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Multimedia Games Holding Company, Inc. (NASDAQ:MGAM)

F1Q 2013 Earnings Conference Call

January 30, 2013 09:00 ET

Executives

Todd McTavish - General Counsel and Chief Compliance Officer

Patrick Ramsey - President and Chief Executive Officer

Adam Chibib - Chief Financial Officer

Analysts

Todd Eilers - Eilers Research

Justin Sebastiano - Brean Capital

Steve Altebrando - Sidoti & Company

Shawn Boyd - Next Mark Capital

Operator

Good day ladies and gentlemen, and welcome to the Multimedia Games Holding Company First Quarter 2013 Conference Call and Webcast. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference over to your host, Mr. Todd McTavish. You may begin.

Todd McTavish

Good morning. Today’s call and webcast contains statements about future events and expectations which are characterized as forward-looking statements within the meaning of applicable securities laws, including without limitation the Private Securities Litigation Reform Act of 1995. These statements are based upon management’s current beliefs, assumptions, and expectations of our future economic performance taking into account information currently available to us.

Forward-looking statements involve risk and uncertainties that may cause our actual results, performance or financial condition to be materially different from the expectations of such results, performance or financial condition. Please refer to the Risk Factors section in our current and recent SEC filings for description of certain of these risks and uncertainties. The company does not undertake and expressly disclaims any obligation to update or alter its forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law.

Today’s call and webcast may include non-GAAP financial measures such as EBITDA within the meaning of Regulation G. A reconciliation of non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with GAAP can be found in the company’s current and recent SEC filings and can also be found along with today’s earnings release on our website www.multimediagames.com in the Investor Relations section.

Financial and operations metrics provided in today’s call and webcast maybe approximated. Please refer to the company’s financial statements as provided in today’s SEC filings and earnings release for more definitive numbers.

Now, I will turn the call over to our President and CEO, Patrick Ramsey.

Patrick Ramsey

Thank you, Todd and good morning everyone. Thank you for joining us on this call. With me here in Austin are, Todd McTavish, who just last week joined as our General Counsel and a Chief Compliance Officer, and Adam Chibib, our CFO.

This morning, we reported first quarter revenues of $44.3 million, which were up 27% year-over-year and diluted earnings per share of $0.24, which we believe is a great start to our fiscal year. The quarter reflects strength in all facets of our business and demonstrates that our strategies are working. We continue to penetrate new markets and customers with our existing product lines in the new games we are introducing continued to gain traction. Our profitability continues to improve and the cash we are generating is being allocated thoughtfully.

As it normally does, Adam will discuss the financial results with even more detail in a minute, but I wanted to call out the fact that we have sold our equipment in Mexico and are winding down the operation there and that the entire transaction is an SG&A and therefore is not inflating the top line growth. As many of you know, over the past several years, we have limited incremental investment in that country and recently made the decision to exit completely with the sale, which simply allows us to focus our resources and capital in more profitable areas.

In the last call, I laid out our strategic and financial priorities and I therefore wanted to dig us back into such on each one, because I believe focus and prioritization have been and will continue to be critical for our continued growth. On the product front, our increased commitment to gain production in technology development clearly has been key to our success. Our first attempt at a premium participation segment of games has gotten off to a very nice start as our High Rise footprint continues to gain momentum.

TournEvent continues to open up many customer doors for us and as of December 31, 2012, it has un-deployed on 137 casino floors and we are very much looking forward to crown the nation’s best slot tournament player later this year as the segment is clearly building for promotion of National TournEvent of Champions, which is planned to kickoff later this quarter in California. Other new products are planned to release this year such as our new series called Smokin Hot Jackpots that is aimed at the high denomination segment.

The second distribution is critical and we remain focused on entering every major U.S. jurisdiction. Just in the last quarter, we have sold units into 17 different states and our recurring revenue footprint now spans 21 different states. Florida is now a perfect example of our success in widening the geographic footprint. A year and a half ago, we had no product in the state and by the end of this past quarter we have sold or placed well over 350 games there. Just as important when it comes to placements in new markets such as Nevada, Illinois, and Pennsylvania were continuing with our licensing and regulatory efforts. In fact, our product field trials at both the MGM Grand and New Orleans in Las Vegas have now been concluded. And we expect to be on the Board’s agenda for approval at the upcoming February 6 meeting. And then with the Nevada Gamming Commission approximately two weeks later.

We are obviously excited about the potential to begin selling into the nation’s largest market, but it is worth clarifying what the pending approvals in February would mean for us. Assuming approval by the Board and the Commission in February, we would have the ability to sell a very limited number of themes into a subset of the casinos in the state of Nevada. Namely those that operate with the same back end system as both MGM Grand and New Orleans. In other words we continue to take important steps towards the nation’s largest market, but the process is time consuming, which is why we have been and continue to be cautious on revenue assumptions for Nevada this year. As we have done for the past several years, the quarter reflects our focus on profitable growth. Our EBITDA margins grew again this quarter which reflects continued progress despite the need to fund our growth. In fact our R&D expenses are worth highlighting as they grew in total year-over-year, but were at smaller percentage of revenue than last year.

Last by no means least, cash allocation and the efficiency on how we increase shareholder value is always a critical part of our strategy. This quarter included some important investments in our business including an installment payment on our latest development deal with Chickasaw Nation and capital expenditures to place new games both of which should continue to generate attractive returns for our shareholders. As well we purchased – we repurchased some stock in the quarter. Adam will discuss more details on these in a moment, but I do want to reiterate our constant focus on allocating capital for the best returns for our company and the shareholders.

With that high level summary, I will turn it over to Adam for a more detailed financial review including our revised guidance for fiscal 2013 that we released this morning. Adam?

Adam Chibib - Chief Financial Officer

Thank you, Pat. Our first quarter was an exciting quarter for the company with momentum build in Q4 carrying forward into the fiscal year. We are pleased with our financial results. We successfully shutdown our Mexico operations and we just celebrated our third year anniversary of creating and placing our award-wining HD video cabinet.

Revenues for our first fiscal quarter totaled $44.3 million, an increase of $9.5 million or approximately 27% year-over-year. The year-over-year revenue growth reflects an increase in unit sales and an increase in our gaming operations business in all major domestic markets. Our first fiscal – our fiscal first quarter revenues include the sale of 644 gaming units, with revenues totaling $12 million versus 408 units sold and $7.5 million in revenues in the prior year period. We sold units in 17 states with Louisiana, Florida and Washington accounting for the majority of the sales followed by California and Ohio.

During the quarter we had one large order from a new traveler customer in Louisiana for 150 units. As a result of this large Q1 order, we expect unit sales to decline in our fiscal second quarter to approximately 500 to 550 sold units. Gaming operations revenues for our fiscal first quarter totaled $30 million, an increase of $5.1 million or approximately 20% year-over-year. The increase in year-over-year gaming operations revenues is attributable to higher revenues from continued growth in our installed participation base across all major markets with the exception of Mexico where revenues were down $755,000 year-over-year.

During our fiscal first quarter we sold all of our electronic gaming machines in Mexico to our largest customer. The revenues and the associated wind down costs were all included in the SG&A with the net amount totaling a loss of approximately $50,000.

The New York Lottery revenues grew by $567,000 or approximately 17.8% year-over-year driven by the openings of Resorts World in Queens New York in October of 2011. Our domestic installed base was 11,188 units at the end of fiscal Q1, an increase of 1,555 units or approximately 16.1% over the prior year period and an increase of 518 units or approximately 4.9% on a quarterly sequential basis. Growth in our domestic install base came from all major markets. Included in the quarter and participation base were 318 high-rise premium participation games deployed outside of Oklahoma, an increase of 120 units or 60.6% on a quarterly sequential basis. Gross margins for the fiscal first quarter were approximately 79% compared to 80% in the prior year period.

SG&A expenses for our fiscal first quarter were $11.3 million, an increase of $595,000 or approximately 5.5% from the prior year period. The increase in the SG&A expenses is related to higher benefit cost and non-cash stock compensation cost associated with higher headcount from the prior year. SG&A expenses were 25.6% of total revenues compared to 30.9% in the prior year period. Research and development expenses were $4.2 million and the increase of $703,000 or just over 20% from the prior year. The year-over-year increase is attributable to higher salary and benefit expenses as we continue to invest in retaining and attracting engineering personnel.

As discussed in this morning’s earnings release effective October 1, 2012, we moved from a 36-month depreciable life for our installed base of gaming operations equipment to a 48-month depreciable life. The end of fiscal 2012 marked the third year anniversary of the introduction of our award winning HD video cabinet and we are now confident that our products have useful lives in excess of three years. Additionally, the change to depreciable life of our gaming equipment is now consistent with the standard use by the majority of our industry peers and is consistent with the current age of our existing equipment in the field. The effect of this change increased operating income by approximately $2.1 million and net income by $1.3 million or $0.04 per diluted share.

Depreciation and amortization expense for the fiscal first quarter was $8 million, a decrease of $1.7 million or approximately 17.8% from the prior year period. Operating margins continue to improve, and were 25.8% inclusive of the change in the depreciable lives of our gaming equipments. Excluding this change, operating margins would have been approximately 20% compared to 10.9% in the prior year period and 15.4% for the fiscal year ended September 30, 2012.

Net income for our fiscal first quarter were $7.1 million or $0.24 per diluted share compared to net income of $5.8 million or $0.21 per share in the prior year period. Pro forma diluted earnings per share for the prior year fiscal first quarter was $0.12 per share and includes adjustments for certain non-recurring items, the change in the depreciable life of our gaming equipment and a pro forma tax rate of 37.2%. Please see the reconciliation of these items in this morning’s earnings release.

EBITDA for our fiscal first quarter was $21.4 million, an increase of $5.1 million or approximately 31% from the prior year period. Our balance sheet remains one of the strongest in the industry even as we invest back into the company through the expansion of our proprietary unit footprint, continued refreshes of our existing footprint, funding of a new development agreement, and repurchases of our common stock.

During our fiscal first quarter, we invested $12.7 million in capital expenditures to expand our existing footprint and to refresh certain of our lower performing machines. Also during the quarter, we entered into a new development agreement with our largest customer that will add 150 additional units at the Winstar World Resort in Oklahoma. The company made its first installment payment of $3.3 million in December of 2012 with a second installment payment of $3.2 million due in our second fiscal quarter.

We expect to record revenues from this expansion in our fiscal fourth quarter. Additionally, we purchased $2 million of the company’s stock or approximately 145,000 shares at an average price of $13.95 per share. Our fiscal first quarter end cash balances totaled $73.3 million with net cash of $40.9 million. As a result of our strong first quarter, we have increased our full year revenue and fully diluting earnings per share targets. The company now expects revenues for the fiscal 2013 to range from $174.2 million to $177.1 million. Additionally, we have increased our fully diluted earnings per share from a range of $0.60 to $0.65 to a range of $0.79 to $0.84 per share.

The updated fully diluted earnings per share guidance include an estimated $0.14 benefit for the change in depreciable lives of our gaming operations assets. We are pleased with the progress we have made with respect to unit sales and gaming operations for the quarter.

I will now turn the call back to Pat for some additional commentary.

Patrick Ramsey

Thanks Adam. We hope that the press release, our detailed analysis, and our perspectives on our business give you all a clear picture of the great start we have had to the fiscal year and why we are very excited about our future at Multimedia Games. The revenue opportunities for our company continues to expand rapidly and the operating leverage inherent in the structure of our business should continue to generate increasing value for our shareholders.

Thank you for your time and attention. We’ll be happy to take your questions. Having said that, I will open it up to Q&A. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from Todd Eilers of Eilers Research. Your line is open.

Todd Eilers - Eilers Research

Hey guys, good morning.

Patrick Ramsey

Good morning Todd.

Adam Chibib

Good morning Todd.

Todd Eilers - Eilers Research

Congrats on another strong quarter. I just want to ask a few questions if I might on the game sales side, obviously a large order that you guys mentioned 150 games and believe you said it was the tribal customer in Louisiana, but was that a new casino opening or was that an existing casino?

Patrick Ramsey

Yeah, I know it’s a new casino opening, that’s actually it will be opening in the next week or two.

Todd Eilers - Eilers Research

Okay, perfect. And can you obviously a very large order, can you maybe talk a little bit about how you are able to achieve such a large game shipment or allocation to the new opening, does that include a lot of TournEvent units or any color on that would be helpful?

Patrick Ramsey

Yeah, I know there is some TournEvent units in there. I would say, this is a good example of us being considered certainly a major manufacturer if not the leader in Class II gaming, it’s an all Class II gaming facility. And I say in that segment we are certainly, we get a very large piece of the footprint just as large as just about any manufacturer on that floor. So, I think that helps us there.

Todd Eilers - Eilers Research

Okay, great. And then on the TournEvent side, it seems like sales really picked up sequentially for you guys with sales representing about 46% of units sold versus 34% last quarter. Can you maybe talk about what drove such a strong quarter that would be helpful as well?

Patrick Ramsey

Yeah, it was spread pretty consistently over quite a few jurisdictions, but I think obviously the National TournEvent of Champions coming up as we had hoped that tournament would drive people to buy the product to have the tournament at their facility, and I think you are seeing some of the benefits of that, like I said it was spread over probably 16, 17 different states and no particularly large orders outstanding that I can see, but certainly I think National TournEvent of Champions is a key driver of that product sale and it should be as we roll – as that tournament progresses throughout the country.

Todd Eilers - Eilers Research

And would you look for – we were too kind of look forward what’s a good range in terms of kind of TournEvent expectations as a percent of overall sales be closer to this quarter or closer to prior quarters?

Patrick Ramsey

I think, yeah, I think if you look at it probably over the last six quarters it’s pretty square in the 30% to 35% range. I think this quarter it’s probably more of an outlier than the other one. So, I would revert back to that 30% to 35% of total sales.

Todd Eilers - Eilers Research

Okay, great. And then on the SG&A side, the total dollar amount came in lower than we were looking for just kind of curious to better understand how you guys are able to control cost so well while driving the revenue growth that we are seeing on that side?

Patrick Ramsey

There is two answers to that question. One is we have a very efficient cost structure, but that doesn’t take the number down necessarily, that just keeps it from going up as fast as revenue. So, that’s the first blush answer. The precise answer is that we had some cost that we used to classify an SG&A that we move the cost of goods sold, and so that’s the real reason. So, we re-class that in the prior period so you will see that switch coming out of SG&A in this period and prior period than into cost of goods sold. So, that’s probably the biggest driver of it being down certainly relative to revenue.

Todd Eilers - Eilers Research

Alright, that’s helpful. And then last question the Mexico I believe I heard you guys say that you are shutting down or winding down the Mexico operation, then I think I missed what the impact was to the P&L. Can you maybe kind of highlight what the revenue and EPS impact is from that?

Patrick Ramsey

Sure. It’s actually doesn’t even round to a penny. So, all of the both revenue and expenses were all netted in SG&A and it resulted in a $50,000 net loss, so it doesn’t even round to a penny.

Todd Eilers - Eilers Research

Okay, alright.

Patrick Ramsey

No revenue benefit, essentially no cost penalty, because all that stuff was netted in SG&A. And it was too small to call out for discontinued operations and that’s why it was netted in SG&A.

Todd Eilers - Eilers Research

Okay, perfect. Thanks Patrick

Patrick Ramsey

And Todd congratulations on the launch of your new firm.

Todd Eilers - Eilers Research

Thank you, sir. I appreciate it.

Operator

Thank you. (Operator Instructions) Our next question comes from Justin Sebastiano of Brean Capital. Your line is open.

Justin Sebastiano - Brean Capital

Thanks. Good morning guys.

Patrick Ramsey

Hi Justin.

Justin Sebastiano - Brean Capital

So, as far as ASPs, you guys held up pretty well in the quarter. And I guess when we get into Nevada maybe that ticks down a little bit, but can you help me for modeling purposes, I mean could we stay in that 18.6% range for the March quarter and then maybe ticket down a bit as you guys get into Nevada?

Patrick Ramsey

Well, again I think obviously as the previous questioner just said, we had a very high percentage of TNE sales in the quarter probably higher than normal. I think 18% to 18.5% is probably safe for the March quarter and to your point beyond that it probably goes down as we enter Nevada. And again the key here is we have said all along that we expected ASPs to come down, but we expected higher volumes and therefore operating margins to expand and we have seen that and we expect to see that benefit carry through.

Justin Sebastiano - Brean Capital

Okay. And then I think in the past, so you said that you don’t expect to immediately sell a lot of TournEvent into Nevada, but as the quarters go on, you think that will happen so that should help your ASP as well. Is that a good way to think about it going forward?

Patrick Ramsey

Yeah, I think prior to being able to sell TournEvent ASPs will be slightly depressed relative to history. And then once TournEvent is sellable in Nevada and that certainly is not in the first way of our products that will be in there, well once that does come online in Nevada, it should bring ASPs up a little bit again, that’s correct.

Justin Sebastiano - Brean Capital

Okay. And when do you think you will get TournEvent into Nevada?

Patrick Ramsey

It’s tough for us to predict right now Justin. We got to go through our technical approvals and trials. And so it’s certainly in the best case very late in our fiscal year and could bump into next fiscal year.

Justin Sebastiano - Brean Capital

Okay.

Patrick Ramsey

Interesting with TournEvent, because it’s a new bonusing system that I really haven’t seen before out of revenue, it has to go through an entire new technical trial in and of itself independent of the ones we’ve just completed.

Justin Sebastiano - Brean Capital

Okay.

Patrick Ramsey

That’s why it’s tough to take down the time.

Justin Sebastiano - Brean Capital

Understood. And then on gross margins, you did about I think 89% in game ops this quarter a little over, is that sort of the good run-rate going forward or is that just kind of a low, because it’s Q1 and you think you will break that 90% going forward for the rest of the year?

Patrick Ramsey

We did move some cost out of SG&A that had been historically in SG&A in the cost of goods sold. So, that’s one of the reasons why it’s down slightly when you go and look at your historical numbers.

Justin Sebastiano - Brean Capital

Right.

Patrick Ramsey

I think Q1 typically is our weakest win per unit performing quarter, so you might expect it to improve in Q2 no question, but again we have got the regional market is kind of suffering for the payroll tax. So, we just don’t know what this new calendar year will look like with respect to win per units.

Justin Sebastiano - Brean Capital

Okay.

Patrick Ramsey

Yeah.

Justin Sebastiano - Brean Capital

Okay. I mean yeah, you talk about the yield when you guys had incredible year-over-year growth, I know you start to lap a little bit of that as more and more High Rise get out there compared to last year, but I would think some of the increase in the yield should help offset some of that as well. Is that fair, because I mean we are still going to see yield go up as you place more High Rise, correct?

Patrick Ramsey

Yeah, it’s still pretty small 300 out of 11,000, but yes in theory you are right, I just don’t know how many decimal points that rounds out to.

Justin Sebastiano - Brean Capital

Got you, okay. And then just I guess on the game equipment sales margins again probably similar answer as far as shifting costs into cost to goods sold, but is that 55 to 56 a good place to be or does that first quarter shipment – well, I guess the question did that first quarter shipment hurt or help your margin based on sort of any discounts you maybe had to give them and then just the game op margins going forward in that segment?

Patrick Ramsey

I think it probably was right at that rate, I think it did neither, because the ASPs on that deal were pretty strong. So, I think 52 to 55, 53 to 56, is probably safe.

Justin Sebastiano - Brean Capital

Okay. Okay, great. Thanks guys.

Patrick Ramsey

Thank you.

Operator

Our next question comes from Steve Altebrando of Sidoti & Company. Your line is open.

Steve Altebrando - Sidoti & Company

Hi guys. How are you?

Patrick Ramsey

Hi, Steve, good.

Steve Altebrando - Sidoti & Company

In terms of the guidance, you are still baking in minimal revenue from Nevada at this point?

Patrick Ramsey

That’s correct.

Steve Altebrando - Sidoti & Company

Okay.

Patrick Ramsey

It’s clear that the plan hasn’t changed, the timing hasn’t changed, but we are still on track for what was consistently said, that’s correct.

Steve Altebrando - Sidoti & Company

Okay and excluding the trials, you mentioned at the point now where you are talking to customers and if so what’s been the initial feedback that you’ve been getting?

Patrick Ramsey

It’s been strong, since we – frankly since we opened the Nevada office which was last summer. So, there is operators whether they are in Nevada or in the other state are looking to try different products. And when we have products like TournEvent they are excited about it. So, it continues to be – we have a great buzz and we’re just excited to keep going there.

Steve Altebrando - Sidoti & Company

Okay. And then in terms of the pace of approvals I know it’s a little typical to handicap, but what type of timeline I guess to essentially have your entire portfolio approved there, is that kind of a one year, two year type timeframe?

Patrick Ramsey

Yeah. Certainly a process, I would say two answers. One is there probably is a full year before the current product portfolio is fully vetted and approved. And then you have to imagine, we continually released new titles. So, it’s essentially, an ongoing process. But with titles we have now available for Class III jurisdiction my guess is that it will take a year before they are all approved.

Steve Altebrando - Sidoti & Company

Okay.

Patrick Ramsey

Static titles that we have right now.

Steve Altebrando - Sidoti & Company

Okay and then – and you had mentioned that the ability to work only on certain systems. So, are those two separate systems that they are being that the trials are taking…?

Patrick Ramsey

Yeah, those are two separate systems and now with hopefully pending approval on those that once we get pass that stage we can then go to other tests on other systems.

Steve Altebrando - Sidoti & Company

Okay, okay. Thank you very much.

Patrick Ramsey

Thanks Steve.

Operator

(Operator Instructions) Our next question comes from (indiscernible). Your line is open.

Unidentified Analyst

Hi, good morning gentlemen.

Patrick Ramsey

Hi, (Res), good morning.

Unidentified Analyst

Just to follow-up on the question that the person asked before. So, if you look at the Orleans and MGM back office systems, what does that represent of the total available market in Nevada those back office systems?

Patrick Ramsey

I don’t have exact number off hand, but I mean it’s what the be MGM and Boyd to be conservative. They operate those systems I think most if not all other properties. And there are other operators with those systems, but it certainly is the sub-segment of the total group. And we are going to go on to the next stage of testing and continue to get approval and open up in entire market.

Unidentified Analyst

So, then you need to get in essence approved for the back office IDT back office and then…?

Patrick Ramsey

That’s correct.

Unidentified Analyst

Okay. And then any other question I had was relating to the New York Lottery, can you talk a little bit about the percentage of daily win and where it was and then what effect of that outcome?

Patrick Ramsey

At the as far as the impact of Sandy or is that…

Unidentified Analyst

No, no, no. Just in terms of the yield that you get on the daily win. I think you’re still like…?

Patrick Ramsey

Yeah, it ranges daily between…

Unidentified Analyst

Between 60 to 80 basis points I think.

Patrick Ramsey

Yeah, I think its 85%, 83% to 88% basis like it depends on their marketing. We pay for a portion of their marketing. So, it does fluctuate every month, that’s why I have to give you a range. As far as yields go they were certainly better than Q1 of last year, but they did open up the second phase of Resorts World during the first quarter of last year and so it wasn’t there the full quarter of last year that’s why was such a bigger bump, it normalized after a much slower growth rate in the remaining quarters.

Unidentified Analyst

And then your contract relating to that New York Lottery the extent it goes till 2017 is that correct?

Patrick Ramsey

That’s correct.

Unidentified Analyst

And the rate you get royalties so to speak does that change at all between now and then?

Patrick Ramsey

Now, prices is in the contract and it should not change.

Unidentified Analyst

Okay, great. I really appreciate it and congratulations and nice going.

Patrick Ramsey

Thanks (Res).

Operator

Our next question comes from Shawn Boyd of Next Mark Capital. Your line is open.

Shawn Boyd - Next Mark Capital

Hi, congrats on the quarter gentlemen.

Patrick Ramsey

Thank you, Shawn.

Shawn Boyd - Next Mark Capital

I have a quick one here. On the 150 units sales into the new casino in Louisiana, help us out, I mean that’s a great win, and I am just wondering it looks like if you take the average just ASP on the systems for the whole division, that’s around $2.5 million to $3 million a quarter. Is that correct or would that have been significantly higher or lower?

Patrick Ramsey

That price point of that deal was lower, it was probably and I think its right at 15.8. So, it would be if you want to extrapolate a little bit lower.

Shawn Boyd - Next Mark Capital

Okay. And is that something that we could start to see a little more of going forward. Can you talk just a little bit about how the company is being perceived now and do you expect to see I don’t know maybe another one in the next quarter or one year how could we think about maybe getting some of these bigger sales?

Patrick Ramsey

Yeah, I think unfortunately I think it’s a little bit of an anomaly like I had mentioned in the previous question or a few questions ago, the opening of a Class II facility in that segment we are considered a leader and we don’t see a lot of openings in that area. So, I think it’s more our typical first orders are opening orders are just smaller than that because we are sort of an emerging player in Class III. And so it’s just a, it’s a different dynamic I wish there are more of them obviously, but I think it’s an open anomaly.

Shawn Boyd - Next Mark Capital

And then switching to TournEvent for a second the TournEvent of Champions is once again, when does that fall in the year?

Patrick Ramsey

It kicks off, it will start the preliminary events kick off in March and then it will culminate at the final event in September.

Shawn Boyd - Next Mark Capital

Okay. And I know it’s really, but is that something that you would anticipate repeating each year or trying to expand upon obviously you’ve had a pretty good impact here on sales from…?

Patrick Ramsey

Yeah, no, like you said it’s certainly early, but we wouldn’t rolling out just once that wouldn’t be the plan. So, I mean I hope it to be successful and obviously there are various reasons we are doing it one is they continue to help us sell our tournament. But also we have a different approach, we want to partner with operators and drive business into their casinos. And I think the participants the operators are going to see that and if we can continue to do that for them then I think that we are a good partner by doing that. So, I would like to keep that going and only grow it.

Shawn Boyd - Next Mark Capital

And last question just extrapolating on a couple of the earlier ones on the gross margin. I understand the re-class on expenses from SG&A up in cost of goods sold, so just roughly was that maybe 100 bps because it doesn’t look like you are really expecting – you are expecting to come up a little here, I think you mentioned in the March quarter, so just trying to understand kind of different level of gross margin we should think about going forward?

Adam Chibib

I haven’t looked on a basis point basis on how much big the change was I think it was between around $500,000 of that re-class, I will give you some kind of idea of the impact is $500,000 to $800,000 if I remember correctly. Now looking overall gross margins and I think they will pickup on gaming ops that they made they stay the same or go slightly down on games sold like we talked about the 53% to 55% range. So, when you look at the total business I think 77% to 80% is probably where it’s going to be. And again we want to emphasize operating margins, not gross margins as we our ASPs will change as we get into more addressed or more commercial markets. And again operating margin expansion is what we are focused on not necessarily gross margin expansion.

Shawn Boyd - Next Mark Capital

Right, right, very helpful. Last thing for me is on the amortization and depreciation, now at kind of a new level given the change on moving from two years to four years it’s at $8 million a quarter it seems like that should be fairly flat going forward is that correct or do we need to build this kind of…

Adam Chibib

As you guys know and if you look at our first quarter alone we put $12.7 million of CapEx to work, so on a run rate basis that’s $45 million to $50 million a year, so in theory it’s going to tick up and it will tick up because the good news is we continue to expand our footprint at using certainly rates above what we thought and also we want to keep at footprint fresh, so it will grow every quarter for this fiscal year.

Shawn Boyd - Next Mark Capital

Okay. Thank you so much.

Adam Chibib

Thank you.

Patrick Ramsey

Thanks.

Operator

I am showing further questions in the queue at this time. I will hand the call back to management for closing remarks.

Patrick Ramsey

Alright. Well, thank you operator. Thanks to those who joined the call. And this concludes our first quarter earnings update. Thanks again.

Operator

Thank you. Ladies and gentlemen, this concludes the conference for today. You may all disconnect and have a wonderful day.

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Source: Multimedia Games Holding Company's CEO Discusses F1Q 2013 Results - Earnings Call

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