Multimedia Games, Inc F1Q09 (Qtr End 12/31/08) Earnings Call Transcript

Feb. 4.09 | About: Multimedia Games, (MGAM)

Multimedia Games, Inc (NASDAQ:MGAM)

F1Q09 (Qtr End 12/31/08) Earnings Call

February 4, 2009 9:00 a.m. ET

Executives

Virginia Shanks – Chief Marketing Officer

Anthony Sanfilippo – Chief Executive Officer & President

Patrick Ramsey – Chief Operating Officer

Mick Roemer – Senior Vice President of Sales

Uri Clinton – General Counsel

Analysts

John Schneider – Indian Hill Advisors

Michael J. Spector – Scoggin Capital

Ryan Worst - Brean Murray

Bill Benjes – Lantern Lane Capital

Larry Haverty – Danco

Operator

Please standby we're about to begin. Good day and welcome everyone to the Multimedia Games, Incorporated fiscal 2009 first quarter conference call and Webcast. Today's call is being recorded. At this time for opening remarks and introductions I would like to turn the call over to Ginny Shanks, Chief Marketing Officer, please go ahead.

Virginia Shanks

And I will start with the Safe Harbor language. The following presentation contains statements about future events and expectations that are characterized as forward looking statements within the meaning of applicable securities laws.

These statements are based on management's beliefs, assumptions, and expectations of our future economic performance taking into account information currently available to them. Forward looking statements involve risks and uncertainties that can cause actual results, performance, or financial condition to materially different from the expectations of future results, performance or financial condition.

Please refer to the risk factors section in our recent SEC filings for a 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 within the meaning of SEC Regulation G. A reconciliation of all non-GAAP financial measures to the most directly comparable financial measure calculated and presented in accordance with GAAP can be found on the earnings release posted on our Website, www.multimediagames.com in the investor relations section.

I will now turn it over to Anthony Sanfilippo.

Anthony Sanfilippo

Thank you, Ginny, and good morning everyone and thank you for joining us on the call. You will hear from in order after me Pat Ramsey, our Chief Operating Officer, Ginny Shanks, our Chief Marketing Officer, and we also have Mick Roemer joining us for the first time, our Senior Vice President of Sales. And available for questions is our General Counsel Uri Clinton.

Let me first start with an overview of the financial performance of this quarter. Revenues were $28.6 million and there is a number of stories within this number that you're going to hear in more detail from Pat Ramsey, our Chief Operating Officer.

You'll hear about a story in Oklahoma that really has to do with WinStar and highlights from WinStar. That facility is now fully open, as far as the casino goes, as of January 1st. There is some non-gaming amenities still to open. And we're encouraged by the early results that we're hearing from WinStar.

But you're going to also hear about other properties in Oklahoma that really are a bit countered to what we're hearing overall in the economy. We've reported growth in revenues in Mexico and while that's good news to have growth in revenues Mexico continues to be a market that our expenses exceed our revenues.

Pat's going to talk with you about what we're doing to counter that and make that a profitable situation. We have a reduction year-over-year in revenues due to reoccurring revenues from revenue share units that were sold in Oklahoma the last reported quarter and the end of fiscal year '08.

That represented about $1.5 million in quarterly revenues. And we also have about $900,000 in revenues – in revenue share agreements from class II games that we had in California a year ago. So I want to make sure you're taking that into account when you compare year-over-year. Washington State we find is a market that has been weakened by what we're seeing overall in the economy.

It's not a significant part of our total revenues but it is one of the markets we do talk about. Alabama has also – we've also seen a reduction year-over-year in revenues but that really is due more to the two things we've talked about in the past. And that is our main facility that we have revenue share units there, Victory Land, has seen an incredible expansion. So there is a lot more supply there than there was a year ago.

And our footprint hasn't grown proportionately. And also we are not attached to the majority of the games as far as the player tracking system which has been a disadvantage for us. Pat will talk about that, as well as, talk about recently 120 games that we just opened up in the new section there last weekend. And we're attached to the player tracking system.

New York continues to be a positive spot for us. And we're encouraged in New York with the addition of more units that will be coming on in the year 2010. But we continue to see steady revenue from New York. I wanted to spend a little bit of time just giving an overview on how we allocate our financial resources and there is as you know two ways that we do that.

One is operating expenses, we have had and we reported extremely large expenses that have to do with litigation with one particular case. That is an accrual that we've made of $2.4 million in an offer to try and settle a lawsuit that is there.

And expenses that have to do with outside legal counsel to defend ourself. There is a couple of lawsuits that we are actively defending. We are defendants in a number of lawsuits that we are trying to in the best interest of share holders bring to an end. They continue to be a negative drag on our earnings and it's unfortunate but it is something that we're dealing with.

And I do believe that we have the right focus on this litigation. We've got excellent outside attorneys working with our General Counsel, Uri Clinton. We've made strides across expenses in selling general and administrative expenses. That's been a focus of reduction and if you took away the legal expenses that we've had you'd start to see that we are reducing our SG&A expenses.

That will become more evident in future quarters. But we feel good that we have made some improvements there. The second bucket that we look at as far as financial allocation of resources is our capital spend and the majority our capital spend for the year was done in this first quarter.

Pat will talk about that. I want to note that the majority of that spend is focused on the Oklahoma market which is by far our most profitable market. And when we take a look at the five markets that we operate in where Oklahoma has been long-term a market for our company that we've talked about wanting to and the importance of diversifying our revenues and where our EBITDA comes from.

It is proving today to be a good, stable market for us until we can transition the company to a point where we have more diverse revenues. We have made and I'm pleased to report significant changes in our organization. Ginny is going to discuss in detail how we're approaching game development.

The future of our company is truly dependent on our ability to produce games, new products, class III products that are relevant. And what I mean by that is that our customers, casino operators, want to buy them and put them on their floor. We feel good about those changes that have been made. They actually were made from ground up level.

We worked with specific departments in technology and talked about what we needed to do to be much more focused on producing games that our customer would want. And as a result of that we redefined our technology organization and we had a resulting reduction in headcount of about 16% and an annual savings in wages and associated expenses of over $5 million, so more to come from Ginny on that.

I'm also pleased to report that since our last call we have added two really terrific executives to our team. We announced earlier in January at the beginning of this year that Mickey Roemer has joined us as Senior Vice President of Sales. He is a respected industry leader and has tremendous experience in multiple class III markets. He is laser focused with his team in getting product on casino floors, both from a trial standpoint, as well as, from the standpoint of either selling or more revenue share gains in new markets. Mickey will talk with you more about that during this call.

And then earlier this week we announced that Adam Chibib has joined our company as Chief Financial Officer. He'll be on the next quarterly call as he transitions in. He, along with our current CFO, Randy Cieslewicz will do a nice handoff in responsibilities before Randy departs middle of February. I would like to now turn it over to Pat Ramsey and he will discuss in further detail our specific markets. Pat?

Pat Ramsey

Thanks, Anthony. As you saw this morning revenue declined approximately $1.7 million or 5% and EBITDA was off year-over-year approximately $6.8 million. So I'll attempt to provide a bit of color around both the financials and the operations with a particular focus on the revenue side given some of the industry trends that we've all seen.

Also we believe the core of this business still remains quite healthy. So let me take you through some of the details since there were a lot of moving pieces. We were actually down 7% or $2 million year-over-year when you remove the EPS sales that are yet to be a consistent revenue stream for our business.

So these year-over-year declines are a result of the following factors. First, our Oklahoma business which is approximately 65% of our recurring revenue base actually saw year-over-year gains of 4% or $628,000 despite losing $1.6 million in recurring revenue due to the Q4 sale that we had talked about before.

These gains were seen in a few areas. WinStar year-over-year gains have been a result of additional unit placements. As of December 31 we had over 2,400 units at the property which held its casino Grand Opening on New Year's Eve and is currently operating with approximately 5,650 units.

A year ago we had slightly over 1,000 units. We are very optimistic about continuing to grow win per unit there at the property as we both optimize our own product and benefit from the property's full opening which will occur over the next several months as the hotel and other amenities come online.

So outside of WinStar and removing the impact of the sale we've seen significant revenue increases year-over-year in Oklahoma of 20% or $1.7 million. The good news is this actually comes from a result of both additional unit placements and win for unit improvements.

In terms of additional units we have increased our floor space on almost every property in the state year-over-year. In terms of optimizing wins per unit I'll give you an example in Riverwinds there was no significant year-over-year change in units but we've seen an 8% increase in revenue and look for further improvements as we continue to focus on the floor mix and as we reap the benefits of converting some of our class II games to the property's system that allows them to participate in casino wide promotions.

Second, our revenues in Mexico were up 12% year-over-year. On the surface this may seem encouraging but as we've expressed in the past this business is still unprofitable for us. To clarify year-over-year we added almost 2,000 units. In addition to the expenses related to these additions the exchange rate has fallen approximately 20%.

And as announced in the press release we have made decisions with our partners to reduce our percentage of the floor in several locations in Mexico and we will deploy these machines in some of their new locations. This is the first major step in many that will allow us to improve the profitability of the business as we expect to see more cross-savings versus any potential revenue loss that we may – that may occur on this site due to the smaller footprint.

Finally, to more than offset the increases that I spoke about in Oklahoma and Mexico the year-over-year declines have come in some of our smaller markets but have been significant. We've seen a 33% or $1.3 million decline in Alabama mainly due to the expansion of our major customer without us being able to increase our footprint.

This casino expansion has been occurring throughout 2008 and officially opened within the last few weeks. We are pleased to report that we have placed, as Anthony mentioned, 120 incremental units in the newest section there which will help partially offset further dilution.

Our California rev share business is down close to $900,000 year-over-year, as well as, a few other very small markets. We have seen softness, as Anthony mentioned, in the Washington market, as well. He mentioned the addition of Mick Roemer and Mick is very actively examining each of these markets for sales opportunities.

I do want to mention on New York business, revenues from our New York lottery business were up 6% year-over-year. The plans to add approximately 4,500 units at the Aqueduct facility are still in place and we believe this business will be a strong source of cash flow over the coming years.

So in summary Oklahoma, the core of this business, has grown despite a Q4 sale that resulted in a loss of $1.6 million in year-over-year revenue and has done so both through incremental units and win per unit improvements. Mexico has added slightly to our year-over-year revenue growth and the majority of the revenue loss comes from Alabama which we are actively addressing and smaller revenue share markets such as California, as well as, Washington where we have some sales and some fees based on value.

On the expense side SG&A increased year-over-year $4.2 million, $3.6 million of this increase comes from an increase in professional fees, almost all of which represent legal expenses. As noted in the press release the majority of this increase or $2.4 million is the result of an accrual regarding litigation.

In addition salaries and wages were up year-over-year by over $700,000. As you are aware we have redefined our company's workforce and these changes alone which were implemented in early January should result in approximately $5 million in annual savings which was the estimated total SG&A target that we had set on the last call.

We've implemented similar cost cutting measures and consistently review the operating expenses of all areas of SG&A so we feel confident that we'll be able to exceed the annualize savings of $5 million. Depreciation and amortization was up $2.2 million year-over-year from $11.1 to $13.3 million. We expect to remain at these levels for the next few quarters but should begin to see a decrease in Q4 there.

Our CapEx for the quarter was unusually high mainly due to the purchase of cabinets and other associated equipment for the finalization of WinStar and the upcoming opening of Tulsa Creek Nation facility. Of the $25 million in CapEx approximately $20 million was spent on these two facilities.

We expect to see quarterly CapEx spend average close to that normalized $5 million level over the upcoming quarters as there are no major openings scheduled. And we begin to supplement our business model with the additional focus on the generation of sales.

At the end of the first quarter we had outstanding borrowings under credit facility of approximately $94 million. This increase is due to both of the expenditures necessary for the major openings we discussed. With reduced CapEx improvements and expenses, development agreement payback, and planned revenue growth at a few major facilities we anticipate being able to pay down this note significantly over the next few quarters.

So I'll turn it over to Ginny who will discuss our new approach to game development which is critical for us as we take steps to strengthen this business model.

Virginia Shanks

Thank you, Pat, I want to spend the next few minutes updating you on the significant strides we've made to improve game development. Specifically we've done three things. First we have restructured the game development organization. Secondly we implemented a focus product development process. And third we're continuing to evaluate top performers from our initial deployment of class III games.

Over the past 30 days we have restructured our game development organization around specific product lines. They include original titles, class II porting and modifications. That's where we take an existing game and modify it for deployment in another market.

We will have two original title studios. One as it exists today in Austin, Texas and the other to be located in Nevada. We are on track to open the Nevada studio by mid-year. This studio model will allow us to improve productivity, game quality, and talent acquisition.

Secondly we have streamlined the game development process to accelerate deployment of high quality class III games. The first step was to evaluate the entire library of over 100 current and in development games. Next we prioritize the portfolio based on proven performance in Oklahoma and Rhode Island, unique features like the community experience of Sport of Kings, and compelling intellectual property as held within our Sigma assets.

As a result I am excited to announce that we will have 36 new class III titles ready for deployment this calendar year, 18 of them will be high definition video slots on our new player HD cabinet. Rollout will begin outside of Oklahoma and Rhode Island in April. As I mentioned we are seeing promising results from our initial deployment of class III games and our new cabinet line.

Specifically in Rhode Island gains placed on our new player HD cabinet are showing a 63% win per unit premium as compared to the same gains on our traditional cabinet in the same property location. In terms of gain performance we currently have over 1,000 class III games on the floors in Oklahoma and Rhode Island. A unit count increase of 30% quarter-over-quarter.

There are a number of titles producing significant win per unit premiums as compared to house average, these premiums range anywhere from 140 to 300%. Lastly when comparing our game performance to the competitive set in Rhode Island our class III games out performed the combined competitor win per unit average by 15 to 50%.

These metrics support our confidence and broader deployment of high performing gains throughout 2009. I will now turn it over to Mick Roemer who will update you on our sales efforts. Mick?

Mick Roemer

Thank you, Ginny, and good morning everyone. First of all let me say how excited I am about joining Multimedia and the great team that Anthony has put together. I have worked for some great companies my career but I have a feeling that this one could be the best. Over the last few weeks I've been talking to a lot of customers about our products, our service, and how we're doing as a company.

And I'm pretty pleased about the feedback so far, it's been very positive. In just the last few weeks I've visited over 20 casinos in Southern California and New York like the Viejas Soquan (ph), Harrah's Rincon, Pala, Vintenga (ph), and most recently Seneca Niagara.

These casinos are all part of our phase 2 rollout plan and we've specifically targeted California first because it's size and its proximity to Nevada. These markets, California in particular, are very similar in many ways to Nevada and in terms of the product offering and the knowledgeable casino customers.

A successful product in California will usually translate very well to Nevada and other gaming jurisdictions. The customer reception to the games exceeded my expectations, actually. Our cabinet design which is gorgeous, our graphics, the (inaudible), community concepts were all well received and got us commitments with almost every customer that we visited.

And we're in process of writing up those initial orders and we expect to get games on the floor by early next quarter. I initially thought that we might run into more resistance placing games based on the economic conditions but and definitely we saw some (inaudible) that affected more others. But customers seem eager to try new product. Their comments back to us were that the competition is too strong, they have to keep those floors fresh.

And my experience has always been that regardless of who makes the game if your product performs the casinos will be interested in buying it. Although capital does appear to be tight for some customers there seems to be a renewed openness and more (inaudible) in participation arrangements. As discussed you know we're focusing ourselves initially on three product groups.

Our core player HD video product with the five proven library titles, Sport of Kings and Casino Commander Tournament and we found that casinos are very interested in community based products right now. These products are consistently returning solid net wins and both Sport of Kings and Casino Commander Tournament offer this kind of shared gaming experience.

You'll see a lot more products like these from us in the future. I have high expectations that these products are going to compete very well in the market. With the positive results we've seen from our initial meetings, I'm comfortabe that we'll be able to establish a solid footprint in our primary target markets over the next 12 months and from this base, we intend to continue to fine tune our product mix to capture those underserved niches that I think Multimedia is well positioned to take advantage of.

To recap, our phase one launch into the Class III in Oklahoma and Rhode Island have given us some important performance data that’s now helping us in our Phase 2 deployment in California and New York.

And although very early in the game, being able to show strong initial performance numbers against big competitors like WMS and Valley and IGT has been a very plus for us. By summer, we plan to expand into Minnesota, Wisconsin, Louisiana Tribal, and Mississippi Tribal.

And by G3 2009, we expect to be in at least 12 U.S. markets and have our first placements of Class III products internationally. And with that, I would like to turn it back over to Anthony for closing comments.

Anthony M. Sanfilippo

Mickey, thank you. And it is terrific to have you on board with us. Mick has added a lot, not only from the sales side, as you heard, Mick articulate our plan to place product, specifically Class III throughout the United States but has been a valuable add as we think about game design working with Ginny.

And I want to add that we have a talented team here at Multimedia that there are a number of people throughout the organization that are making all of this work. Some that have recently joined us but really more that have been the core of Multimedia.

Speaking on behalf of them, I'll tell you they're excited that we have a strategy, that we're focused and we're executing against that strategy. You heard from Pat as he talked about operationally what both results are and what his focus is in making sure that we are on top of our day-to-day operations and we're thinking longer term about it.

Ginny articulated what we're doing in game development and how we're moving that forward. We have Uri available if you've got questions on litigation and while that gets a bit of a highlight in this release he and his team are also diligently working on making sure that we get our licenses in the states that Mickey has talked about so that we can actually sell those products.

So he's working hand in hand with Mick and our sales organization to make sure that we're ahead of the curve in getting the appropriate licenses for us to be able to sell those products. And we're in line to make all those things happen as Mick described it.

Thank you for being attentive. Operator, what we would like to do now is open up the call for questions that anyone on the line may have.

Question-and-Answer Session

Operator

Thank you. (Operator instructions.) We'll go first to the Bill Benjes with Lantern Lane Capital.

Bill Benjes - Lantern Lane Capital

Morning, guys.

Anthony M. Sanfilippo

Good morning.

Patrick Ramsey

Good morning.

Bill Benjes - Lantern Lane Capital

How are you?

Anthony M. Sanfilippo

I'm doing fine.

Bill Benjes - Lantern Lane Capital

Anthony, a question for you, I'm encouraged by what you're saying about CapEx going from 25 in this quarter down to more like 5 million on a annual – on a quarterly basis. I'm just curious how that plays into rolling out your games, your Class III games in different jurisdictions.

Are you planning on all of those games being sold or are you planning on them being placed on a rev share model and how does that you know is that factored into your $5 million quarter number?

Anthony M. Sanfilippo

Well, that’s a good question. As you heard Mick explain that there are customers who have healthy financial situations. They would be likely to purchase the equipment but we would also look at those that we thought, if in a rev share situation, that it would be a good investment for us to spend that capital to place machines on the floor.

We realize that we have to get trial right now. We've got to have people take a look at our games and they need to speak for themselves from a performance standpoint. The 5 million has a – per quarter has a mix in it of both some rev share games, in discussing Mick his initial rollout, and a lot it is going to be – the difference is going to be the situation that we run into.

But today when we look at sort of the heavy lifting of capital spend came in the first quarter, that under the scenario we've talked with you about, we think with the games that we are most likely to place that we'll have a much lower capital spend the rest of the year.

You know we continue to tell you that we are focused on free cash flow. We're focused on paying down our debt. We're focused on being extremely careful with every, not only capital dollar, but any dollar that gets spent in this organization.

Bill Benjes - Lantern Lane Capital

Great. So that the 5 million a quarter does have your current plan as far as mix between game sales and placements for the next few quarters?

Anthony M. Sanfilippo

For the next couple of quarters.

Bill Benjes - Lantern Lane Capital

Okay.

Anthony M. Sanfilippo

Now if the demand is greater…

Bill Benjes - Lantern Lane Capital

Yes.

Anthony M. Sanfilippo

And I hope it is, that number can go up.

Bill Benjes - Lantern Lane Capital

Okay. Perfect. Then the other question was on the charges in the quarter, the accrual on the legal side. Can you add that back for your EBITDA covenant in your bank facility and if so, can you just give us a trailing 12-month number for what that number is under the bank facility and where you are on the covenant?

Anthony M. Sanfilippo

Yes. Today we are meeting all of our covenants. So when you look at trailing 12 months, we've met all of our requirements from a bank standpoint. That’s without adding that back. So that is including that as part of an expense and a charge to EBITDA.

We continue to be in discussion with our lender to make sure that they understand how we're focused going forward with our business. We haven't asked for an exception yet on this. We understand the number that we need to hit this quarter to be able to maintain our convents and we're working towards achieving that number.

Bill Benjes - Lantern Lane Capital

Okay. Great. Thank you.

Operator

We'll go next to Ryan Worst with Brean Murphy.

Ryan Worst - Brean Murphy

Thanks. Good morning, guys. Just a few questions, one I'll followup on the CapEx question. The 20 million incurred in the December quarter, does that cover all the expenditures for the games going into Tulsa or is there still going to be some followup to that?

Patrick Ramsey

Yes, that covers all the Tulsa agreed facility.

Ryan Worst - Brean Murphy

Okay. Great. Then Pat another question that is probably best for you. You mentioned the New York Lottery contract. Has there been any headway in extending that contract or conversations to that end?

Anthony Sanfilippo

Yes, I'll answer that in a couple of ways. Now I'll give you some broad feedback. One when I joined the company of all the things that I thought we do really well, I think we do New York really well.

When you look at our operation in New York and how we service the terminals that are there with our system, we really have a terrific team that’s somewhat self-contained. They have little assistance from the Austin office.

We have met with Lottery officials. We, as you know, last spring legislation was passed in New York that would allow for them to extend the agreement up to 2017. We are interested in extending our agreements to 2017 and we have been discussions with them concerning that.

Ryan Worst - Brean Murphy

Okay. Great. And then, again, concerning these legal fees, the Diamond Games litigation, is that what you expect to accrue for that potential settlement entirely or do you expect additional accruals? And then the $1.8 million in other legal fees, could you talk about that and whether that is one time in nature or is that going to be you know going on for next couple of quarters.

Anthony M. Sanfilippo

I'm going to make a couple of comments. Then I'm going to see if our general counsel, Mr. Clinton, would like to make a couple of comments. And you know sort of the first comment I would make is because when your defending yourself in any kind of litigation it's difficult to expect people to be reasonable and to have reasonable outcomes.

So it would be difficult for our end to be able to predict that – well that is an amount that is part of a settlement we offered, it wasn’t accepted. But we did offer it, we did put it on the table. And I'm going to be careful not to take – say too many things because I think it's counterproductive to be in such litigation over things that to me don’t make a lot of business sense but we are and we have hired terrific attorneys to defend us.

And I feel good about strategically how we're handling that. But I do think it's a waste of shareholder money to be involved with it. So before I probably get into any trouble I'll turn it over to Uri to have Uri add to it.

Uri Clinton

Thank you, Anthony, first I would like to welcome the plaintiff's attorneys from Diamond Games who I acknowledge our listening here and I would like to say that it wouldn’t be wise for us to try to predict what we think the outcome of the litigation will be in the form such as this.

So without being specific on Diamond Games or any other piece of litigation what I would say to you is that when I was hired to be General Counsel my very first charge was to get a handle on litigation. And to be aggressive in defending the company and to be aggressive in settlement where we thought it was appropriate to settle.

And so we have taken that charge and we have fully engaged. We've hired new counsel, we've created strategy that we thought would be effective and we've taken the offensive, as well. So without getting into details on any specific litigation I would just tell you that the legal department is fully committed to defending the company and to preserving the shareholder value.

Anthony Sanfilippo

Well said Uri. Ryan, do you have any other questions?

Ryan Worst – Brean Murray

Yes well the $1.8 million in additional legal expenses is that ongoing or you know is that…

Anthony Sanfilippo

No, they're still in the quarter. We have outside attorneys that we've engaged, it's not done. I would not tell you that is a set quarterly cost. It's a cost specific to try to settle these litigations that we incurred this last quarter. So you know this litigation can't last forever.

I mean it seems like it does but it can't. And we're trying to do – we stay focused on what's in the best interest of our shareholders and it part we made a decision to try to settle this so that it could be behind us was in the best interest of our shareholders. But it's difficult as Uri commented and I've commented to predict what future costs are going to be on this until we come to a resolution whether by trial or whether by settlement.

Ryan Worst – Brean Murray

Okay, so not to harp on this Anthony but it sounds like the $1.8 million is cost specific to certain items and not really a quarterly retainer fee that you're paying.

Anthony Sanfilippo

Oh that is absolutely correct.

Ryan Worst – Brean Murray

Okay. And then you know I was wondering if you could provide some further details on some of the potential in California. You mentioned something about mix any details on mix between revenue share and outright sales? And you know, of course, on you know if you can on the magnitude of placements we could expect?

Anthony Sanfilippo

Mick, do you want to add anything else to your (inaudible)?

Mick Roemer

Yes I think it's too early to really predict what that mix is going to be. I want to get the games into the field, measure those performances, you know and then we can go from there and again predicting quantities at this point would, probably wouldn’t be appropriate.

But I can tell you we do have both the Commander and the Sport of Kings products are participation based. And so there will definitely be a mix of both products.

Ryan Worst – Brean Murray

Okay, great, thank you.

Anthony Sanfilippo

Thanks, Ryan.

Operator

Next we'll go to Larry Haverty with Danco.

Larry Haverty – Danco

Hi, can you tell me what the win per unit is currently in U.S. dollars in Mexico? And then I have a follow-up question.

Patrick Ramsey

Yes, let me – I don’t want to misquote, I can give an estimate it's approximately in U.S. dollars right now approximately $30 gross win per unit.

Larry Haverty – Danco

You know my question is how is this going to get better. The economy is degenerating, you've got a rise to socialism with Albador (ph) gaining political traction as reported in the Journal today. I just can't see how this gets better.

Anthony Sanfilippo

Pat, let me – I'll start and then you can fill in. Larry, as you probably know we have – our major account there is with Televisa which is a well respected company. It's a publically traded company and one of the largest media companies anywhere.

Our original deal with them has us with 70% of the floor of their facilities. And they're on a plan to aggressively roll out a number of facilities, so what we are trying to do is to make the arrangement we've had with them make more sense.

Because it's an arrangement today that's not profitable for us. And we have been in discussion with them on the size floor that makes sense for us to have. We have been in discussions with them on the size facilities and in fact they have reduced their facility size with new facilities that they've opened up.

They've actually – they have even closer facility or mostly closer facility that was poor performing there. So they are getting better educated both through experience and operating as well as with our discussions in how to try to make facilities more profitable there for everybody involved.

We didn’t have a minimum fee we just had a percent of revenue as part of our agreement. And I don't think we've fully understood the cost. The concepts of taking units that were class 2 units in Oklahoma and then sending them to Mexico in theory was a good concept.

But when you start to fully load the handling cost, refurbishment cost, tax to enter Mexico, and then operating costs, we have a staff of almost 50 people in Mexico just to service those games. You need a much higher win per unit than the win per unit that's occurring there.

Some properties are doing better than others but the overall blend is not a good return for our shareholders. And so to answer your question how does it get better? We are working to try to make it better as far as the arrangement that we have as well as predicting the future of Mexico and entertainment and gaming based on the factors you brought up.

That's a hard one to really discuss. We're focused on how is it profitable for Multimedia Games.

Patrick Ramsey

Sure, Larry I think you hit the nail on the head I'll add a little bit. First of all I did misquote I'm looking at Q1 – its closer to $25 not $30. But when you look at the sort of big picture macro economic conditions in Mexico I think you may be right.

You know revenue upside – total revenue upside may be fairly limited. There's always an opportunity for us to place better product, and better themes that are more appealing to the Mexican customer. There's opportunity to examine slot hold which we've been doing with our partners there.

But overall that's probably not where the biggest opportunity is which is why we've been focused on win per units. So reducing our floor space as Anthony mentioned, and increasing our return on capital, and also eliminating some of the very costly operating expenses that we've occur, through expanding there.

So that's why we've been focused more on the cost side and getting sort that in place is much more important and provides much more upside to our company.

Larry Haverty – Danco

Great thanks a lot, great answer.

Anthony Sanfilippo

Thanks Larry.

Operator

We'll go next to John Schneider with Indian Hills Advisors.

John Schneider - Indian Hill Advisors

Hi guys.

Anthony Sanfilippo

Good morning.

John Schneider - Indian Hill Advisors

Couple of balance sheet questions real quick. I know you guys have spent about $25 million cap expenditures for new machines. Can you kind of slate that out for me? And can you talk a little bit about the construction loans and what percentage of that – what the total outstanding is on the loan for WinStar? And are the newest receivable is the current portion of $18 million was that reduced by a payment from the casino in the last quarter?

Anthony Sanfilippo

I think you have three questions that you're asking us. I think Pat you are going to answer.

Patrick Ramsey

Yes can you – I'm relying on some of our finance folks here so if you can repeat them again that would be helpful.

John Schneider – Indian Hill Advisors

Sure, what's left out of the construction loan from the WinStar project? And how is that broken down on your balance sheet?

Patrick Ramsey

Well the short answer on the first part is all of it is left which is about $66 million. And I'm looking at it (inaudible).

John Schneider – Indian Hill Advisors

Is the notes receivable the $18.6 million related to that?

Patrick Ramsey

Go ahead.

Anthony Sanfilippo

The short term piece is.

John Schneider – Indian Hill Advisors

Okay so that $18 million was that reduced – it went from $23 to $18 in the last quarter. Did they make a payment on that?

Anthony Sanfilippo

Yes there's a couple of things here. There's Riverwind, which is a Chickasaw property. And then there's also WinStar. They have made a first payment on WinStar. That has happened, we got check, we have kissed it, and then we put it in the bank.

It did happen though I want make sure I'm accurate on this. It happened at the very beginning of January so it's not reflected in this quarterly report. Riverwind we believe they are on track to pay off by the end of our fiscal year. And one of the things that we've always felt great about is that these are development agreements is what they are.

And the payback of the capital that we've put in has always been ahead of the scheduled time that they are due to pay us back. Our receivables are net receivables are about 64% of our debt. And we feel very good about the receivables because they are almost in total with the Chickasaw with WinStar.

John Schneider – Indian Hill Advisors

Do they pay you back based on a formula is that how it works?

Anthony Sanfilippo

Yes they do. What they do is they set not only with us but they have what they would consider three other vendors that they deal with. And the majority of their properties and after the property hits a certain level of profitability they then distribute back to the development agreements.

But they have been very much focused on paying off what's owed to them. What they owe. So they have done a terrific job at as I mention paying it off and ahead of schedule. And I don’t think this company is gone any kind of credit John for these development agreements and the positive thing from a business side is not only that they pay us back and you can count on getting paid back but the second thing is you know we have and we don’t talk about it a lot and I assume people understand it.

But we've got agreements to have product in their facilities for case of all of these agreements WinStar is the next 6 years and 11 months. And so in a revenue shared situation we effectively have a fourth of their floor in Thackervill, Oklahoma which is the closest casino. It's a terrific casino. Many people attended our investor conference that we had there in January. It's a beautiful casino that their continuing to add non-gaming amenities that say relatively short drive from the Dallas, Ft. Worth area.

And we've got for the next 6 years and 11 months – the bulk of our single revenue comes from is that facility. We have a contract to have gaming units there for a good long period of time. As we do in other facilities. And those contracts – we've got one contract that is coming up it's in a facility in Norman Oklahoma called Newcastle that we have about 636 games at that facility.

We've already had discussions about extending or having a new agreement with them for the next 6 years and 11 months and we're fairly confident that that's going to happen. And then we don’t have any more agreements come up for the two years.

So when you think about our company clearly if I'm an investor in this company which I am. I think about our ability with cash that's coming in today, and we've got a dependable stream of revenue coming in to develop new and relevant products for us to be able to sell both class 2 and class 3. The reason I would continue to be an investor in this company is to say I believe that this team is going to be able to put product on the floor and grow new profitable revenue streams.

Now I want to make sure you had a three part question.

John Schneider – Indian Hill Advisors

Still on that question so that's $66 million of long term debt is essentially responsibility of the casino who you've built their floor out for them?

Anthony Sanfilippo

It's a development agreement and they would pay us back based on the performance of their facilities.

Patrick Ramsey

Let me clarify that total $67 just a little over $67 million, $6.9 million of that relates to our Washington business. So $67 for less the $6.9 is our Oklahoma receivable.

John Schneider – Indian Hill Advisors

So really if you look at the copy at $27 million in debt if you take that piece out?

Patrick Ramsey

Well…

Anthony Sanfilippo

Yes I mean…

Patrick Ramsey

That's how I look at it.

John Schneider – Indian Hill Advisors

My other question would be that you break out the capital expenses for this last quarter it seems real high historically for the company.

Patrick Ramsey

Yes as I mentioned, it's approximately $20 million for the WinStar and Tulsa Creek expansion. Let's see – Mexico was about $1.8 million and I'll give you a little more detail. Of that $20 million $15 million of them was purchased cabinets and then the remainder were certain equipment and related assets for those.

So you know that's how we get the $20 million of $25 million for those two facilities.

John Schneider – Indian Hill Advisors

Okay. Great, thank you.

Operator

And once again, that is star 1 if you have a question. We'll go next to Michael Spector with Scoggin Capital.

Michael Spector – Scoggin Capital

Hi previous question about the bank EBITDA. I was just – you didn’t really give a number and I know the covenants is $60 million I was just kind of curious to see what that EBITDA number is?

Anthony Sanfilippo

It's $60.2 million.

Michael Spector – Scoggin Capital

That's where you're at right now?

Patrick Ramsey

That's correct.

Anthony Sanfilippo

If you look at the last 12 months if you took our EBITDA for – reported this quarter and the last three quarters that is what it would equal to.

Michael Spector – Scoggin Capital

Okay, great. And I was just wondering could you comment on how the quarter progressed on a monthly basis? You know given that all you hear from companies like things fall off a cliff in December, kind of how October and November and December performed for you guys?

Anthony Sanfilippo

Well it didn’t fall of a cliff. And again, I will remind you Michael and I know you know because you follow us closely. That WinStar fully opened up at the end of the year. So if you're looking forward there was a lot of construction going on at WinStar to complete that facility.

And now their fully engaged in marketing that facility now that they're not under construction. So as you think about – if you are thinking about trends, and Pat I'll turn it over to you in a second, but Oklahoma we feel pretty good about, Washington State I thinks been hurt by the economy, if you look at what's in Washington. Microsoft laid off a lot of people, the Seattle area which there is a lot of population that goes to casinos there has been affected.

Alabama we talked about what's happened there. There's been added units that have grown that facility in this last quarter and our footprint got smaller there. New York remains steady I don’t think we're seeing in New York any kind of blip in month-over-month revenues there. (Inaudible), go ahead.

Patrick Ramsey

I think so within the quarter if you look at – if we look at October, November, December, and look at the volumes. It was actually pretty flat going month to month. When you remove a sale that happened in October of $1.7 million it was fairly flat now. Typically in this business as we all know you see an uptake in December. So you know we're seeing some softness but overall I would say our markets and our main sources of revenue have been fairly strong.

You know also looking at things sort of sequentially as you compare Q4 to Q1. I think we're down if you remove against some extraordinary sales we're down approximately 14%, which is not all that uncommon when you look at the season out in the business.

So nothing no major red flags in terms of month-to-month decline or drop off.

Michael Spector – Scoggin Capital

Okay great. You said that January is down 14% over December?

Patrick Ramsey

No, no. I said…

Michael Spector - Scoggin Capital

What was down 14%?

Patrick Ramsey

The 14% was Q1, our current Q1 we are talking about now versus the prior quarter Q4, when you remove sales.

Michael Spector - Scoggin Capital

Okay.

Patrick Ramsey

It’s going back pretty normal.

Michael Spector - Scoggin Capital

Okay. And then as far as continuation to January is that still pretty flat as far as where you stand on volume basis?

Patrick Ramsey

Well we are getting sort of varied sort of preliminary statistics in January and we have been looking at it closely. But again remember at December 31st we added a significant amount of units. So looking at volumes month-to-month is not exactly going to be apples-to-apples. So we are going to have to dig into it with a bit more rigor.

Michael Spector - Scoggin Capital

Okay. And then going back to the previous questioner's question as far as the note repayment, the short term note repayment, it went down by $4.3, $4.4 million dollars. But yet the long term note receivable went up by a couple million dollars. Was that a shift, I mean it sounds to me like you got paid down some from Riverwinds in the quarter and then was the other part was there shift from a short term current amount receivable to a longer term?

Anthony Sanfilippo

Yes. It was a paid out from Riverwind.

Michael Spector - Scoggin Capital

Okay. I mean you only had $5.4 million outstanding on Riverwind as of 9/30 and you say you are going to pay it off before September of ‘09 before your fiscal year end, so I'm assuming it’s not that big of a pay down.

Patrick Ramsey

Yes in addition to what Anthony said there is a $1.2 million dollar payment from one of our Washington customers as well.

Michael Spector - Scoggin Capital

Okay. Got you! And then I was wondering if you could comment on the expanded part of WinStar where you have in and in the presentation you talk about how you had just over a thousand units at a 30% hold and you just expanded with 1400 units at a 20% hold and my thinking is, and maybe I am incorrect, is that you don’t need to hire all that many more people to cover the additional 1400 units, even thought there is only a 20% hold versus a 30% hold.

That the cost associated with that expansion should be relatively minimal so the profitability of that expanded part should be pretty high incremental to margin. Is that a correct thinking or am I missing something?

Patrick Ramsey

I think that is correct on an operating basis. We have a you know a very strong field tech in there and a strong group there and we haven't added staff. So the one issue though is obviously the capital on the machine.

Anthony Sanfilippo

Yes, we have seen the depreciation…

Patrick Ramsey

Yes there is a lot of incremental depreciation but you are exactly right on operating basis.

Anthony Sanfilippo

I again would remind everybody that, that is a lot of supply that was added and so to be able to – we think long term it was absolutely the right thing to do, but there is a bit of growing into that from a market stand point.

Michael Spector - Scoggin Capital

Okay. I just have two more questions for you. Can you give out your – I know you're not giving out monthly numbers for units, could you give out the January debt level? January 31st debt level?

Patrick Ramsey

Yes it is at $98 million.

Michael Spector – Scoggin Capital

It’s $98 million. Okay and then just one last question when you answered the previous questioner's question about you got a check from WinStar in the beginning of January, does that mean that – you said previously that there is some formula that you got after they hit a certain amount of profitability then you get your proportion of being paid down, does that mean that they hit the profitability target starting in December?

Anthony Sanfilippo

Yes, Well…

Michael Spector – Scoggin Capital

Or is it kind of a good faith here is a little bit of – here’s a little bit of money.

Anthony Sanfilippo

That would mean according to the development agreement they hit a level of profitability and they make a distribution.

Michael Spector – Scoggin Capital

Okay so that means that they actually made that level in December?

Anthony Sanfilippo

Yes you know Michael I can’t speak for Chickasaw and discuss what their financial performance is, but that’s the way our agreement is, that we get a distribution as with the other vendors, when they hit a certain level of profitability. As you know they don’t disclose because they are a sovereign nation their specific results but that’s what you should take them at. That’s what we took them at.

Michael Spector – Scoggin Capital

Okay. Great! Those are all my questions. Thank you.

Anthony Sanfilippo

Great! Operator we are a minute from the top of the hour, if there is another question we’ll take it. If not we are going to wrap up.

Operator

We do have a follow up from Ryan Worst with Brean Murray.

Anthony Sanfilippo

Okay Ryan, you get the last question.

Ryan WorstBrean Murraympany

Okay, thanks for letting me in there. Anthony you spoke about Washington a little bit, I thought that was mostly a for sales market, so you know I was wondering what the magnitude of the kind of recurring revenue decline that you are talking about there. And then also just in terms of you know the profitability on game sales in the first quarter, it looks like you had some revenue there, which I assume was also for sales to Washington, but there was a lack of profitability with that, so can you talk a little bit about that as well?

Patrick Ramsey

Yes, on the Washington business. It is a bit of both, Ryan, we have some revenues that come in based on volumes, based on our back office system and it ranges depending on the property. I’ll tell you though that the – when you look at that business year-over-year, there was a sale last year that kind of skewed, and I think it was in October last year that skew, that number.

So the Washington business looks like it’s down sort of more on a recurring basis than it is. When you take out that sale the softness in that market is somewhere between 6 and 10%, which is pretty typical of what we are seeing in other areas. Did that answer your question? Did that answer your first question? And then I think you had another question about sales that you see hitting year over year and the flow through on that sales, is that right?

Ryan Worst – Brean Murraympany

Correct, just the sales in the quarter, Pat. There you know there was not a lot of flow through and how does that play out for the rest of the year?

Patrick Ramsey

Well the sales – in terms of playing out for the rest of the year, so it’s a bit tough because we're really I mean we're ramping up the sales strategy and I think it will be very different as we go forward. But I’ll tell you year-over-year in Washington last year that was a sale where we did recognize some profit margin on that.

And then this year when you look at the sale amount there is really a slight margin, it’s just a couple points so that again hurt the flow through to EBITDA. There were just two areas that were different types. One of the Washington I believe, system sales, exactly, our product, and this one was a – this year's sale was a – we distributed some product and made a very slight markup. So there was really no incremental – not significant like it was last year.

Ryan Worst – Brean Murreympany

Okay, thanks.

Anthony Sanfilippo

Ryan thank you and operator for conducting the call in the manner you did and to everybody on the call, we appreciate you dialing in and those that are investors, we appreciate your continued belief that we are dong the right things for the good of our shareholders. And for those that are thinking about becoming investors, I hope that what you have heard today is something that would encourage you to be an active part of our company. Thank you all.

Operator

Thank you everyone. That does conclude todays’ conference. You may now disconnect.

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