Multimedia Games, Inc. F3Q09 (Qtr End 06/30/09) Earnings Call Transcript

| About: Multimedia Games, (MGAM)

Multimedia Games, Inc. (NASDAQ:MGAM)

F3Q09 Earnings Call

August 5, 2009 9:00 am ET


Uri L. Clinton - General Counsel

Anthony M. Sanfilippo – President and Chief Executive Officer

Adam D. Chibib - Chief Financial Officer

Patrick J. Ramsey - Chief Operating Officer

Virginia E. Shanks - Chief Marketing Officer

Mick Roemer - Senior Vice President of Sales


Todd Eilers - Roth Capital Partners

Ryan Worst - Brean Murray, Carret & Co.

Larry Haverty - Gabelli Multimedia Trust


Good day and welcome, everyone to the Multimedia Games, Incorporated third quarter 2009 conference call and Web cast. This conference is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to your host, Uri Clinton.

Uri L. Clinton

Thank you. I will begin by the forward-looking statement and then I will turn it over to Anthony Sanfilippo, our CEO, for the introductions.

The following presentation contains statements about future events and expectations that are characterized as forward-looking statements within the meaning of the applicable securities laws. These statements are based on management’s beliefs, assumptions, and expectations of future economic performance, taking into account information currently available to them. Forward-looking statements involve risks and uncertainties that may cause actual results, performance, or financial conditions to be materially different from the expectations of future results, performance or financial conditions. 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 laws.

Today’s call and Web cast may include non-GAAP financial measures within the meaning of the SEC Regulation G. A reconciliation of all non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with GAAP can be found on the earnings release posted on our Web site at in the Investor Relations section.

Anthony M. Sanfilippo

Welcome everyone to Multimedia's third quarter earnings discussion. We are pleased to discuss with you a number of events that supports the progress we are making that creates a company that is valued by a wide base of customers and ultimately creating greater value to our shareholders.

Our success is centered around the talent we have in our organization and I am very proud of the team that both has been assembled within the last year, as well as the team that has been a part of Multimedia Games for a number of years and I wanted to take a second just to talk about the individuals who are a part of the senior team that we have.

Uri Clinton, who you just heard from, is our General Counsel and he has done a remarkable job in a short period time, first managing litigation that was important for us to get under control and in some cases, we talked about it at our last earning call, eliminated, as in the Diamond Games case. He has also done a terrific job in managing the expenses from the standpoint of outside attorneys' fees and that's reflected in our earnings announcement today.

Most importantly, though, he has put together a professional licensing team and that team is focused on making sure from jurisdiction to jurisdiction where we are pursuing opportunities, that our company has our license delivered—we can't sell games unless we have a license in place—in an effective and timely manner. We are going to talk a little bit more about that when Mick talks about his efforts in placing games.

He also works collaboratively with Pat Ramsey and other members of our team in working through the extension of our New York Lottery agreement. And as you know, we announced earlier in the quarter and it's the highlight of the quarter, that we have been able to extend our agreement with the New York Lottery for an additional seven years.

Jenny Shanks, our chief marketing officer, has worked closely with some really superior talent that we have within our organization, to work on thoughtful and innovative products. Jenny is going to talk about that and we've placed some of those products.

And the company, when a number came to work with the company, we discovered we had a number of products that coming from, if you would, the operator side of the business, were relevant and could be valuable out on casino floors. The company had actually developed these products, Casino Commander being one, over a many-year period but had difficulty getting it from development to market. Jenny is doing a really superior job in making sure that we take products that are in development and working with her colleagues to get those to market.

Pat Ramsey, our Chief Operating Officer, has been leading our efforts in markets where we operate today. We have seen dramatic improvement in the prudent deployment of capital and improvement of revenue growth from existing footprints. Pat's going to talk about that today and he really has done a very effective job in a short period of time in managing the assets that we have in Mexico.

Adam Chibib, who recently joined us as Chief Financial Officer, has done an also equally terrific job in working in partnership with all members of our team and recently proactively led the effort to create financial flexibility for us as we recently announced our ability to amend our bank facility. Adam will talk a little bit more about that as well as talk about the specific financial results for the quarter.

Mick Roemer, who is a seasoned veteran of the manufacturing industry, has joined us earlier this year as Senior Vice President of Sales. Mick and other sales professionals within our organizations have been focused on placing our products in markets that will produce profitable outcome.

We have told you all along that's important to us. We want to make sure that with each and everything we do, we want to make sure we're placing products, we're making sales, that have profitable outcomes. More to come on that as Mick talks about his efforts in placing in new jurisdictions.

And I am pleased to announce today that we have filled, and we did this in the quarter, our Vice President of Technology position. And that really was the last piece that we needed of the puzzle to make sure that we had the holistic oversight with talented, seasoned, individuals in running our company.

Joaquin Aviellas joined us. He is an individual we met here in Austin who's got a reputation on providing robust, reliable, and repeatable technology with other companies that he's been with and he has been with us a short while but his role, his goal, is to make sure that our technology is technology that is both reliable and repeatable, meaning we want to make sure that we're good at what we do on the front end so that we can quickly move to place that technology in new situations.

We collectively work, the individuals that I talked about, to make sure we're looking at the future of our business. From a technology standpoint, we all participate in thinking about new products, in talking about what products we think are going to be those products that will produce profitable revenue in quarters and years to come for us. Jenny leads the effort from a research standpoint. She's going to talk about that in her comments.

We bring a diverse background of talent and we have a very talented group of individuals we work with there at Multimedia Games. I am pleased for us to be able to specifically discuss with you our results and at this point I would like to turn over the call to our Chief Financial Officer, Adam Chibib.

Adam D. Chibib

As Anthony alluded to, the highlights for the quarter included the amendment to our credit facilities, which provided the company with some breathing room with respect to certain financial covenants, and the generation of healthy cash flow at our fiscal quarter ending June 30, 2009.

The company was able to pay down our total debt balances by approximately $14.1 million during our fiscal third quarter, with total free cash flow for the three months ended June 30, 2009, of approximately $16.0 million. We define free cash flow as cash flow from operations less property and equipment purchases.

Revenues for the three months ended June 30, 2009, were approximately $32.1 million, an increase of $1.9 million, or 6%, year-over-year and down approximately $1.7 million, or 5% on a quarterly sequential basis.

Revenues for the quarter included approximately $3.2 million in revenues recognized from our deferred revenue balances. The recognition of this revenue added approximately $1.7 million in EBITDA for the quarter.

EBITDA for the three months ended June 30, 2009, was $15.9 million, an increase of approximately $200,000, or 1%, year-over-year and up approximately $3.3 million, or 26%, on a quarterly sequential basis.

Adjusted EBITDA, which adds back interest income, income tax benefits, if any, legal costs and settlement fees related to our Diamond Games litigation, stock-based compensation, and certain asset impairment charges, was approximately $18.4 million for the three months ended June 30, 2009, an increase of $1.1 million, or 6%, year-over-year and down approximately $4.2 million, or 19%, on a quarterly sequential basis.

Our trailing 12-month adjusted EBITDA, one of the primary calculations used for the purposes of determining whether or not the company is in compliance with certain covenants in our credit facility, was approximately $79.4 million for the period ended June 30, 2009.

Net loss for the three months ended June 30, 2009, was $1.2 million, or $0.04 per diluted share, compared to net income of $164,000, or $0.01 per diluted share, in the prior-year period.

Gross margin percentage for the quarter ended June 30, 2009, was approximately 93% compared to 99% in the prior-year quarter and 93% in the quarter ended March 31, 2009. The decrease in gross margin percent from the prior year is attributable to a change in the product mix.

In the quarter ended June 30, 2009, player station sales comprised approximately 12% of total revenues versus only 1% of total revenues in the quarter ended June 30, 2008.

SG&A expenses for the three months ended June 30, 2009, were approximately $15.7 million, a decrease of approximately $450,000, or 3%, year-over-year and down approximately $4.8 million, or 24%, on a quarterly sequential basis.

The company benefited from a significant reduction in legal fees during the quarter, which is partially offset by an increase in bad debt reserves related to certain aged accounts receivables.

Included in SG&A for the three months ended June 30, 2009, was approximately $360,000 of stock-based compensation and impairment charges and reserves totaling just under $1.0 million.

Depreciation and amortization for the three months ended June 30, 2009, was approximately $15.6 million, an increase of $2.0 million, or 15%, year-over-year and essentially flat on a quarterly sequential basis.

The majority of the increase in depreciation and amortization over the prior-year period is related to the acquisition of property and equipment in our fiscal first quarter ended December 31, 2008.

Turning to the balance sheet, cash and cash equivalents were approximately $9.4 million as of June 30, 2009, up slightly from our March quarter.

Accounts receivable were approximately $23.8 million as of June 30, 2009, down $3.2 million from March 31, 2009. The decrease in accounts receivable from March 31, 2009, is attributable to an increase in collection efforts and a slight increase in the reserves during our fiscal quarter.

Total notes receivable were approximately $58.0 million as of June 30, 2009, a net decrease of $4.0 million from March 31, 2009. The net decrease in notes receivable is attributable to repayments made by our customers under certain development agreements.

Leased gaming equipment net was approximately $38.9 million as of June 30, 2009, a decrease of $3.2 million from March 31, 2009. The decrease in leased gaming equipment from March 31, 2009, to June 30 is attributable to depreciation expense for the period.

Property and equipment net was $57.9 million as of June 30, 2009, a decrease of $3.3 million from March 31, 2009. The decrease in property and equipment net is attributable to depreciation expense, which is partially offset by property and equipment additions for the three-month period ended June 30, 2009.

For the nine-month period ended June 30, 2009, acquisition of PP&E was approximately $37.3 million with the majority of additions occurring in our first quarter ended December 31, 2008. Our fiscal third quarter additions totaled approximately $10.0 million, the majority of which was a purchase of player station machines which will be deployed into our existing footprint. We expect total PP&E additions for the year to fall between $40.0 million and $50.0 million.

Intangible assets net were approximately $35.6 million as of June 30, 2009, an increase of $3.0 million from March 31, 2009. The increase in net intangible assets from March 31, 2009, to June 30, 2009, is attributable to the Newcastle expansion.

Accounts payable and accrued expenses were approximately $31.4 million as of June 30, 2009, an increase of $4.4 million from the March 31, 2009, quarter. The increase in accounts payable and accrued expenses is directly related to our continued focus on accrued payment terms offenders as a part of our efforts to improve our management of working capital.

The balance on our revolving credit facility was $16.0 million as of June 30, 2009, a decrease of $13.0 million from March 31, 2009. The decrease in the balance on our revolving credit facility is attributable to payments made on the facility as a result of our strong cash flow from operations in our fiscal quarter ended June 30, 2009.

The total balance on our term debt was approximately $67.4 million as of June 30, 2009, down $1.1 million from March 31, 2009. Total indebtedness was $83.4 million as of June 30, 2009, a decrease of $14.1 million from March 31, 2009.

On July 22 the company amended its credit facility with Comerica Bank. The amendment allows the company to add back certain non-recurring items, stock-based compensation, and certain asset impairment charges up to $10.0 million. In exchange for the added flexibility, the company agreed to a 2% LIBOR floor and a one-time fee of 25 basis points. Based on current interest rates today, our effective cash interest rate will be between 6.3% and 7%.

We are pleased with the progress we made with respect to cash flows for the quarter, the reduction of our debt balances, and the changes made to our credit facility. I will now turn the call over to Pat Ramsey, the company's chief operating officer, for a more detailed discussion of our key markets.

Patrick J. Ramsey

As Adam stated, our revenues were up year-over-year 6% and down on a quarterly sequential basis 5%. Like last quarter, and I imagine for the foreseeable future, there are a lot of moving parts in the revenues as we transition from almost a purely rev-share business with a major focus on third-party product distribution to a company producing and selling its own product, so I will provide some more details around those top-line results.

First, the revenue growth Adam referred to includes the sales that were recognized out of deferred revenues and the deduction-related increase in [inaudible]. Normalizing the results our recurring revenue was down both year-over-year and sequentially 5%.

On the recurring revenue side, I will first address the Oklahoma market, which represented just under $19.0 million, or 59% of our third quarter total revenues. These revenues were down 2% year-over-year and 4% sequentially because of prior equipment sales by several tribes that were historically on a rev-share basis. Just looking at those two tribes, our recurring revenues at their facilities this quarter was down $2.5 million year-over-year.

This reduction in recurring revenues resulting from the player station sales was partially offset by improved performance in our other Oklahoma facilities.

Revenues at the WinStar facility were up from $7.5 million a year ago to $8.2 million, representing goals of approximately 9% and were down $327,000, or 4%, sequentially. We are very pleased with these results for a few reasons. One, if you recall during the second quarter call, we mentioned that our product results at that facility were a bit disappointing, only up 2% year-over-year. So the increase to 9% is certainly a good sign.

Second, the sequential drop of 4% compares very favorably to the past couple of years, where seasonal decreases from Q2 to Q3 have ranged from 8% to 10%.

Finally, revenues in the other facilities within the state were up $1.5 million year-over-year, or 17%, and were up sequentially $149,000, or 1%.

This growth came mainly from footprint stanchion with very [inaudible] across the state. So all in all, the Oklahoma market continued to perform quite well for us in our fiscal third quarter.

It is important to note that a few weeks ago WinStar began renovations to update three sections of the casino, which contain over 1,000 of our 2,440 machines. The renovation is currently planned in various stages so we will have a varying number of units out of revenue in our fiscal fourth quarter ending September 30, 2009, and into the beginning of our fiscal year 2010. Currently was have over 450 units out at the first section gets renovated.

I cannot provide you with an estimate on the impact as it is difficult to predict how much of that play will get picked up in other parts of the facility and by which machines specifically. Also, as I previously stated, the number of units down will vary over the next few quarters.

To minimize the impact of the renovation, we have done things operationally such as shift some of the best-performing games to other open sections of the floor and we are working with marketing to further drive play.

On the positive side, this construction period is allowing us to take care of several important initiatives for the longer term. Mainly, we will be converting our Class II product there to a fast-paced protocol which will help drive promotional play on these units and we are also cleaning and refurbing this equipment during the down time.

Going forward, we will continue focusing on performance at this Chickasaw facility through the placement of, or conversion to, higher performing units. We are doing this mainly for our own products such as Sport of Kings, the Snook Commander, and other proprietary titled and also through third-party units.

In Mexico, our revenues year-over-year were down $68,000, or 3%, and were down sequentially $313,000, or 12%, mainly due to two factors: the year-over-year change in the exchange rate and the closure for the swine flu, the latter of which impacted April and May approximately $400,000 according to our best estimates. Normalizing for these two factors, our third quarter was a relatively strong quarter.

As was our stated goal in the beginning of this year, we have worked with our customers in Mexico to significantly reduce the amount of capital we allocate to that market and we have done so very successfully.

Having said that, there has been a lot of discussion recently about the possibility of rolling out Class III products in Mexico. We are very actively working with our main customer there on a systems and product plan that is prudent from a financial perspective and that keeps us competitive in the market. It is likely that we will phase out supplying Class II games there and will instead roll out some of our Class III titles.

In Alabama, our revenues year-over-year were down $1.1 million, or 33%, and were down at all three of the properties in which we operate. This is line with recent results. At the Victoryland property outside of Montgomery, which makes up about 58% of our Alabama business, our Q3 year-over-year decline was a small [inaudible] over the last several quarters.

This is due not only to the fact that we are now moving into periods that better reflect the full dilution of the Victoryland expansion, but also due to the performance of the 120 machines that we added to the newest part of the facility in our second quarter. We are hoping to capitalize on this performance and potentially expand our footprint in the new sections with our updated product.

The New York Lottery business continues to pick up momentum. We are up 8% year-over-year and 11% on a quarterly sequential basis. We do believe that this trend will continue.

In summary, although we have certainly faced some challenges this quarter in terms of maximizing the profitability of our domestic and international footprint, we feel that the third quarter finished reasonably well. We will continue to have some near-term challenges with the WinStar renovation, and in Alabama, over the next few quarters but we are excited about the early results of some of our new Class III products. In Mexico we look forward to continuing to be a major player in that market.

I will now turn the call over to Jenny Shanks, who will fill you in on some of our game development initiatives.

Virginia E. Shanks

I will spend the next few minutes talking about significant progress made in the following four areas of game development: new game releases; game performance; consumer testing; and key product deployment.

First, in the area of new game releases, we continue to prudently expand our library across multiple jurisdictions. Year-to-date for Class III we released 15 new titles and estimate 22 total titles by fiscal year end.

For Class II, 25 new titles have been released thus far this year with a total 30 planned by fiscal year end.

In Washington, 15 new-to-market titles have been released and for Mexico, 23 new game titles have been deployed through Q3 2009.

All in all, we've made very good progress in terms of our ability to produce and deploy a growing game library across the markets in which we operate.

Second, we continue to see strong performance from our recently deployed Class III and Class II game titles, specifically: Total Meltdown is 3-reel 5-line game with its unique re-spin feature is exceeding floor average by 150% in Rhode Island and is showing a 30% win per unit premium at Victoryland in Alabama and a 20% premium at WinStar.

Meltdown for Reaction, showing the strength of the Meltdown series, this game is doing double the floor average in Rhode Island and 50% better than floor average in Victoryland.

Ernestine, our 9-reel 32-line video game with its air active Lily Tomlin feature is also delivering strong results, 80% better than floor average in Rhode Island.

Third, we have implemented a rigorous concept testing approach to game development. New themes, features, and functionalities are tested with an online gaming panel made up of over 400 players from across the country. This allows us to test new concepts against different demographics and in different parts of the country, leading to a more informed decision-making process in terms of what games we pursue.

We have also partnered with a number of casinos to execute on site player intercept studies. This provides us with real-time player insight and helps inform future game development as we seek to clone those features that generate the highest customer appeal.

Lastly, we are commercializing key products. Sport of Kings, our first community game offering, has been deployed at WinStar, RiverWind, and Newcastle in Oklahoma. Early results show very strong premiums that are 35% to 200% above house average.

Plans are to further deploy this interactive, horse-racing-themed game in California over the next 90 days, subject to licensing requirements and regulatory approval.

Casino Commander, our innovative system which enables casino operators to quickly and seamlessly switch network slot machines from in-revenue live status, to out-of-revenue tournament status at the touch of a button, had its first Class III deployment at WinStar last month.

We also recently secured an agreement to install the Casino Commander system at the Chumash Casino Resort in California. The Commander system was selected by this casino following a review of competitive products from two other leading game equipment suppliers.

Across all areas of game development, from new releases to our strategy of launching proven performers in new markets to testing new concepts with a nationwide player base to commercializing key product lines, we are doing what we said we would do, that being to execute against the focus and consumer-informed game development strategy.

I will now turn it over to Mick Roemer, as VP of Sales.

Mick Roemer

We continue to build momentum in California with our Class III product sales. Our first installation in Sycuan Southern California is going very well. We installed on July 6 and the initial performance reports are very encouraging. Although we don't have any specific numbers to announce today, we were told anecdotally by the casino that the slots where people were asking customers to limit themselves to one machine at a time so that others could play.

As Jenny mentioned, our first Casino Commander system and games will be installed at Chumash Casino near Santa Barbara in Southern California within a few months. We are making good progress in finalizing additional contracts for Commander, Sport of Kings, as well as Class III library titles at casinos throughout California.

As we remain focused on the execution of our stated product roll-out plan, we are now beginning to expand our sales effort in Minnesota, Wisconsin, New York, and Florida. Our Phase IV plan is to begin sales in Mississippi in the first quarter of calendar 2010 and these efforts, of course, are subject to licensing requirements and regulatory approval.

In Washington state we have started an engineering effort called M11L to convert our central system to reach that compliance. This will allow our machines to talk more easily to other, to various ticket-in ticket-out systems which will allow us to expand our footprint in Washington and should also improve the overall earnings of the games. This effort should be completed by the first quarter of calendar 2010.

As I travel around the country I continue to be encouraged by the positive feedback for our products. Over the last few weeks I've just completed a series of customer meetings in Washington, Florida, Alabama, and Connecticut, and our customers seem very receptive to new and innovative products like Sport of Kings and Casino Commander.

Gaming budgets are still somewhat restricted with some, but not all, customers but we're finding that there is still a healthy appetite to keep the casino floors fresh with the right product.

In conclusion, we will continue methodically to establish our Class A footprint through calendar 2009 with momentum growing into 2010.

Anthony M. Sanfilippo

To those on the call, whether you're investor or you're thinking about investing in our company, I hope both from the written release that we did and then the comments you heard from those that are leading our company, you see where we're going. You see where we've been, what we've been able to accomplish, and that we're setting the stage to continue to build value for our shareholders here.

I will tell you again, I couldn't be more proud of the team that you've heard from and those that are in the room that you haven't heard from. We are very much focused on everything we do will ultimately build value for those who invest in our company.

And I must tell you, we have right at 420 total employees that are part of the Multimedia Games team. We have terrific talent within this organization who now has, appropriately from the different folks that you've heard from, been the right direction. And it's good to be part of this company. We're excited about what we've been able to accomplish over the last 12 months and we look forward to what's in front of us.

At this time we would like to open the call up for questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from Todd Eilers - Roth Capital Partners.

Todd Eilers - Roth Capital Partners

I wanted to talk a little bit about the WinStar remodel. You touched on that a little bit in your remarks and I believed you mentioned there were 1,000 of your units located in the sections that are going to be remodeled and you had about 450 units out currently in the quarter. Of those 1,000, are these your Class II units in that facility?

And can you maybe give us a sense of the performance of the Class II games versus the compact games that you've got in that facility?

Patrick J. Ramsey

It's a mix, the 1,000 units, there's a mix of I would say probably 30% to 40% are Class II and the remainder are Class III. And the current section that's down is more heavily weighted towards Class II. I don't think I'll get into the details win per units by sections but the current section that's down is our best performing section. This is some of our strongest product on the WinStar floor.

Anthony M. Sanfilippo

As Pat said in his comments, WinStar is a large facility and as you know, WinStar earlier this year opened its full facility, so while that section, which is the older section, is being remodeled, there are plenty of other games to play. And as Pat stated, we've done a couple of things. We've taken some of the better performing games and relocated them, and we're using this opportunity to upgrade the platforms we have for our games.

It's still too early for us to tell the revenue impact in sort of the foreseeable future for us. We're working closely with the management there to look at what we might be able to do to promotionally help the situation there. But long term, I'm very bullish on WinStar. It is the largest casino that is within driving distance of Dallas/Ft Worth. It is one of the largest casinos in the United States. We have a material footprint there. We have a seven-year agreement with placement there.

We like what they're doing. I'm glad that they're actually going through this remodel. You've got to do it at some point and it's never easy to do a remodel but when they're finished we're going to have a completely new facility.

And the Chickasaw Nation has multiple casinos in Oklahoma and they are a terrific operator. They're an operator that's focused on continuing to drive value for their customers there at WinStar.

So while there's going to be a short-term effect from a revenue standpoint, long term it is a wonderful position for us to be in, to have the footprint that we do at WinStar.

Todd Eilers - Roth Capital Partners

Can you also update us on the hotel expansion at the WinStar? Is this part of the remodel and maybe just where we're at in terms of timing and when we expect that?

Anthony M. Sanfilippo

We expect it to be up really any time now. The hotel expansion is going to have a soft opening within the next couple of weeks. They are almost complete on the hotel opening and we should expect it open by Labor Day.

Todd Eilers - Roth Capital Partners

I don't believe you broke this out in your units, but can you give us the mix between proprietary games for you in your install base in Oklahoma versus third-party games?

Patrick J. Ramsey

Just in Oklahoma?

Todd Eilers - Roth Capital Partners


Anthony M. Sanfilippo

We'll come back to that. He's going to look through his information. Why don't we tell the Class III games that we have. The Class III games, Jenny, if you want to talk about that we placed.

Virginia E. Shanks

We have in Oklahoma 1,121 Class III games that are proprietary.

Todd Eilers - Roth Capital Partners

How about on the SG&A side of things, on the expense side, you have made some pretty healthy improvement there in the quarter. Is there any more room for improvement there?

And I think you mentioned that you had about $1.0 million in impairment charges and reserves there. Should we expect to see any more of that going forward or do you think you're done with those sorts of things?

Adam D. Chibib

We're obviously always looking at the balance sheets and I think saying that we're not going to see any charges going forward probably doesn't make sense. But we continue to evaluate all the assets. So I would expect to see that to continue for the foreseeable future.

As far as more room in SG&A, we're always looking at costs to try to make the company more efficient, so I do see more improvements coming. However, we haven't identified where they're going to come from yet. So as far as modeling goes, we haven't targeted anything specifically but we have some big items that we're looking at, like leases, for example, that could have a material impact going forward. But again, we haven't penciled those yet so we're not sure what the impact on SG&A will be. We will probably have a much better sense for that toward the end of the year.

Anthony M. Sanfilippo

I'll say it again, I say it every time I talk about expenses, there's not a dollar we don't look at, if we're getting the right value for the spend of that dollar.

Todd Eilers - Roth Capital Partners

Ohio just recently passed VLTs at race tracks as part of the lottery. Obviously, you have done well in New York with the central system there. It looks like there might be some other opportunities down the road as states are also looking at this model. Do you see these opportunities, these VLT central system opportunity markets as an opportunity for you to do something like what you're doing in New York, to be the system provider? Or would you view these more as a unit sales opportunity? Just how are you looking at these opportunities going forward?

Anthony M. Sanfilippo

That's a good question because we've got the ability to do both. And Uri, our general counsel, who also wears the hat of being a developer, too, as we all do, we all are out looking at what makes sense for us.

Uri recently attended the Ohio lottery commission hearing, a couple of weeks ago and will continue to attend that. So we are understanding the lay of the land, and I think they are, they being the lottery is still writing the rules at this point, trying to decide how they're going to present gaming in the state.

We would look at both the opportunity to either try and be a system provider or a game provider, and it really comes down to what makes most sense for our company. But we're following parallel paths that allows us to participate in either both or either one.

As you know, in New York there is a wall up that if you're the systems provider you can't be the game provider. And early indications are that's the same in Ohio. So we're paying close attention. We are personally spending time there and trying to understand what the opportunity might be.

What I like about Ohio is that it puts us at the same start line as any other manufacturer. And as all of our investors know, we are at the early stages of placing product in the Class III jurisdictions. And we've been a systems provider so it's a good place to be as new jurisdictions open up that we're at the same start line.

And as Jenny talked to, and has Mick also has talked about from a feedback, we're getting very favorable feedback on the product that we're placing on floors in casinos that we either have Class III products or that we're doing trials.


Your next question comes from Ryan Worst - Brean Murray, Carret & Co.

Ryan Worst - Brean Murray, Carret & Co.

Has Ohio decided whether or not they're going to pursue a New York-type of true video lottery system or is it going to be slot machines there?

Uri L. Clinton

The governor's direction and the legislation that passed specifically call out for a central determinant video lottery type system, a similar system to the New York system.

Ryan Worst - Brean Murray, Carret & Co.

So it is a central determinant system that's legal in Ohio?

Uri L. Clinton

Yes. The regulations still have to be completed by the lottery commission but as far as the governor's directive and the budget legislation, that would be correct.

Ryan Worst - Brean Murray, Carret & Co.

Regarding the revenue recognition for Washington state, how much do you have remaining in deferred revenue and is that going to become more consistent going forward like it was in the fiscal third quarter or was there a little bit more than usual as far as the recognition goes in the quarter?

Adam D. Chibib

There is about $6.0 million or $7.0 million still left on the balance sheet. It will not be like the third quarter, like this quarter was. It will probably amortize in over the next four or five quarters. So this was a bigger quarter with respect to the recognition. It will not be that big going forwards.

Ryan Worst - Brean Murray, Carret & Co.

Can you talk about the changes in Mexico and how you see the conversion to Class III games playing out? Is that going to remain a revenue-share market or is there going to be opportunity to sell Class III games to Mexico?

Anthony M. Sanfilippo

I'm glad you brought up Mexico because that is an evolving situation right now. And I'll remind everybody that the largest customer we have there is a company called Televisa and they have opened 25 casinos to date. Going back the last couple of years, Mexico has been a disappointment from the standpoint of revenue that's been generated from the casinos there.

And I think it surprised a lot of people that there hasn't been better outcomes in Mexico and I think it's part of an evolution that has to take place and then you couple that with what's happened in the economy, it's been a marginal, if you want to call it a jurisdiction, of the country of Mexico, it's been marginal.

We have over 5,000 games that are there. We also run the central determinant system for Televisa in those 25 casinos and in 10 of those casinos we have our player tracking system. So that's sort of the lay of the land. We also have a couple of other casinos where we have product.

It is just starting the discussions on the ability to place Class III product. And I would tell you it's not very likely that a sale model works there. I don't think the performance to date really indicates that a sale model could work.

I'm going to ask Pat to give his perspective. That's a lot of games, if you just think about in Mexico, there's a lot of games placed in Mexico. Televisa has over 7,000 games alone. And when you think about the transition in Mexico, I don't think it's going to be a quick transition. It's not like some of the markets that we've seen open up and people are rushing to buy machines, or there's the capital available to buy machines.

So I would tell you that it's going to be an evolution, we are going to do what we have always said we are going with any situation. We're going to make prudent decisions on what's in the best economic impact for us as a company.

We have capital that's already been deployed there. Pat's done a nice job over the last couple of quarters in really carefully managing any other capital that's gone done there. We have a fairly large staff there. We have 50 people who service Mexico so we already have an infrastructure that's in place to service those games throughout the country.

And it's a bit early to tell how this is going to happen. I would be surprised if we saw a transition that happened quickly. I think it will happen over time but I don't think Mexico is a market that supports a quick transition from Class II to Class III.

We still have some of our best performing games that outperform Class III games in Oklahoma today. And when you think about customers get used to playing certain games, it's not just saying that Class III its better for them, they get used to playing certain games and they continue to play those games.

And the final point I'll make is Latin Bingo is the most popular game there, which is really not a traditional game as we would know in the United States.

Patrick J. Ramsey

I think on your question on the transition from a rev-share to sale, I think it depends by operator and given the position that they're in. I think that certain operators will probably start to try to sale model and purchase some of their units, whereas others will stick to the rev-share model and it also depends on then the suppliers as well.

I mean, I think from our perspective it's a good opportunity to just feel things out and see how that transitions and potentially try the sales model ourselves as well. So we're strictly a rev-share business there and we may begin to look at a sales model there and the potential there.

So I'm just echoing Anthony, it's transitioning that's evolving and it's fairly new and there have been a lot of changes over the last few months. We'll see how it plays out and we'll think about what's most prudent from our perspective. But I think there's an opportunity to diversify our model a little bit.

Ryan Worst - Brean Murray, Carret & Co.

And what about your system there? Is your system capable of monitoring Class III games as well as being central determinant system?

Patrick J. Ramsey

It requires a little bit of development work to get that compatible. But we feel pretty confident that we can there fairly quickly.

Ryan Worst - Brean Murray, Carret & Co.

The $10.0 million of capex in the quarter, was that used to purchase machines from third parties and how much remaining do you have in those type of agreements?

Adam D. Chibib

61% of it was attributable to the purchase of third-party machines. So the majority of it was used for that.

As far as what we have under purchase commitments for other vendors, I think we probably have another $4.0 million to $5.0 million to go over the next couple of quarters.

Ryan Worst - Brean Murray, Carret & Co.

Is your ability to buy back stock changed with the amendment to your credit facility?

Adam D. Chibib

The ability to buy it back, I don't believe was changed. No, we may have lowered the amount to $10.0 million per quarter, without approval beyond that, but the structure of it is in place, it's just a lower cap on the amount.

Ryan Worst - Brean Murray, Carret & Co.

But it's the same leverage ratio off that new adjusted EBITDA?

Adam D. Chibib

That's correct.


Your next question comes from Larry Haverty - Gabelli Multimedia Trust

Larry Haverty - Gabelli Multimedia Trust

I just want to piggyback on the Mexican thing. Right now, from what I can gather there are about 20,000 to 25,000 machines there. Do you think this discussion on Class III is going to result in an increase in the number of machines? As you mentioned, nobody is really doing very well down there that I can find. Or do you see the market being more less static at the 20,000 to 25,000. And I would love your comment on whether you think that's the right number. Because it's really hard figuring out what's happening there.

Patrick J. Ramsey

Yes, it is hard to figure it out.

Larry Haverty - Gabelli Multimedia Trust

And you've got 15 guys there. And me sitting in Boston.

Anthony M. Sanfilippo

We've got 50 guys there and then our man, Pat, spends about half of his life, and thank goodness he's fluent in Spanish, down there.

We can't give you an answer on what's going to happen. Again, I don't think the change to Class III automatically means that there's a big difference in how customers perceive the facilities. That's why I mentioned there's a game called Latin Bingo that's actually more popular. And then I'll remind everybody, there's not traditional table games down there. So the casinos are in a different format than you would find in the United States.

I think Mexico is an evolving market. I think it has a lot to do with the economy that's there. It has to do with the ability to change the casinos, for the operators to change them into being more than one-dimensional. Today most of those casinos are fairly one-dimensional. They have limited food, little to no entertainment, and really there's no hotel base. They're really much more slot parlors than they are casinos as we would know them today.

Here's the good news with us. We've got lots of experience with operating down there and we've developed good relationships and we're in a position today to make decisions that we think are very informed decisions on our future in Mexico.

Larry Haverty - Gabelli Multimedia Trust

And now that we're doing so well in Mexico, let's move to the Mexico of the north and you can tell me what's going to happen at Aquaduct in Belmont, which is obviously another muddle if there ever was one.

Anthony M. Sanfilippo

We're encouraged by that. Everything I read, there's some really terrific operators that are bidding for the license there. I don't want to play a favorite but I like some of the names that I see who are potential license holders there and I think that there's three of them, if not four, that if they get it, I think they're going to make something out of it.

Yonkers is a tremendous success in the state of New York and we believe Aquaduct will do the same and we're happy to provide the system for the 4,500 games they will connect to it.

Larry Haverty - Gabelli Multimedia Trust

What would be your best case on start up in Aquaduct as you see things now?

Anthony M. Sanfilippo

We continue to hear, and I think it's the same that's said publicly, that they are going to make an announcement on the license probably in the fall. Hopefully September. And we're ready to move quickly, as quick as the operator would like to move and the state would like to move. We would move quickly in providing the system for them to connect to.

Larry Haverty - Gabelli Multimedia Trust

So you could have a year maybe from the announcement?

Anthony M. Sanfilippo

I think you can. And some of the operators we're talking about sure have the track record to move that quickly. So I think you could have, if not one year, but by the end of calendar year 2010, you could have Aquaduct up and running.

Larry Haverty - Gabelli Multimedia Trust

And what about Belmont?

Anthony M. Sanfilippo

Well, Belmont has been a little bit more distant. And from what I gather the state is focused on Aquaduct first and I think Belmont is a little bit more in the future. We don't have quite the clarity on Belmont that we've seen on Aquaduct.


There are no further questions in the queue.

Anthony M. Sanfilippo

Thanks to all of you for continuing to stay engaged with us and listening and understanding the situation that we have in evolving our company. And I will tell you one more time, there has not been a time that I've been with Multimedia over the last 12 months that I've been more encouraged or optimistic about what lies in front of us. And we appreciate you taking that ride with us.


This concludes today’s conference call.

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