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Multimedia Games, Inc. (NASDAQ:MGAM)

F4Q2010 Earnings Conference Call

November 11, 2010 9:00 a.m. ET

Executives

Uri Clinton – General Counsel

Patrick Ramsey – CEO and President

Adam Chibib – Chief Financial Officer

Joaquin Aviles – Vice President of Technology

Mickey Roemer – Senior Vice President of Sales

Analysts

Todd Eilers – Roth Capital Partners

Michael Spector – Castle Creek Capital

Wilkin Lee – Starwood Capital

Ryan Worst – Brean Murray, Carret & Company

Operator

Good day, ladies and gentlemen. Welcome to the Multimedia Games, Inc. fourth quarter 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 follow at that time. (Operator Instructions).

As a reminder, this conference call is being recorded.

I would now like to turn the conference over to Uri Clinton, General Counsel. You may begin.

Uri Clinton

Thank you, LaToya. 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 of our recent SEC filings for a description of certain of these risk and uncertainties.

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

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

Financial and operating measures provided during today’s call and webcast may be approximated. Please refer to the company’s financial statement as provided in the press release for definitive numbers.

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

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, Chief Financial Officer; Joaquin Aviles, Vice President of Technology; and Mickey Roemer, our Senior Vice President of Sales.

This morning, we reported fourth quarter revenues of $30.5 million and diluted earnings per share of $0.43, inclusive of an income tax benefit totaling $0.50 per share, which Adam will review in more detail.

While the fourth quarter would not have been a profitable one for us had it not been for this benefit, we are all very pleased with the results and we continue to be more optimistic that our business is moving in the right direction. I’ll provide a few highlights of this quarter and then would also like to remind you of a few of our accomplishments this year.

First and foremost, in September our Board of Directors concluded our strategic review process that began in March and I can assure you that our entire team is very focused and in fact excited to continue to execute our plan. We came out of this process with plans to reduce our debt and as a result, we have a significantly improved financial foundation and are now looking closely at additional uses for our cash.

On the product side we (inaudible) the field trials in two major commercial jurisdictions, Mississippi and Louisiana. This is a significant event for our company and initial results from product performance are encouraging. Both our continued licensing initiative and focus on product development leave us very encouraged about our initiatives to expand into new markets.

Financially, again we had a quarter where we were able to improve our balance sheet and generate significant cash flow. We completely paid down our revolving line of credit, which was $15 million as of June 30, 2010, which left our debt at approximately $44 million at the end of our fiscal year with over $21 million in cash. We sold over 300 proprietary MGM units this past quarter, which was our second best quarter of the fiscal year, and just as importantly, we showed year-over-year growth in our footprint of over 5,000 gains with our major customer, the Chickasaw Nation.

Finally, after many years the Aqueduct project has significantly kicked off. We anticipate this will be a boost to our New York Lottery central determinate systems revenues once it is fully operational.

For the year, we succeeded in making this a stronger company despite the closure of the Alabama Charity Bingo market. We sold over 900 units in our first year of unit sales at a time when replacement cycles and capital spend out lows. We began rebuilding numerous key relationships in Oklahoma, mainly through the development and/or placement of our own product and we entered or reentered space such as California and Kansas.

We turned a challenging Mexico business into one that is profitable and generating cash. The key to much of this success is centered around a major strategic shift that began over two years ago, an intense and disciplined focus on our own proprietary games and technologies. We are proud of the products that we took to market in 2010 and even more excited about those in the pipeline.

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

Adam Chibib

Thank you, Pat. The focus of 2010 was to create great products and to ensure we had the financial foundation to further execute our strategic plan. As Pat discussed, the early response to our proprietary products has been positive selling 930 units in our first year.

In fiscal 2010 we generated cash, strengthened our balance sheet and improved our capital structure. The company’s fiscal 2010 highlights include increased year-over-year cash balances by $9.3 million or 75%, reduced year-over-year total liabilities by $36.7 million or 34%, reduced year-over-year total indebtedness by $34.4 million or 41%, reduced year-over-year net debt by $39.7 million or 63%, amended our credit agreement giving us the flexibility to access capital as needed and reduced our funded net debt to adjusted EBITDA to it's lowest level all year of 0.48 times versus the maximum of 1.5 times adjusted EBITDA.

Our fiscal fourth quarter represented our seventh consecutive quarter of total cash generation, which is defined as cash flow from operations, less cash flow from investing activities and our sixth consecutive quarter of free cash flow which is defined as cash from operations less net capital expenditures.

For the year, the company’s total cash generation was $38.3 million with free cash flow of $31.7 million. The company ended the year with $21.8 million in cash and just over $44 million in debt with net debt of just under $23 million. The company reported GAAP net income for the fiscal fourth quarter of just under $12 million or $0.43 per diluted share and GAAP net income for the full year of $2.6 million or $0.09 per diluted share. GAAP net income for the quarter and for the full year was driven by the recognition of a net income tax benefit totaling $14.1 and $14.4 million respectively.

The net income tax benefit recorded in the fiscal fourth quarter and for the year related to the cumulative catch up adjustment for exchange in method for depreciating certain games licenses and other intangible assets. These method changes coupled with the new federal tax law that allowed an elective five-year carry back of our net operating losses generated the income tax benefit. Correspondingly the company increased it's federal and state income tax receivables by $13.7 million bringing our year end receivables up to $19.7 million. We expect to collect the federal and state income tax receivables in various stages over the next 24 months.

Revenues for our fiscal fourth quarter were $30.5 million, down $2.1 million or 7% year-over-year, and up $1.4 million or 5% on a quarterly sequential basis. During the fiscal fourth quarter the company sold 309 proprietary games bringing our total for the year up to 930 units. Revenues generated from unit sales for the fiscal fourth quarter and for the year were $4.9 million and $14.4 million respectively.

SG&A expenses for our fiscal fourth quarter were $15 million, down $3 million or 17% year-over-year and up $372,000 or 3% on a quarterly sequential basis. For the year, SG&A expenses totaled $58.6 million, down $5.2 million or 8% year-over-year. Write-offs, reserves, impairment and settlement charges for our fiscal fourth quarter totaled $1.1 million, down $8.4 million or 88% year-over-year and up $733,000 on a quarterly sequential basis. For the year, write-off's, reserves, impairments and settlement charges totaled $5 million, down $14.8 million or 75% year-over-year.

EBITDA for our fiscal fourth quarter totaled $11.6 million, up $9.7 million year-over-year and down $667,000 or 6% on a quarterly sequential basis. EBITDA on our prior year fiscal fourth quarter, included $9.5 million in charges related to write-offs in [indiscernible]. Adjusted EBITDA, which is used solely for measuring compliance with certain covenants in our credit facility, is $68.3 million for the fiscal year. Adjusted EBITDA adds interest income, stock-based compensation and certain non-cash charges not to exceed $12 million incurred, I'm sorry $10 million incurred, in the previous 12-month period back to EBITDA.

Property and equipment net was $48.6 million as of September 30, 2010, down $20.5 million or 30% year-over-year. The decrease in property and equipment net is attributable to lower capital expenditures, depreciation expense and the transfer of certain assets into inventory.

Net capital expenditures for the year totaled $27.5 million, down $9.6 million or 26%. The decrease in capital expenditures is aligned with our strategy to reduce our reliance on third-party units and to focus on the development, deployment and sale of proprietary units.

We are pleased with the progress we have made with respect to our products and our balance sheet. We believe we have the financial foundation to execute our strategic plan.

I’ll now turn the call back over to Pat Ramsey for updates on our key markets and for closing remarks. Pat?

Patrick Ramsey

Thank you, Adam. I will 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 $1.7 million or 7% and down sequentially $636,000 or 3%.

In Oklahoma, our revenues were down slightly year-over-year, approximately $148,000 or 1%, and down sequentially $708,000 or 4%. The year-over-year decline was driven primarily by the sale of third-party units in earlier periods that were previously included in the installed base. These sales drove down our year-over-year revenues from operations by approximately $1.2 million.

I’m very pleased to report for the first time this fiscal year that revenues at WinStar, our largest property were up year-over-year about 2% . We are very pleased with these results given that the construction at the facility and the resulting shift of play had driven year-over-year declines in the range of 7% to 12% for the first three quarters.

In Alabama, the final charity bingo operation where our units were in operation was closed in early August, which contributed to our year-over-year decline of $1.2 million or 61% and a sequential decline of $351,000 or 31%. In Mexico, our revenues were down year-over-year approximately $440,000 or 19%, and down sequentially $160,000 or 8%.

The New York lottery business again grew as our revenues were up year-over-year $52,000 or 2% and up sequentially $127,000 or 6%.

On the sales side in our fourth quarter, we sold 309 proprietary units, again mainly in the State of Washington. For the full fiscal year we sold 930 games in the first year rolling out a sales strategy supported by our game development plan.

Before we open it up to Q&A, I want to express how excited and optimistic I am about the company in my new role. I’m supported by a committed and talented group of senior executives and we are backed up by approximately 400 employees in Austin, Oklahoma, Mexico, Washington, New York and elsewhere. We truly believe that Multimedia Games will continue on it’s path towards growth and profitability. In 2011, we’ll be looking for growth in the sales of our own proprietary game, both in markets where we have historically been and those where we are entering for the first time.

We look to continue to provide our own proprietary products in the major footprints that we have in Oklahoma, which strengthens our position as a strategic partner with our customer.

In addition, we believe there is a significant, untapped opportunity for the company at certain Oklahoma properties for our growing portfolio of Class II and Class III products. Our ability to become a growth company with a sustainable business hinges around an important factor, the ability to create games and technologies that customers enjoy. We are working hard daily to expand our product lineup, improve the quality of our offerings and continue to deliver an exciting and entertaining experience that players will embrace in greater numbers. For those of you who plan to travel to G3 next week we invite you to come and visit us on the show floor. We have an exciting range of new products that are the direct result of our new approach to product development and we hope you will come and share in the excitement with us.

We'll now open up to questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question is from Todd Eilers of Roth Capital Partners. Your line is open.

Todd Eilers – Roth Capital Partners

Good morning, everyone.

Patrick Ramsey

Hi, Todd.

Todd Eilers - Roth Capital Partners

Just wanted to start off with, on the gaming option install base. Can you give us a sense for how many removals came out of Alabama in the quarter?

Patrick Ramsey

Yeah. It's a, on a quarter-end basis, it's about 2,400. Is that right Shannon?

Unidentified Customer Representative

Just for the quarter?

Patrick Ramsey

For the quarter, it's approximately 2,400 units decline.

Todd Eilers - Roth Capital Partners

For you guys out of Alabama?

Unidentified Customer Representative

475

Patrick Ramsey

475 for the quarter.

Todd Eilers - Roth Capital Partners

Okay. All right. So it looks like the majority of the decline and the domestic install base sequentially was primarily due to Alabama. Okay, that's helpful and then for the rest of the install base, can you maybe just break it down by how many of those units are in Oklahoma versus other markets, domestically?

Patrick Ramsey

Yes. I'm going to have to follow-up with you on that, on the details specifically. Domestic, I can tell you in Mexico, quarter-to-quarter we dropped over 200 units due to the closing of one facility.

Todd Eilers - Roth Capital Partners

Okay and then wanted just to ask maybe some balance sheet questions and cash flow questions or use of cash flow? It looks like in the press release you guys guided for a minimum of $20 million free cash flow and no debt reduction for fiscal 2011? So, if I look at that $20 million then free cash and then if I look on your balance sheet it looks like you've got short-term notes receivables of about $14 million, so if I added those together that's about $34 million in gross cash flow? Coming in I guess expected for 2011 after inventory and CapEx investments, can you, with no plans to reduce debt, can you give us a sense for what your plans are for that $34 million and can we assume maybe a stock buyback given where shares are right now?

Patrick Ramsey

I think I’d be probably premature to assume a stock buyback. Obviously we're considering all capital and other investments to continue to grow the company and that was certainly one of the alternatives the board and company is considering but it's nothing that we've definitively concluded on just yet.

Todd Eilers - Roth Capital Partners

Okay. All right and then I noticed that it looked like you guys in the quarter had advanced around $4 million for a development agreement? Can you maybe tell us what that project was and then can you give us a sense for any development agreement advances or plans for 2011?

Patrick Ramsey

Yeah. Obviously sometimes those things are difficult to plan for. We don't have any specific plans for development agreements in 2011 but again those things are hard to predict and hard to forecast and if we see an opportunity that makes business sense obviously we're going to jump on it but nothings on the horizon as of yet. The one we did in the fourth quarter, I believe was for the Cheyenne and Arapaho tribe for placing agreements there. That will probably go online towards the latter or the beginning of this first fiscal quarter and throughout the rest of the year so it won't come all online at once but will circle in throughout the year.

Todd Eilers - Roth Capital Partners

And how many total games was that?

Patrick Ramsey

I believe that was 400 total units.

Todd Eilers - Roth Capital Partners

Okay and then on the games side, obviously you've got, I think you mentioned five trials ongoing in Mississippi and Louisiana? At this point can you maybe give us a sense for what the average order size is after you guys complete the trial to kind of give us a sense for maybe what that might mean in terms of game sales I guess, this year? And then also what are the next commercial markets past Mississippi and Louisiana that you guys are focused on that we should look for licensing approvals this coming year?

Patrick Ramsey

Well, I’ll tell you, I'll start by saying the average order size varies pretty, it can vary by property. I'll have, Mickey's in the room with me here and then I'll have Uri talk to you a little bit about our upcoming license initiatives. Their normal trials are about eight units. We've had a mix of about four library titles and another mix of four Mega Meltdown or Sport of Kings stockcar speedway. There is an exception with the Plochata tribe, which is closer to 20, which isn't a part of the Louisiana trial, so we have four installations in Louisiana and one in Mississippi. We expect, so far we've been fortunate in the trials that we've had, both have turned to revenue and in the future we would expect four to 10, 12 units as probably an average order size but it's very difficult.

Adam Chibib

Hey Todd, this is Adam. Usually the initial order is four to 12 units and then the follow on orders, if any are usually larger and we've seen that pretty consistently in Washington.

Uri Clinton

With regard to our current licensing pipeline, as stated in our press release in the last 12 months we've got 37 new licenses and currently have 9 licenses that have been submitted to gaming regulators for review and processing and included in those licenses for submission, we've got licenses submitted to Iowa and Nevada and then we have several other licenses that we're currently processing in turn to be submitted to continue that pipeline and the initiative of new licenses.

Todd Eilers - Roth Capital Partners

Okay. That's helpful and then I guess the last question. Uri, maybe you could talk a little bit about the current environment in Alabama now that we're past the elections there? Any sense for the potential for that market to open back up and just kind of want to get your thoughts there?

Uri Clinton

It's, as anything with regard to the Alabama market it's hard to tell until it actually happens. We've had some indication from the governor elect that he intends to disband the governor’s task force, which is good news but what it actually means, we have to wait and see.

Todd Eilers - Roth Capital Partners

Okay. All right. Thanks, guys.

Patrick Ramsey

Thanks, Todd.

Operator

Thank you. Our next question is from Michael Spector of Castle Creek. Your line is open.

Michael Spector - Castle Creek

Hi, I had a couple of follow up questions to the previous caller. Just initially, what was the cost for this strategic review? I assume that's in SG&A?

Patrick Ramsey

It is in SG&A. It's included in SG&A, the total cost was less than $1 million.

Michael Spector - Castle Creek Capital

Okay and in regards to the current portion, the note receivable, is there any reason why it's down from last year?

Patrick Ramsey

Well, they paid off several charges of some of these, we had several notes that comprised that balance. Some of the charges were paid off so we expect the cash flow of ‘11 to be down from ’10 because of that.

Michael Spector - Castle Creek

Okay and then just speaking about, when you say that there's a minimum free cash flow of $20 million in 2011, is that inclusive of some sort of, some amount of the federal, income state income tax receivable being paid off?

Patrick Ramsey

Yes. To be clear obviously we are under, been currently under a routine IRS audit so we don't know the timing of those payments, so unfortunately that $20 million is comprised of some of those federal income tax monies coming back. It's very hard to predict when those balances will turn over to cash.

Michael Spector - Castle Creek

Got you and when are you expecting New York to actually be up and running as far as starting generating earnings or revenue I should say?

Patrick Ramsey

Yeah, we expect the first phase of it to be open in early summer of next year.

Michael Spector - Castle Creek

So early summer?

Patrick Ramsey

Yeah. So probably our fiscal fourth quarter and it probably will not have a meaningful impact on that revenue line in our fiscal 2011.

Michael Spector - Castle Creek

You will not have it?

Patrick Ramsey

Correct. Okay a slight impact but not a meaningful impact.

Michael Spector - Castle Creek

Got you and a couple more questions. Do you, how much do you think is, how much cash do you need to actually run your business? What cash level?

Patrick Ramsey

Well as we talked about with Todd the previous caller, a development agreement is something that are difficult to plan. If you don't factor in the development agreement, obviously we can fund our operations pretty comfortably just by routine operations, as we have for the last necessary quarters or so. This one, development agreements opportunities come up, does typically require cash outlays that are hard to predict so I think keeping our cash $15 to $20 million on the balance sheet is very comfortable and is probably what we’ll, is the normal operating range that we would need to run the business.

Michael Spector - Castle Creek

Got you and can I go into what Todd asked before, so if you need $15 to $20 million in cash to feel very comfortable, you're going to generate somewhere around $34 million of cash flow next year including the free cash flow plus the $14 million of the repayment of the debt? And yet you're, I mean what's your thought process as far as, you say that you're going to keep your debt balance the same? Why would you keep a negative spread on the $34 million that you're generating?

Patrick Ramsey

I think what we said was we were going to continue looking at alternatives, including a stock buyback and investments in other technologies and continue to invest in R&D back into the business. So, I think what we discussed on our, in our press release, in fact we're going to continue to invest back into our business and I think we will explore things such as stock buybacks but nothing definitive on any of those fronts, as of yet.

Michael Spector - Castle Creek

Okay and I guess if you say you're going to invest in your business that should be all included in the $20 million number? Correct? Either the

Patrick Ramsey

Unless we see some technology that we like or an opportunity that we like, then those numbers obviously would change if we decide to make a discreet investment in one particular item that has not been planned for.

Michael Spector - Castle Creek

Got you. That makes sense and then just one final question. Just trying to understand the CapEx, about why it is flat next year? I understand, just kind of, if you could walk me through how much you are anticipating spending on third-party games versus as you say shifting to more of investing in your proprietary technology? I'm a little confused as far as, I mean, I'm assuming when you build a product to sell, it's actually a cost of good sold and not CapEx, so just trying to understand that as you move more towards proprietary gaming? I mean what your thoughts there as far as the need to spend $27.5 million of net CapEx, which is kind of where you’re kind of where you're guiding for '11?

Patrick Ramsey

Yeah. Well there's obviously quite a few questions in there so if I mix one of them up. Which one of the answers you might have? The key here, you’re right, we're going to invest more in proprietary games versus third-party games and you're right, we should be able to put more capital, for the same amount of capital I think, put more machines to work. So just to give you an example, if we only put out 1,000 machines for 2010 because the majority of them were third-party for 2011, I can put in about 2,000 machines into our recurring revenue base, therefore getting a higher cash yield on that deployment of fixed assets. So we will change from '10 to '11, with the number of machines that go into our install base either to replace old games or to increase our total footprint. So that's what’s driving the CapEx and you're right about when we sell a game it does flow through the costs to good sold, so obviously that's not in that CapEx number. So the delta between '10 and '11 is more games will go out into our footprint because they're our games versus third-party games.

Michael Spector - Castle Creek

And if they're recurring revenue, they actually are considered CapEx and not a cost of goods sold?

Patrick Ramsey

Correct.

Michael Spector - Castle Creek

The actual cost of making the game, building the game?

Patrick Ramsey

That’s right. So if I take $15,000 thousand for a third-party machine I capitalize 15,000, which my costs to goods sold is 7,500 for my machine but I only capitalized 7,500 on the balance sheet. We get about twice as many machines for the same amount of hours.

Michael Spector - Castle Creek

Okay, great. Thank you for answering my questions.

Patrick Ramsey

Sure.

Operator

Thank you. (Operator Instructions) Our next question is from Wilkin Lee of Starwood Capital. Your line is open.

Wilkin Lee – Starwood Capital.

Hello.

Patrick Ramsey

Hi, Wilkin.

Wilkin Lee - Starwood Capital

Hey, guys. I just wanted to follow up on the stock buyback question. Clearly I think by any objective measure and you think that the stock is cheap here and secondly, you're clearly overcapitalized and you're going to continue to generate more cash this coming year. I just don't understand what the difficulty is in coming to a conclusion that probably the best use of cash flow right now is to buy back stock?

Patrick Ramsey

Well, like we said in our script and like we said in the press release and like we said when we spoke to you in person, we're looking at appropriate uses of cash and that's obviously one of them we're looking.

Wilkin Lee - Starwood Capital

Okay and it worries me when you say stuff like you want to invest further in the business or if a new technology comes around because I would think that clearly those kinds of things should just kind of be normal course of the business and I would hope that, unless something really extraordinary comes along, that that $20 million of free cash will let your guidance to next year include some of that spending, so I’m just a little perplexed. You took shareholders, you went through a six-month strategic review process, the conclusion of which was really a non-event which was paying down your credit facility and I’m just kind of curious, what's holding you back from doing something like buying back stock? That's, just doing something a little more definitive and doing something good for your shareholders?

Patrick Ramsey

Well, I would say there' nothing holding us back. We continue to review it and we're going to, we'll update as appropriate.

Wilkin Lee - Starwood Capital

Okay and let me rephrase the question. How much longer is it going to take for you to make such a determination? I mean, I would think the six-month process you probably uncovered everything out there that you could possibly think of in terms of, what the uses of free cash flow maybe or what the best thing to do strategically is for the business? How much longer does it take to make a decision like that?

Patrick Ramsey

Wilkin, I appreciate the questions. I think we've kind of answered and I don't want to put any timeframe on it.

Wilkin Lee - Starwood Capital

Okay. Fair enough.

Patrick Ramsey

Thanks.

Operator

Thank you. Our next question is from Ryan Worst of Brean Murray. Your line is open.

Ryan Worst – Brean Murray

Thank you. Good morning, guys. Pat, if you could just talk about where you expect to deploy games and your install dates? Where do you see the growth opportunities? Are those revenue share gains in Class II or are they Class III and in what markets?

Patrick Ramsey

Yeah, well first on, so you're asking all about the revenue share side and that's mainly obviously Oklahoma and the way we look at Oklahoma is, we're very, we've got a huge footprint with the Chickasaw Nation and we look to deploy a lot of our Class II games in that footprint so, and that's not so much a top line growth opportunity, it's more about profitability and cash generation using own proprietary product and also helps again the sustainability of that business. I think the more we put Class II products and good Class II products, the more sort of sustainable that business is. And then outside of Chickasaw Nation within Oklahoma, there's, the opportunities are fairly large because we have very little, if any of our own proprietary games outside of Chickasaw Nation, Oklahoma. Now will that be Class II or Class III, it's up to the customer and that's the good thing about our technologies and our products is that we have both. So we're I think, we're looking for Oklahoma to be a good market for us in terms of incremental revshare placement.

Ryan Worst - Brean Murray

So, incremental or refreshing your current base and how does your base stand now in terms of the breakup between Class II and Class III games?

Patrick Ramsey

Yeah. We're about, our total footprint is, in Oklahoma it's around 7,000 units just using rough numbers. We have about 1,200 Class II units so it's slightly under 20% in Class II units. And I'll remind you over two-thirds of that footprint is third-party product so when you asked if it was incremental or replacement, it's both. Like I said, Chickasaw Nation is going to be all replacement and changing out their own product but we think there's good incremental opportunity outside of Chickasaw Nation.

Ryan Worst - Brean Murray

So, I guess what I’m understanding is that a big part of the CapEx effort is going to go to replacing third-party games with your own proprietary titles?

Patrick Ramsey

Yes, either third-party games or our, some of our older. We do have some proprietary products out there that's lower performing because it's older so we'll do both. We'll replace third-party and our own with higher performing new units.

Ryan Worst - Brean Murray

Okay, thank you and then just on the sales side. You had $2.1 million in sales of parts I guess and services? Is that something that should continue or is that related to the games sales? How should we think about that?

Patrick Ramsey

That's hard to predict. It’s a fact that sometimes it's the software, it's maintenance. The maintenance component will continue to go on but that's relatively small. As I said, it's hard to predict and it's hard to have a run rate because no ones got a quota for it so it will continue to be a monthly and it's not something that you would expect to see every quarter but we will have it throughout the year.

Ryan Worst - Brean Murray

Okay and then just to make clear on your guidance. The $20 million in free cash flow, that does not include any notes receivable?

Patrick Ramsey

In the free cash flow number it does not include, well that flows through cash so yes it's in the notes receivable number absolutely. Yes.

Ryan Worst - Brean Murray

So, your guidance of $20 million in free cash flow, so that includes some receivables on your notes?

Patrick Ramsey

Only the trade’s receivables, not the notes receivables.

Ryan Worst - Brean Murray

Okay. Thank you.

Operator

Thank you. (Operator Instructions) I'm not showing any further questions at this time.

Patrick Ramsey

Great. One follow up Todd, if you're still on the phone? I was prepared for your unicount question and I just didn't have the right paper in front of me at the time. The quarterly decline, just to break out in more detail, VictoryLand was 475. We removed some old legacy products quarter-over-quarter which was 130 units and then the facility in Mexico, La Salas Muchas was 170, so that hopefully gives you some more breakdown quarter-over-quarter. I always have my Todd unicount question prepared. I just didn't have the paper in front of me.

I think that wraps up the call. Thank you for joining the call. We look forward to continued progress in 2011 and we look forward to seeing many of you next week in Las Vegas so we appreciate it. Thanks.

Operator

Ladies and gentlemen, this concludes today's program. Thank you for your participation. You may now disconnect. Good day.

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