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Edited Transcript of NTN earnings conference call or presentation 20-Mar-19 8:30pm GMT

Q4 2018 NTN Buzztime Inc Earnings Call

CARLSBAD Mar 25, 2019 (Thomson StreetEvents) -- Edited Transcript of NTN Buzztime Inc earnings conference call or presentation Wednesday, March 20, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Allen Wolff

NTN Buzztime, Inc. - Executive VP & CFO

* Ram Krishnan

NTN Buzztime, Inc. - CEO & Director

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Conference Call Participants

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* William Tennent Gibson

Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst

* Kirsten F. Chapman

Lippert/Heilshorn & Associates, Inc. - MD and Principal

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2018 NTN Buzztime Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Kirsten Chapman, LHA Investor Relations. Ma'am, you may begin.

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Kirsten F. Chapman, Lippert/Heilshorn & Associates, Inc. - MD and Principal [2]

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Thank you, Lauren. Good afternoon, and thank you for joining us today for NTN Buzztime's Fourth Quarter 2018 Results Conference Call and Webcast. Joining us today are CEO, Ram Krishnan; and CFO, Allen Wolff. After the prepared remark, we'll 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 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 games and services; our ability to maintain or improve our relationship with Buffalo Wild Wings; our ability to satisfy our payment obligations and comply with financial and other covenants under our credit facility with Avid Bank; the ownership and enforcement of intellectual property; and others, more fully described in the company's SEC filings.

The information in this conference call related to projections or other forward-looking statements is 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 is my pleasure to turn the call to CEO, Ram Krishnan. Please go ahead, Ram.

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Ram Krishnan, NTN Buzztime, Inc. - CEO & Director [3]

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Thanks, Kirsten. Let's jump right in today. We closed our fourth quarter with momentum and delivered on strong results for 2018. Some of the highlights include: revenue growth of 12%; positive net income of $44,000; and $732,000 of EBITDA.

For the full year, we experienced roughly 10% revenue growth, a narrow loss at $275,000 and EBITDA growth of 57%. In fact, 2018 posted the strongest bottom line in 24 years. Much of the growth came from new initiatives related to our diversification strategy, including delivery of tablets to our partner in the jail space. For future growth, we're continuing to invest in advancing our technology platforms and bringing new offerings to the market.

Let's review a few of those areas with a focus on our new entertainment platform. It's important to understand the power of the Buzztime network effect. When one of our business customers generates a Buzztime following at their venue, our impact on their performance can be powerful. Through testing and analytics, we have found that at certain venues with a Buzztime following, our players in the aggregate generated in excess of $7,000 a month in revenue for those stores. Further, our absence has a negative effect. When we've turned off the service, we watched players, and the money they spend migrate to other locations.

While the impact of our service has been -- proven to be very strong over and over again, we've had challenges acquiring new locations. Historically, to deliver the robust, real-time multiplayer experience, our solution required a heavy field installation component, with a lot of equipment and extensive expertise to deploy.

That cost translated into relatively high entry price for our monthly service, which, in turn, limited some of our market opportunity. In fact, analyzing our sales pipeline, we believe 50% of our lost opportunities were due to our high entry price. To address this problem, in 2018, we laid out a plan to reduce those costs and provide a lower-priced option for the market. We believe that a capital-light, entry-level offering will enable customers to start using Buzztime and build their audience, all with less perceived financial risks. We believe that our new customers can ramp to achieve that positive Buzztime network effect, similar to what our highly engaged venues experience.

We plan to go to market with a lower price offering with mobile TV and an -- mobile and TV and an advertising component that are easy to install, and utilize the venues' existing infrastructure. To accomplish this plan, we are focused on several initiatives, which I'll expand upon.

First, we redesigned our traditional PC that runs our system inside of our customer locations and have a new version that we're calling SiteHub. It's the brains for running our game engines and allows for quality performance using the customer's Internet. It also enables us to easily and instantly connect to the venue's TVs, which can increase our audience reach and bring awareness to content and gaming experiences.

The SiteHub development leverages the work we've done to run our android tablets. The new device is about the size of a deck of cards and can be affixed to the back of a TV. The new form factor eliminates most of the wiring and cabling needed to install the current system. Most importantly, it's a fraction of the cost of our traditional PC. While we've always served the bar and restaurant market, we've had demand from many adjacent spaces. However, we have always been too high priced for any real entry or penetration into those markets effectively. We believe we can now address that barrier to entry with our SiteHub.

For most of the second half of 2018, we ran our SiteHub platform internally. Now we are excited to get this product to market. We have lined up a number of San Diego locations where we're headquartered and are preparing for a field test in the second quarter.

Next, we've redesigned the architecture of our TV component of the Buzztime experience. Our TV is what most of our audience views and passively interacts with. It's what creates a call to action, getting people to play. It's also what gives players the ability to brag and show off the performance with the venue on publicly visible leader boards.

Our new experience has more dynamic elements, and we'll now be better able to evolve and accommodate a growing number of content types, including streaming video. It also enables new advertiser spots and ways to build monetization into the product offering.

Our third area of focus has been on launching our mobile app, which allows players to play on their own device. This is compelling for several reasons. It aligns with our capital-light goal, and reduces cost to venues. Going mobile allows more venues to participate in the network, which drives more value for our partners as we increase the number of users, once again, fueling the network effect. This will be a Version 1 mobile app with an open beta period. We'll have a lot of basic features that enable guests to play along with tablets in existing Buzztime locations.

We expect to launch with about 80% of our games available in the app. We'll continue to release a number of new features and games over the coming quarters.

The fourth focus is expending on our ad network. For years, we have had an ad network built into our product, but today, it has been completely closed off and customed. As technology has advanced, digital media is increasingly purchased and fulfilled through ad exchanges and ad marketplaces. To take advantage of that, we just released a new update to our core systems that include the integration to an ad exchange included in the new SiteHub. The ad exchange will increase access to our inventory and is expected to make it easier to acquire and fulfill advertising partners. We believe this could be game-changing for the business.

Lastly, we've been developing and managing monthly cash prizes for play on the Buzztime network, and it's been going very well. Each promotion has been different, and we're testing to learn what days, games and price types have the broadest and biggest appeal for players and the biggest impact on our venues. We have delivered over $20,000 in prizes to more than 50 players so far.

We expect 2019 to be a big product-launch year with a lot of changes happening simultaneously. We are changing everything from product architecture to packaging and from contracts to sales collateral. And we're excited about all the potential impact and approaching it methodically to help ensure all performs well in the field, given that each new product we launch puts potential strain on the organization. We plan to spend much of Q2 ironing out the field assumptions we have in our model.

Finally, a quick look into our hardware and platform sales. We are building a nice pipeline of prospects for our tablet, operating system, games and mobile device management platform. Today, the pipeline alone is in excess of $12 million. And we fully expect to see new 7-figure orders on the horizon.

Now before I hand the call over to Allen, I want to circle back to the announcement we made in December that our board is exploring and evaluating strategic alternatives focused on maximizing shareholder value and that we engaged a financial advisor, D.A. Davidson, to assist in the process. The strategic process is ongoing. Our Board of Directors has not set a timetable for the process nor has it made any decisions relating to any strategic alternatives at this time. And no assurance can be given as to the outcome of the process. We don't -- do not intend to disclose additional details, unless and until further disclosure is appropriate or necessary.

With that, I'll hand the call over to Allen to go into more detail in the financial walk-through.

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Allen Wolff, NTN Buzztime, Inc. - Executive VP & CFO [4]

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Thank you, Ram. Revenue grew 12% to $5.9 million for the fourth quarter of 2018, up from $5.3 million due to higher hardware revenue, offset by lower subscription revenue. We ended the year with 2,639 total sites compared to 2,666 at the end of last quarter. We will continue to see site count fluctuation on our legacy and tablet system. We intend to complement these product lines with a lighter SiteHub offering, which we believe will offer new revenue opportunities.

At the end of 2018, our tablet platform reached 84% of our network, up from 81% at year-end 2017. Fourth quarter direct costs were $2.1 million, an increase of 18% from $1.7 million in the fourth quarter of 2017, reflecting the increase in equipment revenue.

Gross margin for the quarter was 65%, consistent with our annual results. As a reminder, gross margin will continue to fluctuate depending upon the revenue mix.

SG&A expenses were $3.4 million, a 15% decrease from $4 million in the prior year period due to our continued efforts to execute efficiently.

During the fourth quarter, we recorded a $261,000 impairment loss on goodwill related to assets the company acquired in 2003. For the fourth quarter, net income attributable to common shareholders was positive $44,000 or $0.02 per share compared to a net loss of $647,000 or a $0.31 per share loss in the fourth quarter of 2017.

We recognized positive EBITDA of $732,000 in the fourth quarter, a 526% increase from an EBITDA of $117,000 in the prior year period. Q4 represents our 11th consecutive quarter delivering positive EBITDA, which we believe is an important measure of our mission to grow responsibly.

Cash and cash equivalents were $2.5 million at December 31, 2018 compared with $3.4 million at year-end 2017.

Site equipment to be installed decreased to $2.5 million from prior year-end of $4.9 million, which included an initial order in 2017 of payment-enabled tablets for Buffalo Wild Wings, a majority of which were delivered in 2018. We anticipate further reduction in site equipment to be installed as we deliver the remaining tablets to Buffalo Wild Wings in the first half of 2019 and as we shift to more capital-efficient options with the expected commercial launch of our SiteHub offering.

For the full year period, revenue increased 10% to $23.3 million, up from $21.3 million in 2017. The increase reflects higher hardware and other revenue, offset by lower subscription revenue attributable to a decrease in site count as well as lower average revenue per location.

Gross margin for 2018 was 65% compared to 68% in 2017, primarily due to increased equipment expense related to our higher hardware revenue. We continue to operate with stable gross margins, which are impacted by our revenue mix on an ongoing basis.

SG&A expenses were $14.5 million, a $1.1 million reduction from $15.6 million in 2017. We continue to focus on optimizing SG&A spend and anticipate SG&A of approximately $14 million in 2019.

For the full year, net loss attributable to common shareholders was $275,000, a $0.10 per share loss compared to a net loss of $1.1 million in 2017 or a $0.45 loss per share.

Full year EBITDA was positive $2.8 million, an improvement of more than $1 million from an EBITDA of $1.8 million in the prior year. For 2019, we anticipate meeting our commitments to Avid Bank, which include a minimum of $1 million in trailing 6 months' EBITDA throughout the year.

Full year cash flow from operations was $1.4 million in 2018, an increase of more than $800,000 from 2017. For the year, working capital increased from negative $1.1 million to positive $2.8 million, primarily due to reclassification of $4.1 million in debt from short-term to long-term in conjunction with conversion to a term loan and recognition of $2.2 million in deferred revenue. These trends demonstrate our continued progress in managing all facets of the business' financial performance.

I will now turn the call back over to Ram.

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Ram Krishnan, NTN Buzztime, Inc. - CEO & Director [5]

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Thanks, Allen. We're excited about and committed to this business and several of us who invested our own capital over the past 2 years, which has resulted in new, innovative ways to provide unique experiences and value to the customers we serve. In 2018, we accomplished a lot. We improved business operations, delivered strong bottom line results and initiated plans designed to advance our entertainment platform and to drive growth. Our efforts are improving affordability of the offering, increasing impact of the venues, enhancing the experience for players and broadening reach to both new markets and to advertisers. We have several launches underway and expect 2019 to be a promising year. While we prudently evaluate measures to create shareholder value, our priority is building scalable distribution along with these new innovative products. We look forward to reporting more successes on the next conference call. Operator, please open the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from William Gibson with Roth Capital Partners.

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William Tennent Gibson, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [2]

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I do have one financial question related to you're now reflecting the Series A preferred in the financial statement. And it looks like you're doing that retroactively. Is that paid every quarter? Or is that a 2 times a year payment?

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Allen Wolff, NTN Buzztime, Inc. - Executive VP & CFO [3]

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Two times a year, Bill.

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William Tennent Gibson, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [4]

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So the June quarter and fourth quarter?

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Allen Wolff, NTN Buzztime, Inc. - Executive VP & CFO [5]

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Correct.

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Ram Krishnan, NTN Buzztime, Inc. - CEO & Director [6]

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Well, all right. If there's no other questions...

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Operator [7]

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(Operator Instructions) And I'm showing no further questions.

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Ram Krishnan, NTN Buzztime, Inc. - CEO & Director [8]

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Okay. Great. Thanks, operator. And thank you, everyone, for joining today. Have a great rest of your day, and we'll talk to you next quarter.

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Operator [9]

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Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program, and you may all disconnect. Everyone, have a wonderful day.