NTN Buzztime, Inc. (NTN)

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TRANSCRIPT SPONSOR

NTN Buzztime (NTN)
B. Riley Conference
March 15, 2007 1:45 pm ET

Executives

Dario L. Santana - President, Chief Executive Officer

Presentation

Moderator

Let’s get started. The next company is NTN Buzztime and CEO Dario Santana is going to start. Dario.

Dario L. Santana

Thank you, Ali and good morning, everyone. It is my pleasure to also introduce Kendra Berger, our CFO, who is sitting at that table. We have also Jeff Stanloss who supports us in the IR function.

What is customary, Ali? Do people actually read these statements or -- ? Okay, so I will just leave it up here for a bit and you guys can read it. You understand what that says; it is all about forward-looking statements to comply with the Securities and Exchange Commission. Am I okay without reading it, Kendra? All right.

Let me move on then to our message and our company. NTN Buzztime is the leading provider of interactive television entertainment. We offer play-along games in 4,000 locations around the U.S., Canada, and now more recently in the U.K. It is primarily focused on sports bars, restaurants, and bars, along with some that are chains or associated with chains, and you see some of the names that we serve down there.

14-hour a day promotional television network, consumer comes, play along with these games. They come more often, they stay longer, they spend more money, hence the reason for having our service is we do receive a fee from the bar for having us. We have been around over 20 years. Recurring revenue model, high gross margin, and you can see from the scatter diagram here or the scatter map that we are pretty much across the entire country.

One-fourth of our revenue, 25% of our revenue, falls in what we call the hospitality division. This company several years ago embarked on a diversification effort to try to complement the entertainment revenue with revenue related to hospitality but not necessarily entertainment in nature. A few companies were purchased around software for table management and reservation management, as well as the pagers for people who come to the restaurant; a table is not ready, you are given a pager.

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Those companies have been for sale, and since Kendra and I arrived about eight months ago we have gone into an intensive effort to move forward with that decision that has been made, which we agree with, we should focus on the entertainment business.

I can tell you that yesterday we announced, with our earnings, we announced that we are weeks away from closing on one of those businesses and expect to have both sold by the end of the second quarter of this year, so an effort that started about a year and change ago will be concluded here in the second quarter of this year.

I am getting some sort of a message here. Yes -- maybe I’ll click. Well, I am going to still get that message. Something about Microsoft Windows here is being flashed on our screen.

This slide describes -- I am not going to mess with it because if I do, I may lose the rest of the graphics. I am just going to let it go and we will ignore that red square there. I mentioned a little bit already about our selling proposition, but here you get some of the statistics. People come back more often, spend more time, spend more money.

We have an ROI equation which simply can be expressed, if you look broadly across the U.S., an hour of play in our game represents about $5 of profit to the restaurant, so when we see several hundred hours of play in a restaurant -- which is sort of typical for us; some are much greater than that, in the thousands -- then it begins to justify very clearly for the bar owner why they are paying us $600 a month. So it is all really equated and related back to the traffic that we are generating.

Our trivia offering is the most popular and it is in a unique format. It is a question with four possible answers. The longer you take to select the right answer, the fewer points you get. There are some hints that are given throughout the question and at the end, once the right answer is revealed, a factoid is also revealed. So it is an educational tool as well and we have in fact about 350,000 avid players that come back and play our games on a regular basis.

One of the keys for our growth, by the way, is growing that player base, and I will talk more about that in a moment, but as you play this game you are competing against other people in that bar, but you are also competing against people across the U.S. As each game ends, and they are on a half-hour schedule, with plenty of time between questions to take another sip of the beer or order another appetizer, as the game progresses and it ends, you are now matched up against the rest of the country. So if you had a very high score in that game, you are shown as the leader in the United States for that particular game at that moment, so a live tabulation.

We also have a second channel which typically is devoted to some other game, and it can be a prediction for sports, the game that got this company started is actually called QB1, so the player acts like a quarterback and they predict the next thing that the quarterback will do. Depending on how sophisticated you get with your prediction, you get more points and that keeps that interactive element, coupled with that football excitement, keeps that customer more engaged.

We also do Poker, Texas Hold’em, and we do a golf game and we do a billiards game, and it is a nice complement to the trivia. Depending on the restaurant and the format of the restaurant or the personality, if I can say it that way, of that restaurant, you can attract a different clientele or be more attractive to that customer base of yours as a bar owner.

We try to extend the experience and, of course, extend our reach to that player and extend the loyalty of that player by providing them a forum in which they can communicate and expand on their interest in our games. We have 350,000 registered players, as I said a moment ago, and they can go into the website and they in fact exchange a lot of information about their favorite games, how they did, what they may think of a different player that beat them today, but the fact that they beat them in the past and what they are going to do next time they face each other next Tuesday, because a lot of them do play on the same night and come back, perhaps with even a team to play and compete against other people.

So this has really been an interesting extension for our product and has helped us to bring additional loyalty to our customer base and we believe that customer base is one of our competitive advantages.

The company has extended the reach of its brand into other platforms and other distribution channels, and for a number of years now, we have been actively engaged in the cable TV space. We have been doing a number of pilots and actual deployments. We are in about 300,000 digital homes today with Comcast and Blue Ridge Cable. We used to be with Susquehanna until Comcast bought Susquehanna.

We recently announced a joint effort in technology through a paper that we publish with Cox Communications. So we are developing and continuing to develop that opportunity, but we see it as an opportunity that if it happens, it could be very important for us from a revenue standpoint and a profit potential standpoint, but it is only going to happen if the cable operators seize it and do something with it. It is really in their hands.

We are in a leading position but until they jump on this, we cannot drive it, not the same way we can drive growth in our network. Consequently, I always make that caveat when I talk about this opportunity. It is big but it is only going to happen when the cable industry is ready to deploy it and deploy it broadly and so far, that decision and that step has not been taken.

We are also in satellite. We are very active with Bell ExpressVu in Canada. We have a presence with DISH on a subscription model. We are in Verizon and Sprint on mobile phones. We have been licensing our content as well for retail games and for books.

So all this together, cable and everything that is represented in this slide, account for about 2% of our revenue, so you can see the importance of our core business, the 4,000 bar and restaurant network and the potential here, but at this point it is pretty much potential.

Back to our network economics, so we charge about $600 a month, as I said a moment ago. We talked a little bit about what the profit potentially is of each hour of play that we see in our network for the bar owner. We have an up-front investment of about $3100. It is our equipment. We own it. If they disconnect, we get it back. So the pay-back period on that investment is about seven months.

Now, when they do disconnect, we get a good part of that back. The gear is about half of that number, so we get a good part of that back. But assuming it does not disconnect and it stays in that bar, then our pay-back is about seven months. I will talk a little bit more about churn in a moment, because we do have some churn.

Operating leverage then has a lot to do with maintaining that customer, growing that top line. It is about a 70% gross margin business, so a lot of the dollars that we bring to the top line fall to the bottom line and we do have a situation in this company as we grow that top line that we can maintain our fixed expenses at such a level that they do not grow anywhere near as quickly as the top line, and that is where the leverage comes from.

It is one of the reasons I came to this company. I ran ADT Home Security over the last three or four years for Tyco. I just came to this company eight months ago, I think I said earlier, and I ran ADT in Latin America. I became familiar with the power of this recurring revenue, high gross margin business model, particularly if you can maintain your fixed costs somewhat, or at last growing at a much lesser rate than your top line and I see many of the same characteristics here.

What is our addressable market? There is about half-a-million, according to the U.S. Census, there is about half-a-million food service and drinking establishments in the U.S. If you look at the association of food and service and drinking establishments in the U.S., it is about twice as many, so whether you are thinking about half-a-million or a million, we believe though that our potential is about 45,000 locations -- locations that have the right format, the right number of TV screens, attract the right clientele to make them prime candidates for our service.

Today, we serve about 4,000 locations. 30% of our locations are with chains and within the chains -- and we serve a lot of them. You saw the names earlier. We have one particular relationship that we are very proud of. It is a company called Buffalo Wild Wings. They have made us a part of their franchise format. They specify the sauce for the wings, they specify that it is going to be Coca Cola, they specify the beer that is going to be served and of course the design of the restaurant. They also specify NTN Buzztime.

We have had a very long, prosperous relationship. It has benefited us a great deal. It has benefited them. We are in all of their locations, about 450 locations. They are talking about growing to about 1,000 locations by the year 2011 and we expect to be there with them every step of the way.

I bring them up because it is an example of what can be done with this service once you make it a part of your solution. Once you recognize the value that it brings and you measure your management team on how much usage the system gets, as they do, and it becomes a part of your equation and the way you do business day-in and day-out, the volume of hours in our system that they get is huge.

We want to extend that kind of success to other formats, not to compete with Buffalo Wild Wings, but to other formats that can benefit from our solutions in different ways.

We have also recently launched in the U.K., and I say recently, it really goes back about a year-and-a-half since that launch happened. We are in about 55 locations today. The potential in the U.K. is about 60,000 pubs. Not all those pubs are going to have the right configuration and so on but we do see an opportunity to certainly be in several thousand locations over the long haul in the U.K. as well.

We have gone public saying that our long-term vision for our company in terms of sites and number of locations that we can reach is about 10,000 locations over the long haul, and that would include the U.K., the U.S., Canada and other countries around the world where we feel our content is well-suited for distribution. So it is a U.S.-scale opportunity in the U.K. and we are looking forward to growing that.

Business strength then, our financial model certainly is a strong point for us. Recurring revenue, high gross margin, we generate cash. We generated cash this last quarter we just announced, about $800,000 went into our balance sheet. We have about roughly $9 million in our bank account right now, no debt. You will see some additional numbers here coming up in a couple of slides.

One of the advantages that we feel we have are the barriers to entry, the competitive advantages that we hold. It is expensive to build a network like this. It is a network that is broad. It reaches 4,000 locations. There are all kinds of communications challenges involved. The technology is not simple to develop. We have a lot of brand recognition and we have a very loyal base of players and that all helps to keep us in those locations and makes it very difficult for someone to come in and try to displace us.

Growth opportunities in the core business, both domestically and internationally, I talked about our vision for long-term growth, 10,000 locations. But there is a lot more also that we can do with this network. We can advertise more effectively over the network and we can extend the reach of the network into new applications.

Recently, we talked about and we launched an application that connects the cell phone to our network where people can send messages that get displayed over our 4,000 screens for a fee. We see that as next wave of opportunities for us. Basically leveraging the social interaction that is inherent in our service.

People play our games in a bar as opposed to playing it at home because they want to be with other people when they play. As we extend that social reach to the Internet, to the mobile phone, we think we have opportunities there for loyalty building as well as for additional revenue.

And we have a new management team, and it is an experienced management team. Kendra is a financial professional that has seen a lot of different public companies and has a lot of experience also with NTN Buzztime, because she did spend some time with the company earlier. I come from the cable TV industry, I come from entertainment, I come from having run a significant $300 million business for Tyco for the last three-and-a-half years in Latin America; recurring revenue, high gross margin.

So a lot of different elements that between Kendra and I, we bring to the company that I really think uniquely qualify us to capitalize on the growth opportunities for the company.

What is that growth opportunity? Well, it is all about focus -- focus on entertainment, focus on what we do, what we do best; continue to increase traffic through our locations. The value we bring to these locations is the traffic that we bring.

We have experienced churn. We have experienced some rotation of customers, particularly during their first 12 months with us. The ones that are with us for a while, a year-and-a-half, two years, and build their player base, they stay with us. The new ones that are coming on board need to build a player base. If they do not get to that critical mass within a certain number of months, usually about the time that their one-year commitment expires, they will disconnect.

In fact, we see and have seen over the last couple of years that about 60% of the cancellations happen during that critical 12 to 16 month window, when the contract expires and they are either acting on it or thinking about acting on it, and they finally act on it on month 13, 14, 15, 16 and they disconnect us.

So for us, to reduce that churn level, which has been running in the 25% to 28% over the last year, year-and-a-half, it is going to be critical that we focus on building the player base for those new locations during those first five, six, seven, eight months. In fact, during our earnings release conference call yesterday, Kendra and I unveiled a number of initiatives focused on that very thing.

We brought a new Vice President of Marketing. She followed us on to the company. We have been here eight months. Our Vice President of Marketing has been with us about four months and she has brought with her a number of ideas and initiatives that she is beginning to roll out now, focused on how to reduce this issue of churn.

So growth for us is churn reduction as well as bringing in more sites, and the two of them added together give us a top line and a lot of it has to do with bringing those players, bringing the traffic through promotions, through tournaments, through championships, through pricing.

Continuing to build the value proposition for our customer through also more engaging content is important and that is going to lead to that increased footprint, as well as increased loyalty with our customers.

I talked about international growth opportunities, the U.K. being the next one on our list, and that is receiving renewed attention for us. When we came on board, we inherited an exclusive distribution agreement with a third party in the U.K. We talked about this launch having been in place for about a year-and-a-half. I have spent the last six, seven months dismantling that exclusive agreement. Now we have direct control over sales, marketing and retention of our customer as an NTN Buzztime-directed activity. That happened as of March 1st, so about two weeks ago. We dissolved that agreement. Now we are ready to move forward in the U.K. under our own resources and with full control of what is happening.

Increased advertising opportunities, increased return on investment through cost reductions, and one of the first things that we did was to bring a company in to look at how we were spending our money and look for opportunities where we could leverage volumes across certain commodities and that has resulted in some nice savings for us, and expand our product offering through innovative games and entertainment, and I have already talked about the 10,000 location long-term view that we have taken.

Our financial results then for 2006, this is for the entertainment side of the business. It does not include the hospitality side, which is being spun-off or sold, I should say. 7% growth, $33 million in revenue, 70% gross margin, EBITDA $4.7 million for the year, and our cash balance, $8.8 million, as I said a moment ago, increased by $2.8 million during the year. Generating cash and we do have some tax loss carry-forwards to leverage as well as we move forward.

Here is another look at the balance sheet. No debt to speak of, and our capital structure outlined in this slide.

So what are our challenges for 2007? Well, focus on increasing value -- increased value for our customer means reduced churn. We are going to do that by focusing on the job at hand, and that starts with a structure that is geared to this focus. The other thing we talked about yesterday is that as of the next 30 days, of the 13 people that I inherited when I came to this company eight months ago, only three are still going to be reporting to me as of 30 days from now. We have Kendra, who has been with us about as long as I have and a number of other folks who have come to the company, so it is a brand new team with a new structure focused on whatever it is that they are bringing with full accountability and clarity as to what it is that each person does within that organizational structure.

Divesting of the non-core assets is important for us; refocus on the U.K., and I talked about the hurtle that we had to overcome there with dissolving this distribution channel that was exclusive, and then pull players -- pull players into our locations, promote it, do a lot of public relations and promotions and just bring traffic to our locations.

That is who we are. I gave you a little bit of a heads-up on what I had done and Kendra, but here are some more specifics around Kendra’s background and mine.

And that brings me to the end. How are we doing time-wise? Do we have time for a couple of questions? Okay, any questions for us? Okay, we have question in the front. Yes?

Question-and-Answer Session

Unidentified Participant

[inaudible]

Dario L. Santana

Good question. So how does the revenue model work for a channel or a distribution channel like Comcast or maybe a satellite network?

In the case of Comcast, we are paid a monthly fee per home pass. They have us in several hundred thousand homes, so they pay us a few cents per home, if you will. In the case of the satellite businesses, it is a subscription model so we get a share of subscription. In the case of cell phones, same thing, share of subscriptions. So it really depends on the operator.

Any other questions? Yes, I saw the elbow move, so I was going to go for you.

Unidentified Participant

[inaudible]

Dario L. Santana

You know, that is the software solutions business, which is the table management and reservation management software, as well as our page business that we are selling. Those are non -- in other words, non-entertainment; focused on hospitality but non-entertainment.

We believe that our vision is that entertainment is a part of our DNA. It is what we do. It is what we have to build on.

Unidentified Participant

[inaudible]

Dario L. Santana

Well, we talked about the fact that as we roll out these initiatives, we have enough cash in the bank to be able to do all of that and not require raising any capital, so that leaves us with a couple of options. One is to look for opportunities and maybe there are some other acquisitions out there that could be done. We are not aggressively or even remotely pursuing that right now but that is one possibility. The funds are there.

Another one might be to use that to repurchase some stock, and that is another possibility. We have not at this point said what exactly we might be doing with the cash that we won’t need, and we won’t need all that cash.

Unidentified Participant

[inaudible]

Dario L. Santana

We have not announced hiring anybody at this point and that is something that we may do in the future but have not done so.

Any other questions? Ali.

Unidentified Participant

[inaudible]

Very good, Ali. Thank you for asking that question. Yesterday we provided guidance in our call. It is the first time I think this company has provided guidance, I believe, and here is what we said. We said that for 2007, top line we expect it to grow 4% to 6%. Now, let me just address that for a moment. Why isn’t it more than 4% to 6%? And I said this in the call.

We are recurring revenue -- 98% of our revenue comes from recurring monthly fees. In 2006, we saw a flat year from a site count standpoint. In 2005, we had a nice growth spurt because we introduced the whole Texas Hold’em product. We started with 300 fewer sites than where we ended.

In 2006, we benefited from the other part of that triangle that became growth in 2006, as ’06 was flat. This year, because ’06 was flat, we get no tailwind whatsoever. All the growth we generate this year has to come from initiatives that we launch in 2007. In other words, re-energizing the whole growth machine. In other words, reducing our churn through some of the things that I talked about earlier and the more detail that I provided on the earnings call, as well as increasing our head rate on new sales through segmentation, again and some of the other things that I have not talked about today but I did talk about yesterday in the call.

So to get to those kinds of numbers, we have to grow our base about 300 to 400 sites this year, ’07, in addition to also getting some growth on the Buzztime distribution side, all the other stuff that makes up the 2%. We practically have to double that and we have some ideas around how to make that happen.

I say all of that because to get to the 4% to 6% is not necessarily going to be a slam dunk. There is going to be some effort there because we are coming from a flat year in ’06. We get no help from ’06 in terms of driving growth in ’07, is what I am trying to say.

We also said that our EBITDA is $2.5 million to $3 million as a guidance for 2007 and we talked about the fact that as you look at this year, you need to look at Q1 behaving much like most of ’06. We expect to see our initiatives starting to show up in our results in Q2, and then we expect to see acceleration in Q3 and Q4.

For 2008, we said we expect our top line to grow at the double-digit and we expect our EBITDA to be $4.5 million to $5 million.

Yes?

Unidentified Participant

[inaudible]

Dario L. Santana

The question is who is our competition in this space. I would say our competition is mostly other things that you can do in a bar or offer in a bar to attract clientele. It could be a billiards table. You create a space in the bar for a billiards table. That gets people to come in and stay longer, spend more money. It could be a jukebox. There are some interesting companies out there that do electronic music downloads to a jukebox in the bar, as some of you may know. That may be an alternative. Or some of these standalone machines that are coin-operated.

There are a number of things -- karaoke -- there are a number of things that can be done in a bar to get people to stay longer, spend more time, spend more money. But in terms of what we do, how we do it, how we offer it, our business model, all of that, we are pretty unique.

That’s enough? Okay. Thank you, Ali. Thank you.

TRANSCRIPT SPONSOR

Hayden Communications ("HC") is a premier information resource to institutions, hedge funds, independent portfolio mangers, buy-side and sell-side analysts, small to large retail brokerage firms and accredited individual investors. With integrity and knowledge, the team of investment professionals at HC draw from “Wall Street” and media backgrounds and continuously strive to maximize the ongoing corporate visibility and market capitalization of clients though a multi tier proactive program. Confidence is essential for a client to attract key investors, customers, and employees. Through a proven track record of exceptional performance, Hayden Communications has established confidence in the marketplace one investor at a time.

Read all investor conference presentation transcripts here.

To sponsor an investor conference presentation transcript please contact us.

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