EGMI Q4 2008 CC Transcript
I hadn’t realized that seekingalpha and Fair Disclosure Wire had published prior CC transcripts, or I wouldn’t have gone to the trouble of doing this one. Hopefully this is the last one I will do. Since neither of those services has posted a transcript yet for Q4, here it is (just completed last night).
Kevin Donovan, CEO
Lee Cole, Board Member, Former Interim CEO
Yvonne Zappulla, IR Representative
YVONNE ZAPPULLA
[Intro and Safe Harbor statement.]
KEVIN DONOVAN
Thank you very much, Yvonne. Well, good afternoon and thank you all for joining our call this afternoon as I present my first earnings call for Electronic Game Card. Before I start to summarize our 2008 financial year and to review the current financial year and company strategy, I wish to introduce myself to you so you have a chance to know me. When the announcement of my appointment was made in December 2008, I was enthused by the opportunities I saw for the company, energized by the vision of Lord Steinberg and the Board, and impatient to start work officially on February 2nd of this year as new CEO.
I was also thrilled to start work that day together with the new Executive Vice President of Sales, Miss Anna Houssels, who was already a Board member of EGC, but has now brought her formidable sales experience and tenacious spirit to develop and leverage our contacts and our international relationships to increase sales revenues and to use our decades of experience and success to add value across the company. I am pleased to say that our energy and visions of opportunities has been reflected by the Chairman, the Board, and the company, but most important, our sales relationships.
My 25 years experience in corporate branding and licensing with prominent entities such as the 2002 Winter Olympics in Salt Lake, professional sports properties, and entertainment media, as well as software application companies, with our technology platform that EGC has developed to create an inflection point for our company, an inflection point that everybody, but especially Anna and I, are determined to make the most of to generate increased revenue and profitability. From that strategy to deliver shareholder value to a stock that we believe is truly undervalued by the markets in comparison to ratios not only on the gaming vertical but against the general performance of the markets.
We both understand the trust and vote of confidence that Lord Steinberg and the other shareholders that I have met with have given to Anna and I [sic], and we are focused to turn that trust into proven results in 2009 and beyond.
However, before we look to the future, let’s not forget the success of the past and present, and review the performance of EGC in 2008. It was definitely a successful year. For the full year 2008, Electronic Game Card generated revenues of 10.6 million, which is an increase of 76% over the prior year revenue of 6 million. This comparison would have been even greater had the British Pound Sterling not fallen by more than 30% during the second half of 2008. Truly an amazing year for Electronic Game Card.
In 2009 we anticipate our business to generate more U.S. revenues, as the contributions from the technology license agreement from Native American Indian promotions and gaming opportunities in the 28 U.S. states and the 423 gaming operations are realized. Equally, the company can generate more revenue from other key and focused product initiatives that extend the product lines already introduced by the new U.S.-based management team.
Electronic Game Card reported an 81% year-over-year growth in net income. Full year 2008 net income totaled $6.3 million, which equates to $.11 per basic share or $.10 per share fully diluted vs. net income of $3.4 million or $.07 per basic share and $.06 per diluted share for the full year of 2007.
As of December 31, 2008 Electronic Game Card had approximately 56.8 million shares of common stock outstanding, with a fully diluted share count totaling 63.1 million as reported applying the Treasury method. The gross profit for the year ended December 31, 2008 was 8.1 million generating a 76% gross margin. The company remains adept and working to provide the optimum in commercial structures. To achieve this we may report future alterations in our gross margin percentage but this would be undertaken to ensure a stronger company with long-ter recurring orders from B2B new client relationships.
The company’s operating expenditures for the year 2008 grew by 35% to 2.1 million. However, as a percentage of revenue, operating expenses did fall 600 basis points over the year to 19.5% of revenue.
As we manage our growing business going forward we may need to increase personnel, but only, and this is important, as we see the need to handle our volumes expeditiously. As we have strengthened and broadened geography of the new client and management of the company, there will be going-forward costs. I and the Board are fully aware of this and I am certain that these relationships will be accretive to the company, and will continue to manage the current strategy of being a tightly-run organization with cost control managed across the company from the Board downwards, and will continue to take advantage of opportunities to outsource manufacturing and the like while maintaining critical IP development, strategy, and sales control in-house. Anna Houssels and I want to maximize our U.S. and global relationships to generate revenues in the most efficient ways possible.
In reviewing the fourth quarter December 31, 2008, Electronic Game Card revenues increased 58% over the prior year to $2.8 million. While our volumes were on target with expectations, the 25% decline in the value of the British Pound Sterling during the fourth quarter 2008 negatively impacted the conversion of our revenues generated in the U.K. as we translated those figures into U.S. dollars.
Had the currency remained constant with 2007 we would have recorded revenues in excess of $3 million for the fourth quarter of 2008. Comprehensive net income applicable to common shareholders was 1.8 million or $.03 per diluted share compared to 1.6 million or $.03 cents per share during the prior year’s fourth quarter on approximately 10% fewer shares in 2007.
Our balance sheet has strengthened materially during the year. Cash and equivalents on December 31, 2008 were $9.2 million, an increase of approximately 4.4 million from year-end December 31, 2007, and an increase of over 1.3 million from the period ended September 30, 2008. It is important to note that our cash balance exceeded our total debt and Convertible Preferred by 3.5 million at year-end 2008.
The company’s investment portfolio increased in value during the year by 3.6 million due to the company’s previous policy of investing in synergistic technologies which enhance the company’s overall product offering. It is the Board’s intention to monetize these investment assets at opportune points over the next two years.
At December 31, 2008, the 6% Convertible Redeemable Preferred stood at 4.5 million, a reduction of 3.1 million from the prior year-end. Two-thirds of the reduction occurred just prior to year-end 2008 as one fund converted its holdings. EGC announced this event in early February 2009 as the company purchased the underlying stock and accompanying warrants for $800,000.
At year-end 2008 Electronic Game Card achieved positive Stockholders Equity of $13.3 million, an increase of over 12 million from the previous year.
In conservatively reviewing our level of business activity, EGC believes that the current contracted backlog gives us visibility and confidence in providing revenue guidance of $17 to $18 million for full year 2009, and Earnings Per Share guidance of $.14 fully diluted EPS.
As first quarter 2009 is concluding in a couple of weeks, we anticipate a continuation of profitable growth as we report the March quarter.
11:30
Let me pause a moment and discuss our business model particularly in context to this year’s expectations. EGC is a consumer goods technology development and licensing company focused on maximizing net profit dollar contribution per card. The business model developed over the past 24 months has been flexible and responsive, designed to grow revenue leveraging the core technology platform through both direct sales with unique vertical market price points reflecting cost variations in packaging, logistics, and security, as well as through distributors and manufacturer/licensor relationships within specific geographies and distinct vertical markets such as gaming, promotion, and education. Contract pricing for distributor and manufacturer/licensor takes into account the ultimate retail price reflecting perceived value of a newly-introduced product as well as costs through the delivery process.
As we look forward to leveraging our existing network relationships with new opportunities in numerous potential markets, within each of these markets as critical mass is established and as controlled technology enhancements are added to create further product feature uniqueness we will have opportunities over time to further increase the profitability per card.
To simplify this structure we have organized the company within three business lines: gaming, promotions, and education.
Lets take the first one, gaming. We define the game section to include gaming, casinos, state and national lotteries, and Native American Indian gaming. In the past, this business has predominantly reflected only a yearly royalty payment of half a million dollars, which we receive from Scientific Games. As CEO, I have started to work to the immediate opportunities globally for Electronic Game Card in state and national lotteries, and Anna and I have already started a number of project bids that we hope will bring positive results in the medium term.
13:50
The reaction to the Instant Win Lottery EGC game cards is very positive from players and I want to insure that all opportunities are explored through the new relationships that the Board and I have started to create.
In 2009 we continue the Sci Games royalty. Additionally, we begin our commencement to receive $1 million of our 5-year $10.25 million guaranteed minimum royalty payment from our Native American Indian gaming contract with Sovereign.
As to additional opportunities with the development of Anna’s contacts and insight in the U.S. and Asian Pacific gaming markets, the company is focused to broaden the U.S. and Asian revenue streams within these areas with new relationships, markets, and verticals.
In addition, our Executive Chairman, Lord Leonard Steinberg, is actively working to leverage his global relationships, his experience and knowledge in gaming, which is a highly unique asset to this company and to the shareholders’ value creation. Importantly, Lord Steinberg maintains his Perpetual President role at the company he launched over 50 years ago and subsequently sold as Stanley Leisure plc, which controls 1,500 betting parlors throughout East and Western Europe. The initial opportunities are potentially in Romania, Poland, and Croatia. The work to enter these highly regulated markets began last year. We have accomplished quite a lot in Romania thus far, where Stanley Betting has over 200 shops.
Another active opportunity is being spearheaded by Anna Houssels within the U.K. and global gaming markets. We’ve had several meetings and are highly hopeful of success utilizing the current product line in Instant Win Lottery EGC game cards, soft gaming, gaming promotions, and especially slot promotions.
The next business line: promotions. This business segment has historically represented a large part of business revenues for EGC. The bulk of our distributor relationships are focused on this market. The new products for 2009 such as the Know-it-All Quiz Card and the sports property opportunities are under this business segment. As I start to introduce these products and the development of new sales relationships, the response to these products is highly positive especially as we start to customize and re-skin the graphic formats to instantly work with new client IP content, consumer brands, and interactive mechanics.
The clear enthusiasm for our new Quiz Card product is strong, as is the opportunity to inexpensively adapt the core technology to present a customized, low-cost consumer proposition but utilizing a robust and reliable core technology. The strength of the base technology platform and the flexibility of the manufacturing process offer many opportunities, and Anna and I are diligently working to identify the most attractive and long-term profitable relationships.
Education. The interactive education technology sector is a $2.2 billion global market based on numbers from In-Stat. It is clear that parents and teachers are looking for toys that stimulate imaginative ways to open the doors of learning to pre-school-age children with some of their favorite characters that they watch on television and the internet.
EGC has a timely and affordable product for parents and families in this present-day economy for under $10 retail, which is adaptable to any branded character with EGC education and general knowledge products. These family on-the-go mobile learning products are highly competitive that can benefit from early stage developmental learning and growth of this market. I truly feel we have a category buster product by early response indication from our B2B network based upon our 2009 release of our Thomas & Friends branded Electronic Education Learning Game Card in the U.K. Again, the contacts that the company and I can leverage in this sector are very strong, with leading educational, gold standard brands, and therefore we see this as a way to help grow the company but also widen the revenue streams.
So therefore to summarize. We’ve had a successful 2008. Our current backlog momentum gives us confidence in our guidance moving forward into 2009. The new management team has hit the ground running and has focused initiatives to close in the areas of gaming, promotions, and education, any one of which could greatly add to the company’s progress and revenue enhancements to the $17 to $18 million 2009 full year earnings per share guidance of $.14 fully diluted EPS.
19:00
In closing, this now concludes the summary of my prepared remarks at this time. I am joined by Lee Cole. Good afternoon, Lee.
LC. Hi, Kevin.
KD. How are you?
LC. Good, thanks.
KD. Good. Good. Well, I will now open this call up for questions. Operator.
Q&A
[Operator Instructions}
TODD EILERS – ROTH CAPITAL PARTNERS
TE. Hi guys, how are you?
LC. Fine, Todd.
TE. I was wondering, can you tell me how many game cards you sold this quarter?
LC. Yes, just north of 1.5 million. Which equates to approximately 5.5 million for the year.
[Operator: caller disconnected…]
TE. Hi guys. Sorry about that. Can you hear me?
LC. Yes.
TE. You guys mentioned a healthy backlog. Can you give that number?
LC. We reckon we’ve got 60% of ‘09.
TE. Okay. And the guidance that you guys gave for fiscal ’09. Can you maybe tell us how much you’re assuming for each of the three business areas, gaming, promotions, and education?
LC. Sure. Obviously we just reclassified it. We’re about 30% for gaming, 25% for education, and 45% for promotions.
TE. Okay. And then, should we expect your tribal agreement with Sovereign, should we expect that to contribute in the first quarter, is that correct?
LC. It will come through ______ slightly in the first quarter, but we really expect it to start really kicking in in Q2.
TE. But will you guys get the minimum royalty?
LC. Yes. Yes. Yes we will.
TE. Okay. Sounds like you think that it could exceed that possibly going forward, is that
LC. There’s a couple of initiatives which if they work out like we expect them to, yes, yes, it could exceed it _____.
TE. Okay. Could you also give the total recurring revenue in the fourth quarter including the Scientific Games royalty?
LC. Total recurring revenue including Scientific Games was approximately $800,000.
TE. Okay. And then, you guys mentioned a gain on investments. Can you maybe tell us what happened there, what led you to increase the valuation there, and maybe which investment specifically that was.
LC. Yeah, that was a software company that we’d invested in, which basically we sold that position and we made a slight gain on that investment. Over the course of the last couple of years we have some inherited investments from previous management and we’d also let you know we increased our investment in a company called PrizeMobile which we’re hoping to get a nice kick from that, during maybe Q2 of this year.
TE. So the gain then in the quarter was unrelated – I was going to ask you the increase on the balance sheet in your investments, so that gain was unrelated to that increase? That was also an investment you guys made in the quarter?
LC. The gain was the sale of an old investment, yeah.
TE. Okay. And then you mentioned a 5% share repurchase authorization. Does that refer to common shares or the Preferred?
LC. Yes, so what happened was during – as we announced, we got authorization from the Preferred shareholders to repurchase the Preferred shares, which we repurchased at the beginning of the quarter. The Board, because of our current share price being significantly below where the company [expects it to trade?] and the Board has authorized us to seek permission of the Preferred _____ to repurchase of up to 5% of our common, which we’re in the process of doing
TE. Okay. And then I guess last question. The education/sports markets. Can you guys maybe talk about what your expectations are for the timing of when we might be able to start to see some of those sales show up in fiscal ’09?
LC. The products on the Quiz Cards should start coming through in May and so Q2, late Q2. And the Thomas and the edu products we’ve got scheduled in in Q3. And obviously the new initiatives which Kevin and Anna are looking at which obviously are not scheduled in revenues for this year at all yet.
TE. Okay. I think that does it for me. Thanks guys.
KD. Thanks very much, Todd.
MICHAEL WEISS – JOSLYNDA CAPITAL
MW. Hi. One part I missed cause I got cut off for a minute was the ’09, your confidence in ’09. Can you give us – I don’t know if you’ve mentioned this already. Have you mentioned how much of this is already contracted or backlogged already?
LC. Yes, 60% Michael.
MW. Oh, 60 percent. Okay. You also mentioned gross margins may be lower going forward on new contracts. Can you give us an idea, is that just because the new contracts are larger or just you’ll not be able to – different kinds of contracts that you’ll have to take a lower gross margin but higher sales?
LC. I think with some of the new products they’re in higher volume mass consumer markets where we won’t get the same high margins we’ve enjoyed previously because they’re different products, different markets, but I think what we can safely say is that although that might affect our gross margins it will definitely enhance our gross revenues considerably, and the bottom line is anything there would be accretive to EPS, so even if gross margin declines, EPS will improve.
KD. May I also add to that?
LC. Sure.
KD. Hi Michael. We’re also working towards the collectability factor, so when we look at the promotions category instead of one-off type of promotions, looking for continuity promotions. And so continuity promotions based on collectability factors would mean higher volumes but more recurring programming over the course of a year or two years.
LC. Yeah, great point.
MW. And can you talk a little about how you’re going to manage increased operating expenses. Is it going to wait til you get the contract or how are you going to manage to keep the operating expense vs. earnings etc.
LC. I think Kevin’s already touched on that. The strategy today is to – as revenues and earnings increase then obviously I think that’s when they’d look at increasing operating expenses.
KD. I think the other thing too to add to that, Lee and Michael, is the fact that with these other larger, gold standard companies here in the U.S., they have a lot of resources. And we want to leverage those resources within their internal teams on a lot of the type of activities that would occur before launch. And so we’re acting in some regards more like a license or approval process. And so we still keep things tightly controlled, tightly managed, and be able to provide – let the other companies in terms of their resources apply towards the project and then we’re still working to produce the cards and get things done in a timely manner.
MW. Okay. and the last question. Can you mention some of the new initiatives either the Indian gaming or some of the others that you’re working on today if possible?
KD. Do you want to start with Indian Gaming, is that okay?
LC. Yes, please.
KD. No, I was offering it to you.
LC. Oh. Sorry Kevin.
KD. No problems.
LC. Okay. No, with Indian gaming as we previously announced, we’re working with Sovereign. We’ve got some initiatives in progress with a variety of tribes which we should see the fruits of in a more significant way in Q2 and Q3. As you know, they got their license at the end of Q3 last year and they’ve been setting up the initial initiatives which always takes a little bit of time, and we should start to see some traction in next quarter. I know Kevin’s been working on some exciting stuff with Anna. Kevin, do you want….?
KD. Yes, absolutely. We have been progressing very nicely, Anna and I, from the national lottery standpoints in Europe, and progressing towards testing and working through the bid processes. We’ve also been working on placement of the Quiz Cards in the U.S. and globally as well with some great brands that have a high appeal for the card across all their various categories, consumer products to licensing, publishing, and other key areas. So we’ve been staying focused on the three core verticals in trying to accomplish the goal of adding to 2009 at least two new accounts from each one of those three categories of gaming, promotions, and education.
MW. Okay. Thank you very much.
KD. Thank you so much, Michael.
JACK CUMMINGS
JC. I guess you may have already answered this question. I’m calling from old Mexico and the connection’s not too good. But I’m reading on the internet your report and it says the Board has authorized the purchase of up to 5% of common shares outstanding. Is that on the open market or one of your institutional investors you’re going to purchase those from?
LC. That will be on the open market, but we have to get Preferred shareholder approval, which we’re currently in the process of getting.
JC. Okay. Sounds like you guys did all right this quarter and for the full year. I’m looking forward to ’09.
LC. Yes, thank you.
KD. So are we, Jack. Thank you very much.
STEVE MAIDEN – MAIDEN CAPITAL
SM. Yeah, hi guys. Congrats on the quarter and the outlook. Question just on the possibility of doing a reverse split to get the stock to a point where you could be listed on a larger exchange and perhaps attract better investors and help to close the valuation gap.
LC. It’s something the Board’s actively looking at, and as you can tell the Board’s instigated a share repurchase as of this quarter, and I’m sure when the Board meets in April that will be high on the agenda.
SM. Okay, great. Thanks guys.
KD. Thank you very much, Steve.
{Operator instructions]
KEVIN DONOVAN
Thank you very much, Kanisha. I would like to thank you all for taking time out of your day to attend this call and TO participate. I am truly honored to have this outstanding opportunity to run Electronic Game Card and to have the trust of Lord Steinberg and the Board members. And the Board, Anna, and I are highly focused to quickly gain the trust of the shareholders to build the value of their investment with a strong, reliable, and robust product technology platform which we feel has only just started to be commercialized.
At a minimum our short term mission is to deliver on the 2009 earnings per share guidance of $.14. Our long term mission is to deliver quality at every level of our organization, to expand the product offering, increase IP, and further our distribution capabilities and reach. I look forward to talking to you when we discuss the first quarter results of 2009. And if you have any questions in the meantime, please don’t hesitate to contact Yvonne Zappulla through the usual phone number and e-mail address. And that is it. And I’d like to thank all my colleagues here and I want to personally thank each and every one of you, from the company. Thank you.
