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Edited Transcript of NTN earnings conference call or presentation 17-Mar-20 8:30pm GMT

Q4 2019 NTN Buzztime Inc Earnings Call

CARLSBAD Mar 26, 2020 (Thomson StreetEvents) -- Edited Transcript of NTN Buzztime Inc earnings conference call or presentation Tuesday, March 17, 2020 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Allen Wolff

NTN Buzztime, Inc. - CEO & Director

* Sandra Gurrola

NTN Buzztime, Inc. - SVP of Finance

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Conference Call Participants

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* 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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Ladies and gentlemen, thank you for standing by, and welcome to the Q4 2019 NTN Buzztime, Inc. Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

I would now like to hand the conference over to your speaker today is Kirsten Chapman from LHA Investor Relations. Thank you. Please go ahead.

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

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Thank you, Jimmy. Good afternoon, and thank you for joining us today for the NTN Buzztime's Fourth Quarter and Year-end 2019 Results Conference Call and Webcast. Joining us today are CEO, Allen Wolff; and SVP Finance, Sandra Gurrola. Before we begin, let me remind you that during this conference call, management may make forward-looking statements about the company's planned strategy and goals and the company's anticipated financial and other performance. Forward-looking statements by their nature address matters that are, to different degrees, subject to risks and uncertainties that could cause actual results to differ materially and adversely from those expressed in any forward-looking statements. Those risks and uncertainties that are outlined in our press release today, in greater detail described in Part 1 and Item A1 and the risk factors of our annual report on Form 10-K and described in other documents we file from time to time with the Securities and Exchange Commission. The forward-looking statements made today are as of the date of this call and are 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 over to Allen Wolff. Please go ahead, Allen.

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Allen Wolff, NTN Buzztime, Inc. - CEO & Director [3]

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Thank you, Kirsten, and thank you for joining us today. I'm glad to be with you and share our results and vision. 2019 culminated with our fourth consecutive year of positive EBITDA. For 2020, we remain focused on growing our digital entertainment and hardware businesses in an efficient manner. To that end, in January 2020, we seized the opportunity to monetize a noncore business and sold our hosted-events asset. We have been prioritizing opportunities with the quickest return on investment and have made significant progress validating our road map that will establish a strong foundation for scalable growth. These include: our mobile-based, in-venue solution with an expanded feature set at a variety of price points, our ability to ship and support a self-installed product, our programmatic advertising that provides strong contribution margin and our hardware solutions platform.

Okay. First, let's discuss the backbone of Buzztime, our entertainment services. We deliver scalable trivia entertainment in various product packages, providing flexibility for customers to choose the best Buzztime experience for their environment and maximizing the product-market fit. Buzztime Basic, our lighter offering, launched in the summer of 2019, it includes a small site hub for venues that enables players to compete using their mobile device. We now have multiple attractive pricing packages, including a prepaid annual subscription as well as weekly or monthly pricing. Buzztime Basic has a broad market appeal due to its lighter offering and lower price point. After a few months in pilot, we began selling the service and to date, have approximately 165 sites, both paid and unpaid. We are seeing paid sites perform better than our initial free pilot sites, and we'll continue to invest in the Buzztime Basic offering to expand the feature set with engagement hooks as well as shorter gains, refine our go-to-market strategy to optimize the sales funnel and best capitalize on advertising revenue markets and explore partnerships for sales distribution and licensing to enable efficiency and scaling the network. Although the revenue per venue is lower with Buzztime Basic, we believe the product's low cash requirement, high gross margin and broader market appeal will help us scale the network and build growth.

While we understand the strong headwinds and difficult market conditions we are facing to grow site count, we continue to remain focused on building value in the product offering and efficient go-to-market strategies, which we believe will enable us to ultimately grow our network.

The effect of the COVID-19 pandemic on the restaurant and bar industry has been rapid, and its scope and magnitude is uncertain. We are monitoring the restrictions being imposed on restaurants and bars by various levels of governmental authorities, and we'll evaluate steps we can take in an effort to mitigate these effects on our business.

Buzztime Elite offers a more robust product offering on tablets, including single-player arcade games and poker. Part of the elite network included the Buffalo Wild Wings locations. In November of 2019, as previously announced, our relationship with Buffalo Wild Wings corporate restaurants and most of the franchisees ended. As a result, we ended 2019 with 1,440 elite sites, which included approximately 100 franchised Buffalo Wild Wings venues, who continue to leverage Buzztime's compelling benefits. We have seen close to 10,000 players from B-Dubs' locations that no longer offer Buzztime migrate their play to new locations, which include both B-Dubs' franchise locations that continue to offer Buzztime and our independent venues. We believe that in today's competitive restaurant industry and challenging market conditions, these loyal players offer significant value through their frequency and overall spend to our venue partners.

And reviewing the landscape of our current customer base, I think it's important to note the tenure of our sites. Over 45% of our elite network sites have been customers for over 10 years, and over 60% have been customers for over 5 years, which we believe demonstrates the value that these venues place on our elite offering. As discussed, the tablets are an attractive component that many of our sales leads are interested in when they inquire about our solution. However, the elite price points can be cost prohibitive. With this in mind, we are developing a midrange hybrid solution, specifically tablets with more limited functionality rolled out in a basic environment with self-installation. This hybrid solution will enable us to offer an upgrade to the basic offering but at a more cost-effective price than the elite solution. We intend to bring this option to market in 2020 and launch the tablet add-on with single-player arcade games first.

Let's talk a bit about our feature set and road map. To start 2020, we launched social sign-on and are seeing positive indicators of new registrations utilizing social integration. Our 2020 player promotions will focus on driving key metrics: frequency, mobile downloads and targeted audience programs, like trivia for charity and download the mobile app to win. We are aligning our 2020 road map with our go-to-market strategy. Our focus is on enhancing the experience, expanding the audience and maximizing social impact. We are creating opportunities for potential partnerships with customizable channels to expand the audience. We will expand the health ads platform for venues to take full advantage of marketing their specials and promotions in-house. And finally, we will continue to enhance our integration into the social footprint by adding features, such as invite and sharing. We are attempting to do this with a much smaller team in a difficult market and macroeconomic conditions. We also have liquidity constraints. We'll need to raise capital to effectuate growth and we'll need to navigate the challenges from the uncertain effects of the coronavirus pandemic.

Okay. On to a review of our advertising expansion and growth. In mid-2019, we launched our first programmatic ad exchange, a key part of our future growth integrated into both our elite and basic services. To date, transaction -- traction has been fantastic. As you may recall, in Q3, we realized approximately $50,000 in gross advertising revenue. In Q4, we grew gross advertising revenue from the exchange over 50% sequentially to $78,000. In Q1 2020, revenue is on track to more than double sequentially from Q4. Please remember, Q1 has 40% less sites than the beginning of Q4 2019. We continue to explore how to maximize our subscription product go-to-market strategy with advertising revenue through new partnerships and monetization opportunities. We believe our network and offerings position us well to capitalize on the growth in digital out-of-home advertising. Our goal is to build advertising revenue as a complement to our subscription revenue, while adding both predictability and positive contribution margin. However, as with other aspects of our business, the effect of the coronavirus pandemic on continued short-term growth of our advertising revenue is uncertain.

Now let's review our hardware solution, where we have a strong competency in designing, manufacturing, deploying and supporting tablet-enabled solutions for our partners. As previously mentioned, we signed a second order in the correctional facility industry for $3 million. Delivery of tablets commenced in Q4, and we anticipate the majority of the remaining quantity will deliver throughout 2020. Our product is now supporting video visitation, which is increasing in demand given the current market conditions. We continue to deliver tablets to our partner Spendgo. Additionally, we now have 2 hardware pilot opportunities with large casual dining organizations. We continue to carefully monitor and support these efforts, and if it proves to be the right solution, we anticipate tablet orders in 2020. With our hardware pipeline healthy at over $30 million, we continue to be bullish on the market opportunity. We believe the hardware business will expand as a key part of our revenue growth. However, these sales opportunities are unique in their individual demand and implementation. So looking ahead, we anticipate some lumpiness to the orders and revenue.

Regarding hardware inventory, as our hardware is manufactured in China using a significant number of Chinese sourced parts, we are closely watching the impact of the coronavirus on our supply chain. Our current inventory is robust, in part as a result of acquiring tablets with newer technology from Buffalo Wild Wings for only the cost of shipping. We are in active discussions in exploring how to monetize our existing inventory. That said, supply chain disruptions may impact our ability to deliver product during the second half of 2020.

Before I turn the call over to Sandra, I'd like to comment on our relationship with Avid Bank. We recently signed an amendment to our loan agreement with Avid Bank under which the amount of our monthly payment obligations on our term loan increase, such that is to be fully repaid by December 31, 2020. We continue to explore financing opportunities that provide custom and flexible solutions for us to meet our debt servicing and liquidity needs as well as strategic alternatives for the company. We have and will continue to take steps to lower our overhead. This includes a recent staff reduction, resulting in 38 full-time employees currently. As the environment is changing rapidly, we are closely connected to our contacted Avid Bank and understand they are evaluating how they will support companies affected by the coronavirus pandemic and its impact to their short-term financial performance.

In summary, we have narrowed and refined our core strategy, launched new products with validation and compelling margins and are now increasing our focus on channel partners. With refined priorities and a clear vision, we will work together to grow revenue from our improved entertainment suite, our new advertising solutions and our robust hardware business.

I will now turn the call over to Sandra Gurrola for a review of our Q4 and full year financials. Sandra, please go ahead.

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Sandra Gurrola, NTN Buzztime, Inc. - SVP of Finance [4]

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Thank you, Allen. Revenue was $5.2 million for the fourth quarter of 2019 compared to $4.6 million in the third quarter of 2019 and $5.9 million in the fourth quarter of 2018. For the full year, 2019 revenue was $19.8 million compared to $23.3 million in 2018. Q4 2019 hardware revenue increased due to the delivery of the first tranche of tablets our jail partner ordered earlier in the year. We expect to continue delivering the majority of the remaining tablets under this order throughout 2020. As Allen mentioned, during the quarter, we acquired tablets with our newer technology from Buffalo Wild Wings for only the cost of shipping. We expect to redeploy these assets to our existing and new customers as well as look for ways to monetize them. The increased inventory enabled us to write off older tablets and cases for $675,000, which increased direct cost and lowered gross profit. For the fourth quarter 2019, direct costs were $2.9 million, including the equipment write-offs and expenses associated with increased hardware revenue, compared to $2.1 million in the fourth quarter of 2018.

Fourth quarter 2019 gross margin was 43%, lower than typical due to revenue mix and the equipment write-off. 2019 gross margin was 62% compared to 65% in 2018. Although revenue mix will continue to result in margin fluctuations, we continue to optimize our gross margins and anticipate that it will be higher than the fourth quarter of 2019 in future quarters. For the fourth quarter 2019, SG&A expenses were $2.9 million, decreasing 15% from the prior year period due to our continued efforts to execute efficiently and reduce costs.

For the full year, we achieved our goal to reduce SG&A expenses to less than $13.5 million. Reporting 2019 SG&A of $13.2 million compared to $14.5 million in 2018. We continue to match SG&A to our current product strategy and profile of the company. To this end, after taking into account the anticipated impact of our recent headcount reductions and other cost management initiatives, in 2020, we are tracking for SG&A to be less than $10 million though that number excludes the uncertain impact that the COVID-19 pandemic may have.

During the fourth quarter of 2019, operating expenses included a noncash impairment charge of $498,000 for capitalized software development projects that no longer fit in our strategic product road map. For the fourth quarter of 2019, net loss attributable to common shareholders was $1.3 million or $0.45 per share compared to net income attributable to common shareholders of $44,000 or $0.02 per share in the fourth quarter of 2018. For 2019, net loss attributable to common shareholders was $2.1 million or $0.72 per share compared to net loss attributable to common shareholders of $275,000 or $0.10 per share in 2018.

EBITDA loss, including the $1.2 million impact of the previously mentioned noncash items, was $555,000 in the fourth quarter of 2019 compared to an EBITDA gain of $732,000 in the fourth quarter of 2018. In 2019, EBITDA was positive for the fourth year in a row at $1.1 million compared to $2.8 million in 2018.

2019 cash flows from operations was $2.7 million, up $1.4 million from 2018.

We had negative working capital of $25,000 at December 31, 2019, compared to working capital of $2.8 million at December 31, 2018, primarily due to reductions in site equipment to be installed, increased payables and operating lease liabilities and reclassifying our debt to current as a result of the amendment to our loan agreement with our bank that Allen previously mentioned. Due to increased debt service obligations under our loan agreement, the company does have liquidity constraints, and we are seeking creative ways to continue funding our operational plan as well as finding opportunities to optimize our cost structure.

Cash, cash equivalents and restricted cash were $3.4 million at December 31, 2019, compared to $2.8 million at year-end 2018. Site equipment to be installed decreased $1.1 million -- to $1.1 million at December 31, 2019, from $2.5 million at prior year-end. We anticipate further reduction in site equipment to be installed as we shift to more capital-efficient options, such as our Buzztime Basic offering. And with that, I will now turn the call back to Allen.

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Allen Wolff, NTN Buzztime, Inc. - CEO & Director [5]

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Thank you, Sandra. Thank you. In conclusion, in 2020, we will continue to expand our hardware business, explore licensing and maximize our opportunity to accomplish more with less. I will also continue to explore partnerships, and together with Sandra and the Board, we will explore strategic alternatives. To augment our position, we are diversifying our set of entertainment offerings, thereby creating a solid set of packages for our target market and new verticals. Complemented with advertising, our products offer a compelling contribution margin, providing the foundation of growth for our scalable business. Thank you for joining us today. We appreciate your support, and we look forward to connecting with you throughout the quarter.

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Operator [6]

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Ladies and gentlemen, thank you for your participation on today's conference. This does conclude your program, and you may now disconnect.