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Multimedia Games Inc. (NASDAQ:MGAM)

Q1 2011 Earnings Call

February 3, 2011 9:00 am 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

Ryan Worst – Brean Murray

Operator

Good day, ladies and gentlemen, and welcome to your Multimedia Group, Inc First Quarter 2011 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 introduce your host for this conference call, Mr. Uri Clinton. You may begin.

Uri Clinton

Thank you. 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 risks and uncertainties.

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

Today's call and webcast 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 today. It can be found our website, www.multimediagames.com, in the Investor Relations section.

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

I’ll now turn it over to Patrick Ramsey, our CEO of Multimedia Games.

Patrick Ramsey

Thank you, Uri, and good morning, everyone. Thank you for joining us on this call. With me here in Austin are Uri Clinton, General Counsel; Adam Chibib, Chief Financial Officer; And Joaquin Aviles, our Vice President of Technology. Mickey Roemer, our Senior Vice President of Sales is with us telephonically from the southeast.

This morning, we reported 2011 first quarter revenues of $28.6 million reflecting year-over-year growth of $2.3 million or almost 9% and a diluted loss per share of $0.05. We also reported another quarter where we continued to generate cash and further strengthen our balance sheet.

We are especially pleased with our topline growth this quarter. In fact, this was the time we have seen year-over-year topline growth in our first quarter since fiscal 2007 and these results are especially impressive when you consider the fact that our Alabama charity bingo revenues were down year-over-year $2 million due to the closure of that market.

Primarily reflecting this closure of this Alabama charity bingo market our revenue from gaming operations went down 2% year-over-year from $22.4 million to $22 million in our first quarter.

Our revenue from gaming equipment and system sales was up 87% from $3.3 million to $6.1 million in this quarter.

Before Adam discusses our more detailed financial results I will walk you through a summary of each of our major markets.

On the gaming operations side, our revenues in Oklahoma were up year-over-year 4% from $14 million to $14.6 million. That growth is primarily a result of our expanded footprint in Oklahoma. In fact, within the city grew by over 400 units year-over-year.

Our revenues in Mexico were down year-over-year 7% from $2.1 million to $1.9 million. This decline was directly related to our unit comp reduction as our major customer continues their transition from Class II gaming to Class III gaming.

Finally, our gaming operations our recurring revenue in other jurisdictions including the New York lottery was up year-over-year 17% from $3.4 million to $4 million.

On the unit and system sales side, our revenues were $6.1 million which represented a year-over-year increase of $2.8 million. The increase is mainly attributed to two factors: $1.4 million of the increase came from the sale of 52% more games than we did last year at a higher average selling price. We sold 201 units in our first quarter versus 132 in the prior year period. $1.2 million of the increase came from revenues recognized from deferred revenues from our bingo product that was recently completed.

We believe that we are continuing to make progress and stabilizing revenues, creating great products and solidifying our balance sheet. With the lowest level of net debt in six years and exciting products being introduced in the pipeline, we are now better positioned than ever to expand our footprint in new markets and in the markets we currently serve.

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. As Pat mentioned, we continue to generate cash even as we invest back into the company for the expansion of our proprietary unit footprint, to continued refreshes of our existing footprint and through repurchasing of our common stock.

During our first quarter, we invested $9.3 million in capital expenditures to expand our existing footprint and to refresh certain of our lower performing machines. Additionally, we purchased just over $2 million of the company stock or approximately 394,000 shares at an average price of $5.13 through December 31, 2010.

Our fiscal first quarter end cash balances totaled $26.2 million, up $4.4 million or approximate 20% from our fiscal fourth quarter. The company generated free cash flow of $3.6 million for the quarter. Free cash flow is defined as cash flow from operations less capital expenditures.

Total cash generated for the quarter which is defined as cash flow from operations less cash used in investing activities was $6.4 million. The company’s total debt net of cash has decreased for eight consecutive quarters and stands at $18.2 million, down from $54.9 million a year ago and down from $89.5 million two years ago. We are now at the lowest level of net debt from September 2004.

Total revenues for our fiscal first quarter totaled $28.6 million, an increase of $2.3 million or approximately 9% year-over-year and down $1.9 million or 6% on a quarterly sequential basis. Our fiscal first quarter revenues included sale of 201 gaming units with revenues totaling $3.4 million, up from 132 units and $2 million in revenues in the prior year period.

Gaming operations revenues for the fiscal first quarter totaled $22 million, a decrease of $427,000 or approximately 2% year-over-year. The decrease in year-over-year gaming operations revenue is attributable to significant decline in charitable bingo revenues from the State of Alabama totaled $2 million or 100% and a slight decline in gaming operations revenues in Mexico. These declines are largely offset by increases in gaming operation revenues in all of our other major markets.

SG&A expenses for fiscal first quarter $16.1 million, an increase of $1.1 million or approximately 7% year-over-year. The majority of the year-over-year increases is attributable to the final retention payments is made to certain executives and an increase in salaries as we continue to invest in research and development. SG&A expenses represented 56% of total revenues in the fiscal first quarter, down slightly from 57% of total revenues in our prior year period.

Depreciation and amortization expense for our fiscal fist quarter was $10 million, a decrease of $3.6 million or 26% year-over-year. The decrease in depreciation and amortization is attributable to lower capital expenditures over the last two years.

Net loss for our fiscal first quarter was $1.4 million, or $0.05 per share, compared to net loss of $4.1 million, or $0.15 per share in the prior year period. EBITDA for our fiscal first quarter was $10.5 million, a decrease of $431,000 or approximately 4% year-over-year.

For our second fiscal quarter, we expect gaming operations revenues to increase sequentially from the first quarter in all markets expect Alabama and Mexico. Additionally, we anticipate higher quarterly sequential unit sales for the fiscal second quarter. Unit sales will be down year-over-year from the 361 units that was sold in last year's fiscal second quarter.

We are pleased with the progress we have made with respective to cash flows, units sales and gaming operations for the quarter. I will now turn the call over to Pat Ramsey, our Chief Executive Officer for closing remarks. Pat?

Patrick Ramsey

Before we open it up for Q&A, I think it’s important to recite our goals that our opportunities that are laid out in our previous call at the end of fiscal 2010. First, growth in the sale of our own proprietary great change is critical. Our success with this initiative in the first quarter indicates we are continuing to move in the right direction.

The sales in the first quarter came mainly from the core markets of Washington and Oklahoma and going forward, we expect unit sales to be supplemented by new markets. We expect to grow unit sales sequentially in our second fiscal quarter, but reflecting to somewhat inconsistent nature of our product sales business that ramps up units sales were likely to be down form the 361 units we sold in the fiscal 2010 second quarter.

Second, in the past we have addressed the importance of place our own proprietary products in to the Oklahoma markets. This was important for two reasons. One, in order to strengthen our relationship with our major customer is important to provide compelling Class II products in our existing footprints. We have made and continue to make an investment in doing so in our unit count for our proprietary Class II and game machines is up significantly year-over-year.

Secondly, it is important for us to grow in other part of the state and the early indications are very positive in our first fiscal quarter and the unit comps were up 321 units just from the previous quarter ending September 30, 2010.

Third, all of our goals must be supported by both gains and the underlying technology that customer enjoys. We continue to invest in the development of our own products and we believe we are starting to see the results from doing so. We had a successful G2E, where we showed many products that we plan on bringing to market this year including our advanced turn event system, the Side Action Series, Maximum Lockdown Series and Power Stack Series and we continue our work on our gaming platform that will work our efficiency as we expanded to new market.

Now, we are ready to open up for Q&A. Operator?

Question-and-Answer Session

Operator

(Operator instructions)

Our first question comes from Todd Eilers with Roth Capital Partners.

Todd Eilers - Roth Capital Partners

I wanted to ask, on the domestic units can you may be comment tell us how many of those are in Oklahoma and then of that number could you maybe break it down between Class II and compact again?

Patrick Ramsey

I will give you the numbers that quarter end and that’s not the average Todd. In Oklahoma that quarter end, we had 6,033 Class III under the compact and we had 1,335 Class II games in Oklahoma, so that totaled 7,368 in Oklahoma. That a year ago those same metrics we had 6,117 Oklahoma Class III games and 764 Class II which totaled 6,881. So between Class II and Class III in Oklahoma we grew year-over-year at quarter end from 6,881 to 7,368.

Todd Eilers - Roth Capital Partners

Okay, great and then, can may be give also sense for I know you guys are trying to increase the amount of proprietary games and the installed base, can you give us may be what that mix is right now in Oklahoma, how much of that is still third party games versus proprietary?

Patrick Ramsey

Yes, I could generalize for you. It’s still in very significant proportion is third party products, but in the numbers I just gave you, that increase in Class II that’s obviously all from our proprietary development. So the majority of that Oklahoma footprint in still Class III which means that still the majority of entire Oklahoma footprint is still third party. You can see the transition started to happen to our proprietary product.

Todd Eilers - Roth Capital Partners

Last quarter you guys had mentioned a development agreement with the Cheyenne and Arapaho tribe and I thought that was around 400 games. Have you guys started to place any of those in this next quarter?

Patrick Ramsey

That’s right.

Todd Eilers - Roth Capital Partners

You have done that?

Patrick Ramsey

Yeah.

Todd Eilers - Roth Capital Partners

Then moving on the games sales side, ASPs were pretty strong in the quarter, is there anything unique in this quarter that drove that or so you expect a 16,000, 17,000 type ASP going forward?

Patrick Ramsey

The products makes you probably in all in meaning built screen and that includes licenses and kidos[phonetic] and that’s an all in price. So, the mix was weighted more heavily towards that. We also put some turn event products out in the field which has more expensive signage so, I think it’s a combination of those items that are driving that perhaps going up. So it’s probably higher than normal for this quarter.

Todd Eilers - Roth Capital Partners

Okay. I don’t know if you guys gave this but can you tell us what the gross margin was on the game sales?

Adam Chibib

Yeah between 48% and 52% on the majority of the sales.

Todd Eilers - Roth Capital Partners

Then also again I apologize if you guys mentioned this but SG&A was a bit higher than I was looking for, can you may be talk to what kind of drove the increase there, and then can you also tell us may be how much of that SG&A is for R&D expense?

Adam Chibib

Yes, so the first was the reason (inaudible) the big driver of SG&A in our first fiscal quarter. So, that’s an expense that we had to ones obviously in that quarter and we won’t have it going forward in that as at least $500,000 to the quarter. We did have the final with retention payment that was enacted by the board last year which also took about $700,000 in the quarter. So those were two drivers of FYQ1 typically they are highest expense quarter. Obviously, the retention payments go away after because we won’t have those again.

R&D expense, I’m just going up my notes real quick, bear with me, about $3.5 million for the quarter for 2011.

Todd Eilers - Roth Capital Partners

Final question just any update on Alabama, or maybe if you guys just can gives us the latest developments there and what we should be looking for if anything, here in the near term?

Patrick Ramsey

Yes. With Alabama the situation remains fluid. We were expected some relief after the elections. We are now considering the new Attorney General and new Governor’s position with regard to electronic bingo within the state. So, right now, we’re still in the same position but we were still actively considering of what the future of that market looks like.

Operator

(Operator Instructions) Our next question comes from Ryan Worst with Brean Murray.

Ryan Worst – Brean Murray

A question on the Oklahoma game base pad, how many games actually went into the Lucky Star Casinos and then how did your footprint looked at WinStar on a year-over-year basis because I know there was construction last year?

Patrick Ramsey

I don’t know specifically about the Lucky Star Casino.

Ryan Worst – Brean Murray

You haven’t got the Cheyenne and Arapaho?

Patrick Ramsey

Yes, but they have various casinos. Yes, that deal wasn’t just with one casino, it was with three different casinos.

Ryan Worst – Brean Murray

Those went in in the fourth quarter, right?

Patrick Ramsey

Those went in in the fourth quarter, 400 games went in at quarter end.

Ryan Worst – Brean Murray

When did those go in during the quarter, do you know?

Patrick Ramsey

I don’t know the dates on each casino but that went on live throughout the quarter. Then WinStar there was some construction, you’re right, last year but that construction ended around Halloween. So, we were fully live and operational pretty much throughout November, December of last year. So, quarter end, that would be a very immaterial difference in unit comps at WinStar.

Ryan Worst – Brean Murray

Then you said you expect the footprint to continue to grow in Oklahoma. Where do you see that happening? Where is your biggest opportunities on the gaming op side?

Patrick Ramsey

Yes, it’s really all over. As you know, Oklahoma is close to 100 casino market and as we have expressed we are very concentrated to 13 to 20 casinos throughout the state. So, that leave 80 more and we are looking at all opportunities. As you know, we have a good history there. We have a great team there, and we are seeing positive indications literally throughout the entire state.

Ryan Worst – Brean Murray

Is your goal just to place your own games or any third party games?

Patrick Ramsey

We want to focus on our own games but there will development deals, and depending on the size of the footprint where we will continue with our partnerships and continue to provide some third party games. For the most part, we are very focused on our products.

Ryan Worst – Brean Murray

Are you required to purchase any third party games at this point under existing contracts or have they all run off?

Patrick Ramsey

No, we do have an agreement with a major manufacturer to provide more games throughout calendar year 2011.

Ryan Worst – Brean Murray

How many games through that or…?

Patrick Ramsey

Yes, I don’t know if we are going to probably see through agreement, but we have an agreement that where we feel comfortable. Remember, we have two-thirds still in our footprint is that third party product and we will continue to refresh it and that’s important for us. So, obviously, those long-term agreements with certainly providers are pretty important for us.

Ryan Worst – Brean Murray

What was your guidance for CapEx and I guess that includes the third party agreements as well, right?

Adam Chibib

Right. It’s pretty consistent with last year and its $28 million to $33 million is forecast for 2011.

Operator

Our next question comes from Howard Friedman, who is a private investor.

Howard Friedman - Private Investor

Quick question. Regards the New York Lottery and same thing will be installed at the race track. I mean, certainly seem like a lot of revenue comes out of New York State Lottery. You mentioned material went through bottomline with Champion[phonetic] opening and will cost you additional funding monies or expenses with the opening of Champion. One other question regarding New York Lottery I feel that the RFP out there for a video lottery terminal and central system, testing system, does that in any way impact the company?

Patrick Ramsey

Could you clarify your second question?

Howard Friedman - Private Investor

The New York State Lottery had sent RFP that they have sent out on February 8, I am not really familiar with it, but for video lottery terminal and central system testing that’s due on February 8. Does that have any impact on what the company does in New York State Lottery?

Patrick Ramsey

I’ll let Adam answer the question about the incremental revenue and follow through on the New York Lottery and then Uri can address the second part.

Adam Chibib

Currently, we manage essentially 12,500 VLT terminals and we get a percentage of total revenue. Then the full Aqueduct facility comes online, it will add approximately 4,500 additional units. So, just using simple math the number of units increase over where we are today, it could add approximately 25% more revenues to that line of business. We do not think that is going be fully operational in the back half of our fiscal 2011, so we won’t see those full unit counts until sometime in our fiscal 2012. So, it won’t have any material impact on our FY11 P&L.

Your second question was significance of the CapEx and the range I just gave to Ryan was $28 million to $33 million for the entire year. That includes the CapEx requirements for the Aqueduct project. So, that in that numbers that’s impact won’t be significant to us on the project.

Uri Clinton

With regard to your second question, the RFP, our contract with the New York Lottery is still very much active and there is no indication that any of the scope listed in the RFP would impact that contractual obligation.

Operator

I'm not showing any further questions at this time.

Uri Clinton

Okay, well, thank you for joining us on this call. For those who would like to see from our newest products we will be at the NAGA[phonetic] event in the first week of April. So, thanks again and have a good day.

Operator

Ladies and gentlemen, this concludes today's presentation. You may now disconnect.

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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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