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Edited Transcript of NTN earnings conference call or presentation 13-May-19 8:30pm GMT

Q1 2019 NTN Buzztime Inc Earnings Call

CARLSBAD May 29, 2019 (Thomson StreetEvents) -- Edited Transcript of NTN Buzztime Inc earnings conference call or presentation Monday, May 13, 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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* 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 First Quarter 2019 NTN Buzztime, Inc. Earnings Conference Call. (Operator Instructions) As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Kirsten Chapman from LHA Investor Relations. Please go ahead.

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

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Thank you, Sarah. Good afternoon, everyone, and thank you for joining us today for NTN Buzztime's First Quarter 2019 Results Conference Call and Webcast. Joining us today are CEO, Ram Krishnan; and CFO, Allen Wolff. After the prepared remarks, 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 any results expressed or implied during the call. Potential risks and uncertainties that could cause actual results to differ materially include, but are not limited to, the company's ability to compete effectively within the changing and highly competitive interactive entertainment and game industry; customer and consumer acceptance and adoption of the company's products, platform and technology; the company's ability to successfully introduce new revenue streams based around consumer games and services; the company's ability to maintain or improve its relationship with Buffalo Wild Wings and the company's ability to raise additional funds in the future on favorable terms; the company's ability to satisfy its 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 on this conference call related to projections or other forward-looking statements is the basis of 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 Ram Krishnan. Please go ahead, Ram.

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

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Thanks, Kirsten. And let's jump right in today. We closed our first quarter with a solid start, posting our 12th consecutive quarter of positive EBITDA. For 2019, much of our focus has been on getting ready to launch our new light product. I'll give some updates on the progress, changes in the business model and our target towards the future.

We often talk about what we like to call 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 the Buzztime following, our players in the aggregate generated in excess of $7,000 a month in revenue for those stores. Further, the absence of Buzztime has had negative effect. We know this as we tested scenarios. And when we have turned off the service, we watched players and the money they spend migrate to other Buzztime locations.

While the impact of our services has repeatedly been proven, we've had challenges acquiring new locations. Historically, to deliver that 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 a relatively high entry price for our monthly service, which in turn limited some of our market opportunity. In fact, analyzing our historical 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 financial risk. We believe that our new customers can ramp to achieve the positive Buzztime network effect similar to what our engaged venues experience. To that end, to acquire more locations, you will see us roll out our light offering to the market branded as Buzztime Basic. So let's get into some of the details behind the elements of this offering, which has several parts to it.

First, when we deploy Buzztime, part of our experience is delivered through the TVs. A portion of our engagement actually happens passively, that’s people in the venue who are watching our screens but not necessarily picking up a device to play. We're in the midst of updating our audience metrics by a third party, and we know that over 75% of patrons who visit the locations see our TVs and recollect what they saw. This is very powerful to advertisers.

Leveraging this audience, however, required modernization of our ad platform, which we set out to do last year. In the first quarter of this year, we rolled out new ad technology to both our existing installed base and also embed it into Buzztime Basic. To help ensure we are best positioned to take advantage of our large existing installed base, we have been heavily testing this rollout. This new system gives us access to ad buying platforms. Most of the digital advertising inventory is already bought and sold on public exchanges and private marketplaces using very sophisticated algorithms.

Understanding the growth potential and value to advertisers is important. According to recent data, digital ad spending in the U.S. exceeded $100 billion for the first time last year. Specifically, total domestic spending reached roughly $108 billion in 2018, a 22% increase from 2017. Mobile advertising has become increasingly dominant, growing 40% year-over-year to almost $70 billion, and video ad spending grew 37% to $16.3 billion. We are representing -- or presenting our advertising inventory as digital out-of-home, which is a separate category for mobile ad platforms and over-the-top type networks. Out-of-home is a roughly $10 billion market, and the digital portion is a new growth segment which is expected to grow in the double digits for the next several years. We are on the forefront of a space that much of the advertising industry is leveraging the same way as other digital media assets and looking to increase spend.

We recently opened up a fraction of our inventory to the public marketplaces, and we've already booked 3 deals in the open exchange. This is exciting. We'll continue to learn, adjust and optimize. This gives us options of how we go-to-market with our quest for maximizing screens.

The second element of Buzztime Basic is our mobile app, which released last week in open beta and you can find in both the Apple and Google Play stores. The first release offers users the ability to play along with the most -- with most of the network trivia games on our schedule. You must be in 1 of our 2,600 locations to play and have location services turned on. The app is both a complement to the tablet experience and will be intended to stand-alone in Buzztime Basic as the primary means of play.

The app will drive the Buzztime Basic offering and allows us to target more prospective businesses, creating the opportunity to increase our location count and expand into new vertical markets. We released the app with most of our trivia games available and expect to release the remainder over this summer with new releases tied to performance improvements, user experience and a number of new features which we'll get into the rhythm of releasing.

Finally, we have our SiteHub platform, which is our deck of cards-size version of Buzztime, which as you may recall has a lower cost of goods sold and a much simpler installation. This device is in the process of field testing to help ensure our packaging, remote device management and installation process is meeting our expectations. We're already preselling and taking on a more mark-to-market approach. We've got a backlog of sites already lined up in our first market and can't wait to see this take hold.

As we are evolving the business, we are and will always be about driving engagement between players, brands and venues. As we evolve, our goal is to have more easily accessible technology and services that get us to more markets faster. You can see the Buzztime business model being driven by the following.

First is events. We are in 300-plus venues per month with live events. These continue to be a core part of our business, connecting customers and venues. We'll begin opening the opportunity to connect brands to this audience and provide our SiteHub product to them as well.

Next is subscription. We continue to sell our subscription model, which will be for sites that have built an audience and use tablets or our digital signage platform. Third, we are expanding our advertising capabilities. This will be how we aim to monetize our lightest offering and also the entire network. We currently have over $30 million in inventory in the network today and expect this to grow.

Finally, as the use of our mobile app increases, we can see the potential for in-game transactions. As our mobile app is deployed and downloaded, there are wide range of features and capabilities we can unlock through transactions. While we are prudent with capital, we continue to seek the right growth partner to help us execute our operating and strategic plan and to better position the company to expand.

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 adviser, D.A. Davidson, to assist in the process. The strategic process is ongoing. Our Board of Directors has not set a timetable for this strategic 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 do not intend to disclose additional details regarding the strategic process until and -- 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. For the first quarter of 2019, revenue was $4.8 million, down from prior year revenue of $5.8 million primarily due to decreases in hardware and other revenues and to a lesser extent, subscription revenue. We ended the first quarter with 2,632 total sites compared to 2,639 sites at the end of last quarter. First quarter direct costs were $1.5 million compared to $2 million in the prior year period. The decrease was primarily due to hardware equipment expense tied to lower revenue as well as lower service provider fees and freight expense. Gross margin, however, improved to 69% from 66% in the prior year period.

Our team has produced great results on hardware production, and we are seeing a very stable product in the field with less than 2% repair rates, which is industry-leading. SG&A expenses were $3.5 million compared to $4 million in Q1 2018 and consistent with our target of $14 million for 2019. For the first quarter of 2019, net loss was $313,000 or $0.11 per share compared with a $409,000 loss or $0.16 per share in the prior year period. We are pleased to report that EBITDA was $512,000, up from $325,000 in the prior year. This is the 12th quarter in a row where we recognized positive EBITDA.

Cash, cash equivalents and restricted cash totaled $2.9 million compared to $2.8 million at year-end 2018. Cash flow from operations for the period was positive $780,000 compared to negative $120,000 in the prior year. Total cash flow was positive $111,000, up from negative $718,000 in Q1 2018. In the short term, we will continue to remain focused on building value while responsibly managing the business for EBITDA profitability. As we begin to shift to a lighter model, we will evaluate prioritizing investment in growth over EBITDA profitability.

We ended the quarter with $2.2 million in site equipment to be installed compared to $2.5 million at year-end 2018, reflecting continued delivery of payment-enabled hardware to Buffalo Wild Wings. This is the lowest level of site equipment to be installed since May 2014, and we will continue to optimize this key balance sheet item in the future.

As you review the balance sheet, you will also notice a gross up of the assets and liabilities related to the new accounting guidance that took effect in January 2019. This standard predominantly affected our operating leases, most significantly our new headquarters with an immaterial impact to our financing leases. As a reminder, we moved into new offices at the end of 2018, reducing square footage from 29,000 square feet to approximately 16,000 square feet at a future savings of approximately $1.4 million over the next 5 years compared to the renewal pricing of the former space. As of March 31, accounts receivable decreased to $848,000 from $1.1 million at year-end 2018.

Looking ahead, we will continue to review our options for growth and within the capital markets to best position Buzztime for successful execution of our growth plan under the new product vision and ecosystem. 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. This is an exciting time as we are transforming the Buzztime experience. We believe we have the building blocks now, the lower cost model and easier to sell and distribute product and a way to monetize it on a local and regional basis. This is the kind of model where when we nail down the economics of one market, we will look to employ capital against it to scale rapidly. This is a pivotal period for us, and we're laser focused on delivering on the new model. 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) And we have no questions in the queue at this time.

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Ram Krishnan, NTN Buzztime, Inc. - CEO & Director [2]

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Okay. Thank you very much, operator, and thank you all for joining the call today. We look forward to catching up with you on the next call.

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Operator [3]

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