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Multimedia Games, Inc. (NASDAQ:MGAM)

F3Q10 (Qtr End 06/30/10) Earnings Conference Call

August 5, 2010 9:00 AM ET

Executives

Uri Clinton – General Counsel

Patrick Ramsey – Interim President and CEO

Adam Chibib – CFO

Analysts

Todd Eilers – Roth Capital Partners

Operator

Good day, ladies and gentlemen, and welcome to the Multimedia Games, Inc. third quarter 2010 conference call. At this time, all participants are in listen-only mode. Later, we will conduct the question-and-answer session, and instructions will follow at that time. (Operator Instructions).

As a reminder, this conference is being recorded.

I would like to introduce your host for today’s conference, Mr. Uri Clinton, General Counsel. Sir, you may begin.

Uri Clinton

Thank you, Chuck. Today’s call and webcast contains statements about future events and expectations that are characterized as forward-looking statements within the meaning of applicable securities laws. These statements are based on management's beliefs, assumptions and expectations of our future economic performance, taking into account information currently available to them.

Forward-looking statements involve risk 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 risk and uncertainties.

The company does not undertake and expressly disclaim any obligation to update or alter its forward-looking statements, whether as a result of new information, future events or otherwise except as required by applicable law.

Today's call and webcast may include non-GAAP financial measures within the meaning of the 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 in company’s current report on Form 8-K as filed with the SEC today. It can be found our website, www.multimediagames.com, in the Investor Relations section.

Now, I’ll turn the call over to Patrick Ramsey, our Interim President and CEO.

Patrick Ramsey

Thank you, Uri, and good morning, everyone. Thank you for joining us on this call. With me here in the office are Uri Clinton, General Counsel; Adam Chibib, our Chief Financial Officer; Ginny Shanks, Chief Marketing Officer; Joaquin Aviles, our Head of Technology; and Mick Roemer, our Senior Vice President of Sales.

Before Adam and I walk you through the details on our third quarter results, and as I did in the last call, I want to quickly summarize the paragraph of this morning’s release. The strategic review process is still ongoing and we’ll therefore not be making any comments regarding this process on today’s call.

This morning, we reported third quarter revenues of $29.1 million and a diluted earnings per share of $0.01, inclusive of a benefit totaling $0.09 per share related to the cumulative catch up adjustment for change in method for depreciating certain game licenses.

The third quarter would not have been a profitable one for us had it not been for the benefit, but given where we are in the turnaround of this business. We’re pleased with the results and I say that for a few reasons.

First, once again we had a quarter where we were able to improve our balance sheet and generate significant cash flow. This is obviously critical to building a sustainable business model for which we can grow and it is important to note that we have reduced our net debt position and have had positive cash flow each quarter consistent for over a year now.

Second, we continue to gain momentum on our proprietary product development for both Class II and Class III markets. It is exciting to see some of our own new products performing well in the limited markets where we can deploy them and it will be even more exciting to see them go into the commercial markets where we recently received licenses such as Louisiana and Mississippi.

Third, we continue to strengthen our relationships with our major customers in each of the markets in which operate are partnering with them to provide the right products that appeal for their customers.

And, finally, and I certainly don’t want to downplay this by saving it last, but we’re all pleased with the continued progress we are making on all of our strategic initiatives that we laid out. There had been significant headwinds from almost a complete closure of a major market to challenging macroeconomic in that market condition to some other road blocks, and frankly, we just had to list out of the way to begin taking things in the right direction.

Despite all this, we’re certainly a healthier today than we were two years ago. I can assure you that the management of this company understand that sustaining top line growth and profitability are critical keys to our transition and we’re keenly focused on these metrics as well.

I will now turn the call over to Adam Chibib, our Chief Financial Officer, who will provide a more detailed financial result. Adam?

Adam Chibib: Thank you, Pat. This is our sixth consecutive quarter of increase in cash balances and decreased net debt and our fifth consecutive quarter of positive free cash flow.

Our fiscal third quarter-end cash balances totaled $30.8 million, up $9.6 million or approximately 45% from our fiscal second quarter. The company generated free cash flow, which we define as cash flow from operating activities, less net capital expenditures of approximately $6.6 million for the quarter and $25.3 million for the nine months ended June 30th, 2010.

Total cash generated which is defined as cash flow from operations, less cash used in investing activities was approximately $9.3 million for the quarter and $32.8 million for the nine months ended June 30th, 2010.

Free cash flow and total generated for the nine months ended June 30th, 2010 included a tax fund from the US Treasury totaled $5.4 million, which occurred in our fiscal second quarter.

For our fiscal third quarter, net CapEx spend was approximately $9.7 million, bringing CapEx for the first nine months of the year to $23.9 million, down from $36.3 million in the prior year comparable period.

Also, during the quarter, the company completed the last of its material purchase commitment with third-party manufacturers for gaming unit. The company expects net CapEx to be in the range of $28 million to $31 million for the year.

Our fiscal third quarter and outstanding borrowings under the company's credit facility totaled approximately $59.8 million. Net debt, which is defined as total debt, less cash on hand was approximately $29 million as of June 30th, 2010 down approximately $9.4 million or 25% at March 31st, 2010.

As of June 30th, 2010 our funded net debt to adjusted EBITDA was 0.3 times adjusted EBITDA versus the maximum ratio of 1.5 times adjusted EBITDA. Adjusted EBITDA is used to measure compliance with certain companies in our credit facility and add back interest income, stock-based compensation, and certain noncash charges, not to exceed $10 million to [inaudible] balances.

Revenues for our third fiscal quarter totaled approximately $29.1 million, a decrease of $3.1 million or approximately 10% year-over-year, and down $3.1 million or approximately 10% on a quarterly sequential basis.

Our fiscal third quarter revenues included the sale of a 128 proprietary gaming units, down from 361 units sold in our fiscal second quarter, with revenues totaling $2.1 million, down from $5.3 million in our second fiscal quarter.

As we discussed in our last earnings call, we expect to sale our proprietary gaming units remained uneven. Proprietary gaming unit sales for the nine months ended June 30th, 2010 totaled 621 units and generated approximately $9.4 million in revenue, with year-to-date gross margins of 49%.

SG&A expenses for our fiscal third quarter were approximately $14.7 million, down approximately $600,000 from the prior year, and up approximately $500,000 on a quarterly sequential basis.

EBITDA for the fiscal third quarter were $12.3 million, a decrease of $3.7 million or 23% year-over-year, and down approximately $500,000 or 4% on a quarterly sequential basis.

EBITDA for the three months ended June 30th, 2010 and March 31st, 2010 included noncash charges of approximately $400,000 and $3.2 million respectively. EBITDA for the prior year third fiscal quarter included noncash charges totaling $300,000.

Adjusted EBITDA was approximately $13.7 million for our fiscal third quarter and our trailing 12-month adjusted EBITDA was approximately $63.6 million for the 12 months period ended June 30th, 2010.

Net income for our fiscal third quarter was $360,000 or $0.01 per diluted share, compared to a net loss of $1.2 million or $0.04 per diluted share in the prior year period. Included in net income in our fiscal third quarter was an income tax benefit totaling $2.6 million, related to the cumulative catch up adjustments for exchange in method for depreciating certain game licenses. This method change was for tax purposes only and did not impact our GAAP depreciation.

We are pleased with the progress we have made in respect to our ability for produce consistent cash flow and our continued reduction of our net debt balances.

I’ll now turn the call back over to Pat Ramsey to discuss key market developments. Pat?

Pat Ramsey

Thank you, Adam. I’ll take you through a bit more detail on each of our major markets beginning with our revenues from gaming operations which was down year-over-year at $3.6 million or 13% and sequentially $394,000 or 2%.

In Oklahoma, our revenues were down year-over-year at $1.8 million or 10% and up sequentially $311,000 or 2%. The year-over-year decline was driven by a few factors. First, $1.7 million of the year-over-year decline was a result of solid third-party units in earlier periods that were previously included in the installed base.

Second, at WinStar, our results were down 4% year-over-year or approximately $1 million. As a reminder, we had approximately 300 games out of revenue through late May due to remodeling efforts at that facility and then we have united some conversions in the month of June, so we’re happy to report that the renovations are now complete and all 3,440 games are up in the avenue.

Finally, these declines are offset by the improvements of – and by the collection of a one-time payment of $1 million from the customer in that state and was recorded as revenue during our fiscal third quarter.

In Alabama, our total revenues were down year-over-year at $1 million or 47% and up sequentially $270,000 or 31%. In Mexico, our revenues were down year-over-year approximately $314,000 or 13% and down sequentially $337,000 or 14%. Importantly, in the third quarter, we were able to finalize the contracts with our partner in Mexico that allows us to both remain a major games provider for them and to have an operation in that country that can be profitable and generate cash. As I stated at last call, we believe that the agreement positions us to achieve returns on our investment in that market.

The New York lottery business again grew as our revenues were up year-over-year at $14,000 or 1% and up sequentially $70,000 or 4%.

On the sales side, we sold a 128 new proprietary units mainly in the State of Washington. We have now sold 621 games in the first fiscal year of rolling out of sales strategy supported by our game development plan. In the last call, when asked about our sales pipeline and prospects, I believe I used the word lumpy to describe the projection. As a reminder, we sold 361 units in our second quarter, but these current results support this characterization.

As we gained momentum on our products, increased the size of our proprietary product portfolio and most importantly gain access to new markets through our licensing initiative, we expect a sequential sales performance to become more predictable.

Before we open it up to Q&A, I want to reiterate a point that I made earlier, we are very focused on supplementing our results with top line growth and sustained profitability. Our own game development is absolutely essential for this to happen and we are encouraged by the results so far.

The success of the sales strategy that we began implementing supported a course of the major licensing strategy, which is critical for us, and we feel that our year-to-date performance in its first year showed we’re on the right track. This strategy must be supported a strong performance of our new games to not only support a current revenue shared footprint, but to potentially expand that footprint.

In fact, as Adam mentioned, we no longer have any purchase committed to any third-party provider. We will evaluate our slow performance and our customer demands as we go, and like we have said for almost two years, continued to deploy capital in a prudent manner.

We will now open it up for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). And our first question comes from Todd Eilers of Roth Capital Partners. Sir, your line is open.

Todd Eilers – Roth Capital Partners

Good morning, everyone. Thanks for taking my question.

Patrick Ramsey

Hi Todd.

Todd Eilers – Roth Capital Partners

I wanted to start-off with WinStar, and obviously that the final renovation there completes. Can you maybe comment a little bit on how your gains have performed following the final renovation phase? I believe you said you had 300 units out end of May. Can you also give how many days those units were out of the install base as well?

Patrick Ramsey

Well, the first part of your question. So we finished the renovations in late May. And then, in June, I mentioned that a couple of minutes ago, in June, we performed a lot of conversions on our games there. So really throughout the entire quarter, we didn’t have all of our machines up and running, so it’s hard to give you any solid facts about how the floors – we’re just going through July numbers right now. So the whole quarter was really disruptive to be honest.

Todd Eilers – Roth Capital Partners

Okay, and that’s fair. How about – can you – I wanted to ask about the new agreement in Mexico. Can you maybe give us a sense of the rollout or transition from Class II to Class III games there for you now at this point and maybe a sense for what sort of CapEx requirements that might detail?

Patrick Ramsey

Yes, I’ll give you a sense of the rollout. We’re working with our customer there. We won’t be providing assistance, so we’re working with them – with their systems provider. They’ll be opening their first facility – the plan is to open up our first facility with that systems provider in the month of September. And so we are working hard and getting all of our games to either transition to be Class III games or have our Class II games speal to that new system.

And so, we have a commitment to transition a portion of our games from Class II to Class III. I won’t get into the specifics about cost per unit. But I’ll tell you that we feel good and that’s appropriate commitment from a CapEx perspective again to keep that business profitable and keep generating cash.

Todd Eilers – Roth Capital Partners

And can you – in the press release or in the comments, you cited kind of a major percent of the floor to acquire, I’m assuming that’s down from what the original agreement was. But I don’t know if you can provide a number. But I mean is it something would it be greater or less than 50% or just any color on how – what major means I guess for just to better understand that?

Patrick Ramsey

Yes, roughly, it’s about a third of our current floor print. That’s the commitment we – we made a commitment to transition around a third of our current Class II games to Class III games.

Todd Eilers – Roth Capital Partners

Okay. And then, just in terms of the Mexico market, can you maybe give us a sense for how big that market is right now, both Class II and Class III games in total?

Patrick Ramsey

Well, it constantly changes and it’s changed a lot over the last year or so. I definitely think it is based on between Class II and Class III. I’d have to follow-up with you I think on some more specific numbers, but I don’t want to throughout a number, that misleads you.

Todd Eilers – Roth Capital Partners

Okay, that’s fair. And then, last question, I’m assuming you can’t, but I’ll ask anyway. Anyway to buyback shares, while the Board’s considering strategic alternatives? And then, if there are – if it turns out that there is an acquisition given where you’re at right now would you like to buyback stock or reduce debt with the cash you have and free cash flow.

Patrick Ramsey

I certainly understand the question, Todd. But having said we’re in the middle of the process, and I don’t want to comment on it now.

Todd Eilers – Roth Capital Partners

Okay. All right, thanks guys.

Operator

Thank you. (Operator Instructions). And at this time, I’m showing no further questions. I’d like to turn the call back over to you for any closing remarks.

Patrick Ramsey

Thank you all for joining the call. This concludes. Thanks.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the program. You may now disconnect. Have a great day.

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Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

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