PokerTek's CEO Discusses Q3 2011 Results - Earnings Call Transcript

PokerTek, Inc. ( PTEK)

Q3 2011 Earnings Call

November 8, 2011 11:00 AM ET

Executives

Tracy Egan – VP, Marketing

Mark Roberson – CEO, CFO and Treasurer

James Crawford – President

Analysts

Jeffrey Link [ph]

Presentation

Operator

Good day, ladies and gentlemen and welcome to the third quarter 2011 PokerTek earnings conference call. My name is Tanny, and I will be your conference moderator for today. At this time, all participants are in a listen-only mode. (Operator instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to hand the presentation over to your host for today, Tracy Egan, VP of Marketing. Please proceed.

Tracy Egan

Thank you and good morning. Welcome to PokerTek's investor conference call for the third quarter ended September 30, 2011. The purpose of today's call is to provide our investors and other interested parties with information about the Company’s operating results and to communicate other business developments.

Joining us today are Mark Roberson, Chief Executive Officer and Chief Financial Officer, and James Crawford, President. Today’s conference call is being simultaneously web cast and will be also be archived for replay purposes.

Before we get started, I would like to remind you that certain comments about future expectations, plans and prospects for the Company constitute forward-looking statements. Actual results may differ materially from these expectations and we undertake no obligation to update those expectations.

We will also be discussing certain financial measures such as earnings before interest, taxes, depreciation, amortization and share-based compensation which represent a non-GAAP financial measure. A reconciliation to the GAAP financial statements can be found in today’s press release, and we also ask that you refer to our public filings with the SEC for additional information.

Now, I’ll turn the call over to Mark.

Mark Roberson

Thanks, Tracy. Thank you all for joining us today. On today’s call, we will review the quarterly operating results, and also provide you with an update on the state of the business, and our growth plans. I know many of you will be interested in hearing about the situation in Mexico; we will discuss the current status and our future expectations for that market, and also update you on market opportunities in other markets that will drive placements and operating results going forward.

Overall, Q3 marked another quarter of solid financial performance. On an annualized basis we stand at approximately 6.5 million in recurring revenue, producing strong margins and stable operating expenses. Q3 also marked our fourth consecutive quarter of EBITDAS profitability.

As we look ahead, there are several key drivers that will impact our trajectory over the next several quarters. First, as previously announced, we have moved the tables in Mexico following a determination that all electronic roulette incurred gains are not permitted. Based on the information we are receiving from our customers and advisers in the market, we believe this to be a temporary situation.

The government is currently focused on inspecting casino operators and tightening up enforcement, which has resulted in the closure of numerous properties operating without proper permits, import documents and other paperwork. Once that phase is complete, the expectation in the market is that those remaining properties will be allowed to reinstall electronic roulette and card games in early 2012.

Prior to removal, the tables in Mexico generated approximately 70,000 of monthly revenue at approximately 45% gross margins. The table performance and margins were significantly below what we see in other markets, where our margins traditionally run at approximately 70%. We are proactively bringing a small number of tables back to the US to meet anticipated demand in other markets, but our plan is to leave the majority of the Mexico tables in country, while the regulatory process runs its course.

We believe that if electronic tables are allowed back on the floor next year, the market will be more concentrated as a result of the removal of illegal operations, especially where manual games are being dealt. As a result, if the government allows e-tables back on the floor, we expect the market to have fewer operators and those installations should generate revenue and margins more in line with our other markets.

Outside of Mexico, we have several significant opportunities in the pipeline. Throughout our markets we have a dominant position in automated poker, and we estimate the addressable market to be approximately 8000 to 10,000 gaming positions. We have limited competition in this niche market, and we believe we have room to increase our installed base by a factor of three or more in our target markets over time.

Near time there are several meaningful placement opportunities teed up and James will elaborate on those specific markets in a few moments. The ProCore platform for house bank Blackjack and specialty games also creates significant placement opportunities for growth and product diversification. We are approaching the house bank e-tables market in a two-phased approach. First we will continue to deploy the account-based version with Blackjack to cruise ships, and also to select markets in Europe where TITO and GOI [ph] approvals are not required.

We have identified specific near-term installation targets estimated at 600 to 900 player positions for the account-based version. Second we plan to submit the SAS/TITO version of the ProCore table to GOI for regulatory approval in the coming weeks. Once approved the SAS/TITO version of the ProCore table opens larger gaming markets for Blackjack and additional specialty games in regulated markets.

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