one the exit strategy, two to the extent we do have to sell receivables, whether they’re current or whether they are call it 90 days and beyond. That’s more of a market driven phenomenon so we hope to have a better range for the next call. Again the receivables liquidation, if it comes to that, is more market driven.

[Paul Carpenter:]

I have another question about the business that you’re acquiring, Mr. Gresham worked for eFunds which was then acquired by FIS, is that a business that he had some exposure to while his company was acquired by FIS and has that been a reason you bought it or is that an added benefit to you in being able to understand it, because of the historical relationship?

[George Gresham:]

I’ll just answer the first part, as part of the transaction with FIS and eFunds there was no exposure to that business whatsoever, of course due to the FIS enterprises business quite small so it never crossed my desk in any way while I was at eFund.

[Paul Carpenter:]

Do you expect your relationship with them to be any kind of added value in evaluating this business, understating it and growing it, or is it completely different from the eFunds business?

[George Gresham:]

eFunds was engaged in between 2002 and 2004 in businesses very similar to a different sectors and so from that experience it brings some familiarity with respect to that business as well as GCA’s business and I have what I like to think of as a lot of positive relationship with folks over at FIS that should always kind of help business. But really nothing specific to this acquisition and I of course was not an employee at GCA during the time of the negotiation or assessment or evaluation of this acquisition. So I heard about it just a little bit before you did.

[Paul Carpenter:]

Thank you and just one final question. I know you don’t want to detail the amount of synergies that are baked into your evaluation of how much you can get from the business, but can you talk about how quickly you’d expect them to be realized? Is this something that could happen in a quarter or over 12 months, what’s the time frame?

[Scott H. Betts:]

We would expect to have the business fully integrated in three to six months.

[Paul Carpenter:]

And the full synergies available by that time?

[Scott H. Betts:]

Yeah, by and large that’s probably true

[Operator:]

(Operator Instructions) You next question comes from the line of Rachel Matthews with Cardinal Capital Management, please proceed.

[Rachel Matthews:]

I just wanted to follow up with some more questions on the CGS acquisition just because I’m not that familiar with their business. But I know you’re giving a $6.9 million in EBITDA and synergies on the $100 million in revenues which implies about a 7% EBITDA margin which is much lower than the company’s margins. I’m just wondering how different is this business? What’s different about it that their margins are much lower?

[Scott H. Betts:]

First and foremost they have a different product mix than we have, that’s the biggest driver to our blended margins. They have a slightly different portfolio of customers than we do, those are the major factors that influence that. As we bring these businesses into ours and our customer relationships are brought into Global Cash we’ll look for opportunities where we can cross sell our full suite of products and services and would expect on like size and types of businesses that the margins on this business will trend to where we are in our base business.

[Rachel Matthews:]

How different are the customers? Is it a smaller customer? Are they more Indian Casino? How different are the customers, if you could just quantify that?

[Scott H. Betts:]

I can’t give you a number , what I’ll tell you is that it’s got a fairly different portfolio of products and services at which customers that those product and services are delivered. So that’s really the biggest piece, today I’m not going to go into any kind of by product line comparison of margins.

[Rachel Matthews:]

And then finally, what kind of cash flow implications will we see in the first quarter? Obviously the $25 million outflow for the company, but then for the cash that your putting in for the business. Is that a working capital outflow of the other $75 million or where will we see that money coming out?

[George Gresham:]

We’re going to draw that out of the revolver in the first quarter you’ll see just to keep our working capital kind of neutral until we transition all the site funds and ATM funds on to our existing B of A vault cash platform. You’ll see a short term drawdown on the revolver until our leverage go up, until we transition these locations over. But that will be a three to six months transition period [inaudible]. Rachel, just to add to that we paid down the revolver as we plan currently as the leverage comes back up.

[Operator:]

At this time there are no further questions in the cue. I would like to turn the call back over to Mr. Scott Betts for the final remarks.

[Scott H. Betts:]

Thank you all for joining me today, like I said this has been a bit of a strange journey for me over the last three or four months but I remain extremely enthusiastic about the business. I’m very pleased with the talent we have now running the business and I really look forward to talking to you guys as 2008 unfolds. So everybody have a good day and we’ll talk to you in a couple months.

[Operator:]

Ladies and gentlemen than for joining in today’s conference, this concludes the presentation you may now disconnect and have a wonderful day.