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Multimedia Games, Inc. (NASDAQ:MGAM)

F2Q 2013 Earnings Conference Call

April 30, 2013 9:00 a.m. ET

Executives

Todd McTavish - General Counsel

Patrick Ramsey - President and Chief Executive Officer

Adam Chibib – Chief Financial Officer

Mick Roemer – Senior Vice President, Sales

Analysts

Todd Eilers – Eilers Research

Justin Sebastiano – Brean Capital

Steve Altebrando – Sidoti & Company

Operator

Good day ladies and gentlemen, and welcome to the Multimedia Games Holding Company Second 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 be given at that time. (Operator Instructions) As a reminder, this conference call may be recorded.

At this time, I would like to hand the conference over to Mr. Todd McTavish, General Counsel. Sir, 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 on 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 operating metrics provided during 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 this morning are Todd McTavish, our General Counsel and Adam Chibib, Chief Financial Officer, and Mick Roemer Senior Vice President, Sales.

We are joining you today from the impressive Winstar World casino resort in Southern Oklahoma which is noteworthy because it’s largest casino resort in Oklahoma and one of the largest in the country by several different measures. We’re proud to be an important provider of gaming product at the (inaudible) property.

This morning, we reported first quarter revenues for $46.6 million, up 18% year over year and diluted earnings per share of $0.31 versus $0.24 last year, another strong quarter for us. In light of these results in our first quarter results, Adam will be discussing our revised guidance for 2013 in a bit.

First, I wanted to provide a bit of color on the quarter and our strategic objectives. On the product front, we continued to see success placing our high-rise games throughout the country. In 12 short months, we are placed around 500 high-rise games outside of Oklahoma, which is a good indication that they are performing well and that our strategic approach to the premium-leasing segment is a good one.

While this is clearly a competitive segment and the choices operators had to continue to grow, our share continues to grow as well. Although, key driver of the growth is increasing distribution, the game path demonstrated they can perform in competitive markets.

We continue to develop new games paddles for this series and expect to deliver a new title for each quarter for the pursuable future. Additionally, we began releasing a new series of games called Smokin’ Hot Jackpots with our first placements occurring in March and of course, we have other premium series cabinets and themes in the pipeline.

Second, game content and development have been a key component of our strategy combined with expanding distribution. We placed and sold games in 22 different states this past quarter, which is a company record. Regarding our game sales, we sold 580 units and the sales were very well diversified by customer and by jurisdiction, which is great to see. In addition, although the revenues were immaterial, we sold our first products into Nevada and the Illinois, both of which are important markets for us as to expand.

Access to Nevada in particular not only represents a great opportunity to sell games but also showcases the company’s products in the world’s largest stock market and provides access to a broader segment of customers.

From an operating and financial standpoint, the companies' margins and profitability continue to expand. We have continued to spend more mainly in R&D as increasing our output is critical to continue growth, but I believe we are doing a good job of balancing spend with profitability.

For more detail on the financial results, I will now turn the call over to Adam to discuss the second quarter.

Adam Chibib

Thank you Pat. Our second quarter was another exciting quarter for the company. We were able to execute well and delivered solid financial results despite some challenges in the regional gaming markets during the quarter in a tough comparable to our prior year fiscal second quarter.

We continued the expansion into new markets and we recorded our first ever Nevada revenues. Revenues for our fiscal second quarter totals $46.6 million, an increase of $7 million were approximately 18% year over year. Our fiscal second quarter revenues include the sale of 580 gaming units with revenues totaling $11 million versus 472 units sold in $8.5 million in revenues in the prior year period representing an increase of 26% year over year.

We sold units in 19 States with Washington, Michigan, and California accounting for the majority of the sales followed by Iowa and Arizona. The turn of event system was sold with 47% of our games up slightly from 46% in our first fiscal quarter. Gaming operations revenue for fiscal second quarter total $33.4 million, an increase of $4.4 million are approximately 15% year over year.

The increasing year over year gaming operations revenues is attributable to higher revenues from the majority of our major markets partially offset by the clients in Oklahoma and Mexico. Oklahoma revenues decreased by $600,000 or approximately 3.5% driven by lower daily revenue yield versus the prior year. As we discussed last year on our fiscal second quarter call, our prior year fiscal second quarter had unusually high daily revenue yields driven by a strong regional economy, good weather, and an extra day in February.

Mexico revenues were 0 down $636,000 year over year, as we closed our operations in our fiscal first quarter. New York lottery revenues grew by $222,000 were approximately 5.5% year over year driven by higher daily revenue yield and a very strong March. Our domestic install base was 11712 units at the end of fiscal Q2, an increase of 1820 units are approximately 18.4% over the prior year period and an increase of 524 units of approximately 4.7% on a quarterly sequential basis. Growth in our domestic install-base came from all major markets included in the quarter end participation base were total of 505 premium games deployed outside of Oklahoma, an increase of 187 units were 58.8% on a quarterly sequential basis.

Gross margins for the fiscal second quarter were approximately 81% compared to 81% in the prior year period and 79% in our fiscal first quarter. Gross margins benefited from a high concentration of games sold with our turn event system and from a strong mix of gaming ops revenues relative to total revenues. SG&A expenses prior fiscal second quarter were $11.6 million a decrease of $701,000 were approximately 5.75% from the prior year.

The decrease in SG&A expenses is related to lower customer marketing expenses, lower inventory expenses and lower legal fees partially offset by higher benefit and salary expenses. SG&A expenses were 24.9% of total revenues compared to 31.1% in the prior year. Research and development expenses were $4.3 million an increase of $392,000 were just over 10% from the prior year.

The year over year increase is attributable with a higher salary and benefit expenses as they continue to invest in retaining and attracting engineering personnel. As previously discussed in our fiscal first quarter earnings release effective October 1, 2012 moved from 36 months depreciable life for install base of gaming operation equipment to a 48 months depreciable life.

The effect of this change increased operating income by approximately $2.1 million and net income by $1.4 million or 5 cents per diluted share. Depreciation and amortization expense for our fiscal second quarter was $8.1 million, a decrease of 1.4 million approximately 14.4% from the prior year. Net income for our fiscal second quarter was $9.3 million or 31% per diluted share compared to net income of 6.8 million or 24 cents per share in the prior year. Our former diluted earnings per share for the prior year fiscal second quarter was 22 cents per share and includes adjustments for the change in a depreciable lives of our gaming equipment and Pro Forma tax rate of 32.3%.

Please see the reconciliation of these items in this mornings’ earnings release. EBITDA for our fiscal second quarter was $24.1 million, an increase of $5.8 million were approximately 32.1% from the prior year period. Our balance sheet remains one of the strongest in the industry even as we invest back into of the company through the expansion of our proprietary unit footprint, continued refreshes of our existing footprint and repurchases of our common stock.

During our fiscal second quarter, we invested $12.9 million in capital expenditures to expand our existing footprint and to refresh certain of our lower performing machines. Also during the quarter, the company made its second installment payment of $3.3 million for development agreement we entered into in December 2012. We expect to record revenues from this 150 units expansion in our fiscal fourth quarter.

Additionally, we purchased $1.6 million of the company stock approximately 10300 shares at an average price of $16 per share. Our fiscal second quarter and cash balances total $81.5 million with net cash of $50 million. As result of our strong first half of the year, we have increased our full year revenues and fully diluting earnings per share targets. The company now expects revenues for fiscal 2013 to range from $183.2 million to $185.6 million with unit sales ranging from 2450 units to 2550 units.

Additionally, we have increased our fully diluted earnings per share from a range of 79 to 84 cents per share to a range of 98 cents to a $2 per share. We are pleased with the progress we have made with respect to cash flows, unit sales, and gaming operations for the quarter.

I will now turn a callback over to Patrick Ramsey for additional commentary.

Patrick Ramsey

Thanks Adams, before we open up the questions, I will preempt some of them by discussing Nevada in a bit more detail. In the second quarter, we completed our trials on an IGT Advantage and Bally ACSC Systems and are currently on trial with two more systems Bally SDS and Aristocrat Oasis. Our turn event application is on trial at a strip property as well and we are continually working to get additional titles approved. In summary, being able to sell all of our products, there will take some time, but we keep advancing each month we have taken for and steps forward.

Having said that, I will now open it up to questions. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from Todd Eilers from Eilers Research.

Todd Eilers – Eilers Research

Hi guys, great quarter. I wanted to ask you few questions, sorry on Nevada and how you try to preempt some of the questions, but I cannot help myself.

Patrick Ramsey

I knew that it’ll be more Todd.

Todd Eilers – Eilers Research

I know it is probably immaterial, but it would be interesting to know may be just how many units you guys placed in Nevada in the quarter even though its small and then I guess looking at the second half of your fiscal year as you guys get, you know as the placement started to ramp up, how should we kind of look at the revenue model is, should we look at these being more sole products or lease or some combination of both would be helpful? Thanks.

Patrick Ramsey

Yes, literally we sold six units in Nevada in the second quarter, so when we says it is immaterial, certainly it materials one small bank and then likely especially in these early phases, so certainly for the next couple of quarters, I would assume most of those would be failed.

Todd Eilers – Eilers Research

Okay, I do not know if you guys can share may be what your current kind of unit and stall based on trials may be in the State that also might be helpful?

Patrick Ramsey

Yeah, I wanted to preempt it so I don’t want to go property by property obviously and get into too much detail, but you know if we have whether there are the technical trials or performance trials, we have less than 90 games out there, total between all sort of trials.

Todd Eilers – Eilers Research

Okay, that is helpful and then you wanted that to move to turn event obviously another very strong quarter for you guys, I think I believe you mentioned 47% of sales and I believe last quarter was also fairly high, seems like the last two quarters it jumped up fairly significantly in terms of percent of overall sales, how should we kind of look at this going forward as this kind of new run rate or does Nevada may be changed that one way or the other up or down, you know just possible kind of look at turn event as the percent of the overall mix going forward?

Adam Chibib

Hi this is Adam. As you guys know the turn event is not approved yet in Nevada so I think this run rate that we are at in the first half of the year probably goes down in the second half of the year until turn event kicks back in and approved in Nevada, so my guess is we dip down in Q3 and Q4 and then we step back up when it is ready in Nevada, that is my high level theory on that, though I do not think it will be this high next two quarters.

Todd Eilers – Eilers Research

Okay and then it looks like both your ASPs and gross margins in the quarter were add or were records for you guys in the quarter, I am assuming that’s probably related to the high mix of turn event, was there anything else going on there that might have impacted that positively and then how should we also look at is that to get run rate going forward as well?

Adam Chibib

I think for game sales, we are round at the 58% that is pretty high for us. I don’t think – I don’t expect to see -- we’ve been between I think the low point in the last four quarters of 52%, the high point was 58%, my guesses were you know more like 55% or 54% going forward, so 58% is extraordinary high. There was nothing else in there that drove that number up other than you know really product mix and when you look at overall gross margins, we had a pretty high percent of recurring revenue in the quarter that helped overall margins and also helped operating margins as well.

Todd Eilers – Eilers Research

Okay, great and then just one final question and I am not sure if you guys can comment at all about it, but it seems fairly significant or meaningful, but we have heard some chatter out there that the turn event has been selected by Caesars and be these kind of preferred slot turn event solution to the extent, again I am not sure if you can comment but to the extent you can that would be helpful because it does seem like a fairly large opportunity for you guys and if you can, I certainly understand.

Patrick Ramsey

Yes, we continue to work with Caesars and other operators and I am not going to comment on that rumor as we have turned event at couple of Caesars' properties now and I believe they like it but you know we continue working with them to try and to expand property.

Todd Eilers – Eilers Research

Okay great, thanks guys.

Operator

Thank you, our next question comes from the Justin Sebastiano from Brean Capital.

Justin Sebastiano – Brean Capital

So, back in Nevada as I am sure you are happy to talk about, what we are looking for as far as June and September, in the previous guidance you were expecting this -- the ship units and they are in the month of June or they are about is a lot of the guidance raised due to the getting into Nevada little quicker may be than anticipated?

Adam Chibib

This is Adam, I do not know not really I think our phase III Nevada is exactly what we thought would be you know even 12 months ago and I think we are in a still not looking at a significant portion of unit sales happening in the second half of 2013. So I think we are spot on – I think really the reason behind the guidance increase in the second half of the year is because our participation in group phase has grown a lot more rapidly than we had thought, so adding you know more than 500 net units over the last three quarters in a row really helps drive that recurring revenue going forward. That’s later reason for the increases is more that than the Nevada coming early.

Justin Sebastiano – Brean Capital

Okay, in just Illinois I guess you haven’t really touched on that, you said modest sales there as well, what was your numbers for Illinois?

Patrick Ramsey

Yes, it was larger than Nevada at 34 units.

Justin Sebastiano – Brean Capital

Okay, and you said you saw a strong March, the month in EGR numbers and support that for sure, are you seeing that continue through April based on the game opportunity you have out there?

Patrick Ramsey

Well, we do not want to comment on our third quarter just yet but we -- I am just going to leave it that. I haven’t seen any regional numbers come out yet on April as well so we will just hold off for few more days if you don’t mind.

Justin Sebastiano – Brean Capital

Sure, and in just back to guidance for a second, are you assuming any share repurchases in your EPS guidance?

Patrick Ramsey

Yes, obviously we only bought back about 100,000 shares this quarter, my guess is something like that going forward, so nothing too phenomenal is my guess, yes.

Justin Sebastiano – Brean Capital

Okay, alright. Thanks guys.

Patrick Ramsey

Thank you.

Operator

Thank you. (Operator Instructions) and our next question comes from Steve Altebrando from Sidoti & Company.

Steve Altebrando – Sidoti & Company

Guys, the high rise series obviously ramping up pretty quickly. Can you talk about if you are seeing any churn in that number?

Patrick Ramsey

Yes, very-very little. We’ve started to put these out, I think it was last March. We have seen very little churn. We have seen some -- we have done some team conversions but just from I think when you talk about churning mainly talking from the hardware prospective, we have not seen a whole lot, so we continue to just sort of keep that fashion growing, which is good.

Steve Altebrando – Sidoti & Company

As you know, it obviously is the lot lower than I had modeled this, is that sustainable with you guys suspect as a percentage of sales?

Patrick Ramsey

Certainly, an absolute dollar is going to increase the second half of year and obviously we are continuing hiring. We will hire some folks in sales and services that will hit that line and also as you guys know in our fiscal fourth quarter September will have G2E and that adds anywhere between that is a big number for us, it would been 600,000 and million dollar for G2E in our fiscal fourth quarter so those two drivers should drive it up an absolute dollars and probably as a percent of revenue and then we will continue to add research and development personnel as well as also both those line items are going to grow in absolute dollars and my guess is SG&A will grow as a percent of revenue as well.

Steve Altebrando – Sidoti & Company

Okay, but nothing unusual on the quarter?

Patrick Ramsey

No nothing unusual that made it above in the quarter now.

Steve Altebrando – Sidoti & Company

Okay, the tax rate a little bit lower is that something that you are extrapolating into the guidance for balance of the year.

Patrick Ramsey

That’s a good question, what we have – when Congress enacted the new Tax laws in January, they did reinstate the R&D tax credit so what we did is we got essentially two quarters of R&D tax credit pickup in the first half of the year now lower the rate of 32%, but in the back half of the year the range is between I think 36% and 38% and that is enough and good range for the second half of the year. So, we will not see that benefit carry through.

Steve Altebrando – Sidoti & Company

Okay and last one, I know, key goal of yours coming into the year was expanding and widening the product portfolio. You know, how do you feel like things are coming on that front, if you can talk a little bit about the game pipeline?

Patrick Ramsey

Yes, sure. That is something that we are very focused and we continue to grow and I think our plan is basically be up 10% to 20% in terms of the amount of games we put out year over year, we are on that plan but we continue like Adam said we will continue to add R&D, mainly that means we are going to grow our development staff and so we will continue to grow hopefully 2014 as well so we continue to put more resources there and continue to grow.

Steve Altebrando – Sidoti & Company

Okay, thanks guys.

Patrick Ramsey

Thanks Steve.

Operator

Thank you. I am showing no one else in the queue at this time. I will like to hand the conference back over to Mr. Ramsey for any closing remarks. I apologize we do have Mr. Todd Eilers who have just queued up. Your lines are open.

Todd Eilers – Eilers Research

Sorry guys, can let you go, just had one more followup for you. On the guidance Adam, looks like the lower end was kind of raised and in conjunction with kind of the beat at least relative to street expectations for the quarter, but it looks like the higher or the upper end was raised, the higher looks like about 18 cents from the prior upper end of the range.

Is there anything driving that in the back half that they cause you the raise that a bit higher or is it like you said in your comments just higher, kind of trend of, you know, gaming ops unit placements in the current quarter.

Patrick Ramsey

Yes, I think it is really gaining ops because that is the gift that keeps on giving as guys know, so you know in the way I look at it were up, you know, couple hundred units in Q1 and couple hundred units in Q2 over what we had originally thought, so that benefit will carry us through the rest of the year. So, we have a lot more visibility in those numbers and that helps with the guidance range.

Todd Eilers – Eilers Research

Okay. Thanks guys.

Patrick Ramsey

Thank you.

Operator

And I am showing no one is in queue at this time. I would like to hand it over to Mr. Ramsey for closing remarks.

Patrick Ramsey

Thank you operator and thanks to those who joined us on the call. This concludes our second quarter earnings update. We appreciate your interest in the business. Thanks.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This concludes our program. You may all disconnect and have a wonderful day.

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