Multimedia Games' CEO Discusses F1Q 2014 Results - Earnings Call Transcript

Jan.30.14 | About: Multimedia Games, (MGAM)

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

F1Q 2014 Earnings Conference Call

January 30, 2014 09:00 a.m. ET

Executives

Todd Mctavish – Senior Vice President, General Counsel, Chief Compliance Officer, and Corporate Secretary

Patrick J. Ramsey – Chief Executive Officer and Director

Adam Chibib – President and Chief Financial Officer

Analysts

Barry Jonas – Wells Fargo Securities

Todd Eilers – Eilers Research

Justin Sebastiano – Brean Capital

Steve Altebrando – Sidoti & Company

David Ehlers – Las Vegas Investment Advisors Inc.

Operator

Good day ladies and gentlemen and welcome to the Multimedia Games Holding Company Inc. First Quarter 2014 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) I would now like to turn the conference over to your host for today, Mr. Todd McTavish, General Counsel. Sir, you may begin.

Todd McTavish

Good morning, today’s call has statements about future events and expectations which are characterized as forward-looking statements within the meaning of 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 consideration information currently available to us.

Forward-looking statements involve risks 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 SEC filings for a description 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 law.

Today’s call 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 direct comparable financial measures calculated and presented in accordance with GAAP can 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 Chief Executive Officer, Patrick Ramsey.

Patrick J. Ramsey

Thank you, Todd and good morning everyone. Thank you for joining us on this call. With me here in Austin are Todd McTavish, our General Counsel; and Adam Chibib, our President and Chief Financial Officer.

This morning we reported a good start to fiscal 2014 with first-quarter revenues coming in at a record high of $59.2 million, which were up over 30% year-over-year and diluted earnings per share of $0.31.

As you will note in our press release and as Adam will discuss in more detail, there are some specific items that we wanted to make sure to call out namely a large sale to one customer in Alabama, and some abnormally high health-care costs that affected our results.

When it comes to what we can control, I’m encouraged by these first-quarter results and I believe that once again reflects strength in all facets of our business and demonstrates that our strategies are working.

Before I hand it over to Adam to discuss the more detailed financial results, I will attempt to pre-empt some of the questions by giving you some more detail on two topics. First, how was our rollout in Nevada going, and second, now that our recurring revenue base is getting more diversified geographically, what kind of play trends are we seeing nationwide.

As far as Nevada is concerned, I’m very pleased with the early results. Our product performance in other markets, our very talented sales and field service team, and our brand recognition among the slot operators have helped us get a footprint into approximately 60 Nevada casinos by the end of our first quarter, which is a very impressive start.

On average these footprints are small since we are still improving our product, establishing the relationships, and building our library, but it is very good to see us penetrate the largest domestic market so quickly. Both TournEvent and High Rise games are now live in the state, and we are encouraged by early results. In fact, when I ranked the states by growth in new revenue units for the first quarter Nevada edged out some pretty strong numbers than both Alabama and California to be our top state for the quarter.

So it is a good start, but we also have a lot of work to do in order to grow these footprints and build new relationships. Second, with well over 12,500 units on recurring revenue in addition to our New York lottery business, we’re not as immune to macroeconomic forces as we once were. Having said that I will tell you that December was a pretty disappointing month regarding gaming operations.

To put it in perspective, through the first two months of our quarter, our gaming operations revenue was up 17% year-over-year. In December, our gaming operations revenue was up 3%. This 14 point drop-off was quite significant and unexpected, and given the weather so far this January, we are cautious as we look ahead.

My information on January is only anecdotal at this point, but we are hopeful that the weather breaks a bit and these next few months can rebound.

With that brief high-level summary, I will turn it over to Adam for a more detailed financial review. Adam?

Adam Chibib

Thank you Pat. The first quarter was an exciting quarter for the company as we successfully carried the momentum built in Q4 into the new fiscal year. However, our financial results were tempered somewhat by the widely reported soft regional gaming trends and the impact of bad weather in some of our key markets in December, which is also carrying through to January as well.

Revenues for our fiscal first quarter totaled $59.2 million, an increase of $14.9 million or approximately 34% year-over-year. The year-over-year revenue growth reflects an increase in unit sales, which totaled 42% of total revenues, and an increase in our gaming operations business.

Our fiscal first quarter revenues include the sale of 1,375 gaming units with revenues totaling $23.9 million versus 644 units sold and $12.7 million in revenues in the prior year period. TournEvent unit sales accounted for 30% of total units sold during the quarter, with ASPs across our entire product line averaging just over $17,300 per unit. We sold 143 units in Nevada and 68 units in Pennsylvania.

During the quarter we had one large order from a tribal customer in Alabama for 499 units, of which 220 units 221 units came out of our recurring revenue footprint. As a result of this large Q1 order, we expect unit sales to decline in our fiscal second-quarter to approximately 800 to 900 sold units.

Gaming operations revenues for our fiscal first quarter totaled $33.6 million, an increase of $3.6 million or approximately 12% year-over-year. The increase in year-over-year gaming operations revenues is attributable to higher revenues from continued growth in our installed participation base across all major markets, partially offset by a 13% decline

in Oklahoma revenues.

While our domestic yields improved year-over-year in both October and November, we experienced a steep year-over-year decline in December yields, which brought our daily win per unit average down for the quarter. Daily win per unit for the full quarter was $25.64 per day versus $25.87 in the prior year quarter.

Turning to the cost side of the business, SG&A expenses increased $2.4 million or approximately 21% year-over-year, driven by higher salary and higher health care costs related to an abnormal number of significant or large insurance claims in our fiscal first quarter.

Research and development expenses were $4.3 million, an increase of $215,000 or just over 5% from the prior year. The year-over-year increase is attributable to highest salary and benefit expenses as we continue to invest in retaining and attracting engineering personnel.

As discussed in our previous earnings call, depreciation and amortization increased to $2.5 million, or 31% year-over-year and will continue to grow throughout the fiscal year. Operating margins declined slightly from 25.6% to 25.1% of revenues. The decline in operating margins is attributable to the health insurance claims in excess of our normal run rate and a higher mix of game sale revenues to total revenues.

Fully diluted earnings per share for the fiscal first quarter was $0.31 versus $0.24 in the prior year period. EBITDA for our first fiscal quarter was $27.9 million, an increase of $6.5 million or approximately 31% from the prior year period. Our balance sheet remains one of the strongest in the industry, even as we invest back into the company through the expansion of our proprietary footprint, continued refreshes of our existing footprint, and repurchases of our common stock.

Our fiscal first quarter end cash balances totaled $112 million, with net cash of $83.8 million. During the quarter we purchased $2.2 million of the company’s stock or approximately 76,000 shares at an average price of $29.30 per share. We maintain our original guidance issued in November, and will update accordingly as our visibility into the regional gaming markets improve.

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 the call back to Pat for some additional commentary before we get to Q&A. Pat?

Patrick J. Ramsey

Thanks Adam. We hope that the more detailed press release combined with our comments on this call give you a clear picture of the strong start we have had to the fiscal year and why we continue to feel good about our business.

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

Question-and-Answer Session

Operator

And our first question comes from the line of Barry Jonas of Wells Fargo. Your line is open. Please go ahead.

Barry Jonas – Wells Fargo Securities

Hi guys. Good morning.

Patrick J. Ramsey

Hi Barry.

Barry Jonas – Wells Fargo Securities

Can you quantify the impact from the bad weather in Oklahoma this quarter?

Patrick J. Ramsey

Well, I mean – I could tell you -- I will answer it one way that it is hard to characterize what is bad weather and what relates to something else, but here is what I can tell you, if our yields were flat, remember they were up in October, up in November, if they were just flat in December year-over-year, it would have -- revenue would have been about $1 million higher, almost exactly.

And the other way to look at it was the stat I had given, which was, you know, October, November combined were up 7 -- and this is in Oklahoma, this is our gaming ops overall. But gaming ops was up 17% heading into December, and then in December it was up 3%. So it was a 14% drop-off. So that is one way if you carve out our Oklahoma revenue, maybe to think about it.

Barry Jonas – Wells Fargo Securities

Got you. Okay, and look I think last quarter you talked about goals for the year of increasing your premium units outside of Oklahoma by 200, you did 181 this quarter, first off, was 181 on the traditional fixed fee arrangement, and how many do you think you might be able to do this year now?

Patrick J. Ramsey

Well, I think that the main question is what we are going to call a premium unit, and I think the majority of the ones or quite a bit of the ones we placed in the first quarter were on a rev-sharing not on a fixed fee. So it is too early to tell what the win per unit on those units are going to be, but if you just use the definition of High Rise Games placed outside of Oklahoma, I think it will grow faster than the 200 we talked about last time. If you want to talk about which ones are at $55 a day, my guess is it is going to be less than that.

So I think what you might see is that number being higher than 200, with the yields being lower because a lot of those are going to be on 80:20 in markets that have lower win per unit and the [Reno] is one example of that.

Barry Jonas – Wells Fargo Securities

Got you. That is helpful. So, I mean, relative to your guidance, it seems like the maintaining of guidance is specific to just concerns over GGR trends is that a fair characterization, it seems like unit-wise you are at least reaching some of your goals as of last quarter?

Patrick J. Ramsey

Yeah, and I will say that GGR is two things. One is softness in regional markets and the second one is weather. And unfortunately we are going to have weather in the month of December and we had weather in the month of January, so it is spanning two quarters, and then obviously none of us know what is going to happen to regional gaming throughout the rest of the year.

Barry Jonas – Wells Fargo Securities

Got you. Just one more from me, [Indiscernible] gross margins were up lower end of your guidance last quarter, ASPs were at the high end. Was that just mix related and how do you see margins within that segment preceding the rest of the year?

Patrick J. Ramsey

You know, I think margins are probably going to be in this territory at the lower end of the range. From a cost per unit perspective, we are pretty much in line with what we had thought, maybe a little bit higher. We are seeing some pressure on our [Indiscernible] licensing cost that are going up. We had a pretty good price and it is now creeping up on us and that is impacting that cost side of things. So, I think, you know, 50 to 55, but probably I would bet on the lower end of that range for gross margins on equipment sales.

Barry Jonas – Wells Fargo Securities

Got you. All right. Thanks so much guys.

Patrick J. Ramsey

Thank you.

Operator

Thank you. Our next question comes from the line of Todd Eilers of Eilers Research. Your line is open. Please go ahead.

Todd Eilers – Eilers Research

Hi guys. Thanks for taking my questions. I want to ask on the equipment sales, units shipped that number you guys gave, can you say how many of those were new and expansionary units, I know you had a portion of the Alabama sale were considered new and expansionary, but can you maybe give an all-in number for that, I believe you guys had an opening in California and then also maybe some Ohio units, so just kind of want to get a feel for what the total number was?

Patrick J. Ramsey

Okay. So I think you are not -- you are asking what of our units shipped relates to new property, was that the question?

Todd Eilers – Eilers Research

New properties and/or major expansion, so basically anything that wasn’t a replacement type sale I guess.

Patrick J. Ramsey

The [grand] property opened up, or we shipped units for [grand] and that was about 135 total units. And I am --

Adam Chibib

And then the only other one I could think of is the one we called out regarding Alabama.

Patrick J. Ramsey

That was expansion as well -- a portion of those units were expansion.

Adam Chibib

Yes, but that --

Todd Eilers – Eilers Research

And then of the [grand] units that 135, were those all sold, or were a portion of those leased?

Patrick J. Ramsey

98 are on rev-share and the other remaining were sold.

Todd Eilers – Eilers Research

Okay. And then with respect to the lease of sale portion of the Alabama units, so you had one of those transactions last quarter and another one this quarter, and I suspect you probably have some of these, you know, from time to time. But it does seem like you have had two large ones here two quarters in a row, is this -- should we kind of expect this going forward to see some large transactions like this each quarter or is this kind of viewed as non-normal for you, and we shouldn’t expect that and then the second part of the question would be can you quantify the impact that lease to sale transaction had on your ASPs and gross margins, you know, just maybe what your ASPs and gross margins would have been if you back that out?

Patrick J. Ramsey

The first question is that we prefer not to have things sold out of our recurring revenue footprint. Obviously we like recurring revenue. So we don’t think that they are something that we can plan for or predict. You are right, we did have two transactions two quarters in a row, but that is certainly not the norm. we don’t want it to be the norm. So I would not model it that way or think about it that way.

We have small ones probably each quarter, but nothing to the magnitude that we have had in the last two quarters. So I would say it is probably infrequent than something we can’t model or predict and therefore you probably can’t either. The second part of your question was what did that do to ASPs, and on this one in particular what happened was that we took the old units off the floor and sold all new units.

So everything was sold as a new unit, nothing was sold at a discount as a used unit. So it really didn’t impact ASPs or gross margins in any kind of weird fashion because the old stuff just came back to the warehouse, we refurb it and ship it back out, and everything was brand new that was sold. So I think the average price for that transaction was about $16,600, but it was not because it was used equipment. That was just the agreed upon price.

Todd Eilers – Eilers Research

Okay, great. Thank you and then just one last question, with respect to the new premium platform, the MPX platform, can you maybe talk a little bit about how you guys are planning to position that platform as it relates to your existing high-rise platform. I’m assuming you want to distinguish between the two as to minimize, you know, any sort of cannibalization, or anything like that. You know, can you maybe talk a little bit about your strategy there?

Patrick J. Ramsey

Yeah. Well, a little bit because it is still ways off. You know, like we said we are still on target to release in the second half of our fiscal year, and to be honest we are still working out the detailed marketing plan. And part of it also relies on performance price that will -- so we need to see some test. We need to get out in the field before we completely can summarize the marketing plan, which also may change by geography as well. So it is a bit more complex and it is ways off. I don’t want to get into too much detail.

I will tell you and you hit the nose on the head where our main goal is obviously not to cannibalize the high rise footprint for it to be additive.

Todd Eilers – Eilers Research

Okay, great. thanks guys.

Patrick J. Ramsey

Thank you.

Operator

Thank you. Our next question comes from the line of Justin Sebastiano of Brean Capital. Your line is open. Please go ahead.

Justin Sebastiano – Brean Capital

Thanks guys. Good morning. So as far as margins in game ops, you guys still feel good in that high 80s area, all in with the New York lottery in there as well?

Patrick J. Ramsey

I would say yes with the exception of knowing the impact of weather and regional. I think if weather was factored out I think we would be comfortable with that range.

Justin Sebastiano – Brean Capital

Okay. And as far as any follow-through from G2E sales, what -- you know, we have got you know four months or so since then, I mean, how has it progressed since the last time you guys were talking, as far as any orders coming through, any more sort of buzz or any feedback you have gotten from operators based on what you showed at the convention?

Adam Chibib

Well, yeah, I think you see it in the numbers right, where our equipment sales continues to be strong. and I remember that show was in early October, so a lot of that stuff is actually pretty new, and we’re just starting to release it now. But I think the best answer to that question is just what you see in our growth.

Justin Sebastiano – Brean Capital

Okay.

Patrick J. Ramsey

Most of those products that we showed probably are not out on -- in revenue just yet, but should be happening over the next couple of months.

Justin Sebastiano – Brean Capital

Okay. And in -- you still generate a good amount of free cash flow of a big large cash balance, is use of funds right now still buybacks, I mean, I know, I guess the [Indiscernible] answer is you are looking at anything that increases shareholder return, but what specifically, is it just share buybacks, or what are you thinking about now?

Patrick J. Ramsey

I think the strategy hasn’t changed, which is, you know, put as much as we can back into the business but still try to grow earnings, invest in the footprint through expansion capex or through maintenance capex to improve yields and then obviously repurchase shares in the open market to keep your share count flat. Those are still the priorities. As you guys know, our cash will probably still grow despite all of that and you know, we are continually evaluating things to do with the cash. But right now that is still the plan that we just laid out.

Justin Sebastiano – Brean Capital

Okay. Thanks guys.

Patrick J. Ramsey

All right. Thank you.

Operator

Thank you. Our next question comes from the line of Steve Altebrando from Sidoti. Your line is open. Please go ahead.

Steve Altebrando – Sidoti & Company

Good morning. How many High Rise Games are currently outstanding and what prompted the change in pricing that you mentioned earlier on the call?

Patrick J. Ramsey

So, we have I believe now 1059 High Rise Games units outside of Oklahoma, and that was up from 878 for last quarter. and the pricing change is really to allow us to place that product in markets that can’t support a flat fee of $55 per day. And an example, some casinos have total win on a machine of $100 a day, $110 a day, and it is very difficult for the operator to give more than half of that to the manufacturer. And so, we hope that that product will do better and earn higher than the floor average obviously because of the type of product today isn’t limiting supply there, but it is able to take advantage of those types of situations, where a flat fixed fee just wouldn’t work.

Steve Altebrando – Sidoti & Company

Okay.

Patrick J. Ramsey

So, it is not across the board. It is just in specific markets that we are willing to do that.

Steve Altebrando – Sidoti & Company

Okay that is helpful, and then, was the Alabama sale contemplated when you initiated guidance?

Adam Chibib

A portion of that probably 200 of the units were -- 250 units were contemplated in the original unit guidance. That is why we obviously give a range. it came in a little bit higher than that. So I suspect it will be at the higher end of that unit sale range by the end of the year.

Steve Altebrando – Sidoti & Company

Okay, and then just last in terms of the strong balance sheet, have you been considering offering more financing to facilitate sales knowing that a couple of your competitors obviously are a bit more leveraged than you are currently?

Adam Chibib

Yes, we certainly are getting requests for two-year financing that we are kind of working our way through. We probably will entertain doing things like that over time. So, yes, we will use our balance sheet if it helps our customers and helps us at the same time.

Steve Altebrando – Sidoti & Company

Okay. Thank you.

Adam Chibib

Thank you.

Operator

Thank you. (Operator instructions) Our next question comes from the line of David Ehlers of Las Vegas Investment. Your line is open. Please go ahead.

David Ehlers – Las Vegas Investment Advisors Inc.

Good morning Pat and Adam. Pretty nice quarter.

Patrick J. Ramsey

Good morning David.

David Ehlers – Las Vegas Investment Advisors Inc.

All considered let me ask you something about your new production facility is cited in your webcast, giving a Las Vegas address on Martin King Luther Boulevard, can you give us some ideas, now the space that you have there in square footage, and also when do you contemplate commencing assembly work there, and is this decision because you think that there are going to be further material gains in Nevada?

Adam Chibib

Well, I will take that question. So, we started production in that facility in September of last year, September ’13. We have got only about 10,000 square feet. They can do probably between 400 and 600 units a month, and the primary reason for that facility was really to save on shipping costs. So what was -- it will probably save us or at least on a cash basis, cash-on-cash return basis, the facility will pay for itself probably in 16 months on saved shipping cost, and it will -- you know, the goal is for that facility to serve the western part of the US.

So, it wasn’t really based on increased -- obviously we have increased demand, but we have the capacity in Austin, and now we have capacity in Vegas. But it really was logistics, it was the main driver behind opening up that facility, and support for our customers in that market.

David Ehlers – Las Vegas Investment Advisors Inc.

That is very good. Thank you very much.

Patrick J. Ramsey

And Dave, this is Pat. I will add one more point, I think you said Martin Luther King, if I recall it is on Dean Martin.

David Ehlers – Las Vegas Investment Advisors Inc.

Oh, Dean Martin, you are right. That is right.

Patrick J. Ramsey

Thanks Dave.

David Ehlers – Las Vegas Investment Advisors Inc.

You bet.

Operator

Thank you. Our next question is a follow up from the line of Justin Sebastiano of Brean Capital. Your line is open. Please go ahead.

Justin Sebastiano – Brean Capital

Yes, thanks. So, the 1059 units of High Rise, how many of those are rev-share?

Patrick J. Ramsey

Of the whole 1059, my guess is probably, I’m guessing, it is around 20% are probably on rev-share.

Justin Sebastiano – Brean Capital

Okay. And…

Patrick J. Ramsey

And Martin, I am sorry, Washington, a little bit in California and a little bit in Nevada.

Justin Sebastiano – Brean Capital

Okay. Yes, that was my next question. All right. Thanks guys.

Patrick J. Ramsey

Thank you, Justin.

Operator

Thank you. And with no further questions in queue, I would like to turn the conference back over to Mr. Pat Ramsey for any closing remarks.

Patrick J. Ramsey

All right. Thank you operator and thanks for those who joined us on the call. This concludes our first quarter earnings update. Thank you.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the program and you may all disconnect. Have a great rest of your day.

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