PokerTek, Inc. (PTEK)

Q2 2010 Earnings Call Transcript

August 10, 2010 11:00 am ET

Executives

Jody Burfening – IR, Lippert/Heilshorn & Associates

Mark Roberson – CEO, CFO & Treasurer

James Crawford – President & Board Member

Analysts

Mark Smith – Feltl & Company

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the second quarter 2010 PokerTek Inc earnings conference call. My name is Sally, and I will be your operator for today. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. (Operator instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Ms Jody Burfening with LHA. Please proceed.

Jody Burfening

Thank you operator, and good morning everyone. Welcome to PokerTek’s investor conference call for the second quarter ended June 30, 2010. The purpose of today’s call is to provide PokerTek’s investors and other interested parties with information about its operating results and to communicate other business developments.

Joining us from management are Mark Roberson, Chief Executive Officer and Chief Financial Officer; and James Crawford, President and Founder.

Before we begin, I will read the Safe Harbor statement under the Private Securities Litigation Reform Act of 1995. The statements that are about to be made in this conference call that are not historical facts are forward-looking statements, and involve risks and uncertainties. These and other risks and uncertainties are described in more detail on the company’s most recent Annual Report on Form 10-K and other reports filed with the Securities and Exchange Commission.

The company expressly disclaims any obligation to update or revise publicly any forward-looking statements whether as a result of new information, future events, or otherwise. The company will also discuss EBITDA, which is a non-GAAP measure used internally to evaluate performance and allocate resources. The manner in which the company uses EBITDA may differ from the manner in which other companies use the term EBITDA or EBITDAS.

On today’s call, the company will also discuss its operating results in a pro forma basis as if the amusement business had been treated as a discontinued operation for GAAP purposes as of June 30, 2010.

With that introduction, I will now turn the call over to Mark Roberson. Go ahead please Mark.

Mark Roberson

Thanks Jody. Welcome everyone and thanks for joining us on today’s call. On our last conference call in May, we discussed the strategic changes being implemented to position PokerTek for profitable growth.

Just to recap, our strategic plan encompasses the following key elements, targeting the right markets to accelerate revenue growth, expanding our product portfolio while lowering our product costs, and controlling expenses. With regard to the stated objective of targeting the right markets, we continue to transition tables from highly saturated traditional gaming market to markets with less competition and where electronic table games excel.

For the second quarter, 90% of our revenues were now derived from installations with limited or no competition. These changes in market mix have resulted in a stronger and more reliable recurring revenue stream, in addition, gross gaming margins increased to 60%, reflecting a combination of improved product performance and lower costs.

As part of our mid-year planning process and in keeping with its key objectives, we took a hard look at our amusement segment and concluded that the Heads-Up Challenge business simply does not fit our long-term vision of becoming a diversified supplier of electronic table games. In addition, the current trends and future prospects for the coin-op industry do not justify continued investment in this line of business.

Our plan is to sell our amusement inventory and related assets over the next two to three quarters as we exit that business. We are reducing prices to adapt to changing market conditions, and to accelerate sales and generate cash flow. These actions will have a favorable impact in future periods driving positive cash flow for investment in the gaming business.

In addition to enhancing cash flow, this allows us to migrate all of our focus to expanding the gaming business where business conditions and growth opportunities are favorable. We will touch on the accounting and reporting applications of discontinuing the amusement segment in a few minutes when we recap the numbers for the quarter.

With regard to the second element of our strategy, expanding our product portfolio with lower cost products, I am happy to report that game development and hardware production are on schedule, and we expected to play BlackJack as the first new game on the ProCore platform later this year. ProCore leverages the same operator and player friendly attributes that have made PokerPro as the dominant Poker product in the industry and will be very competitive from a pricing standpoint.

Before reviewing the numbers for the quarter, James Crawford will provide an update on the current opportunities that we see in the gaming business.

James Crawford

Thanks Mark. Less than a year ago we started our push into Mexico and we took over international distribution in the rest of the world. The efforts being made in those markets during the first half of the year are expected to drive increased inflations for the second half of 2010 and 2011, which will in turn drive increased revenue growth.

In Mexico, we have established PokerPro as the dominant poker table where we now have over 50 tables installed. Having gone head to head with other automated tables across Mexico, PokerPro has consistently won out and displaced competitor’s products. Our current market penetration represent only 25% of the potential for PokerPro in Mexico, that coupled with having contracts with all the major operators provides a significant room for growth in the second half of 2010 and in 2011.

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