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Multimedia Games Inc. (NASDAQ:MGAM)

F2Q2011 Earnings Call Transcript

May 3, 2011 09:00 am ET

Executives

Uri Clinton – General Counsel

Patrick Ramsey – CEO and President

Adam Chibib – CFO

Analysts

Todd Eilers – Roth Capital Partners

Peter Jeffer – Jeffer Management

Operator

Good day, ladies and gentlemen, and welcome to the Multimedia Games Inc., second quarter 2011 conference. At this time, all participants are in a listen-only mode. Later, we'll have a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, today's conference is being recorded.

I would now like to turn the conference over to your host for today, Mr. Uri Clinton, General Counsel. Sir, 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 security 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 condition. 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 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's 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 measure 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, and can be found on our website at www.multimediagames.com in the Investor Relations section. Financial and operating metrics provided during today's call maybe approximate. Please refer to the company's financial statements as provided in the press release for definitive numbers.

With that, I'll turn the call over to Patrick Ramsey, our President and CEO.

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, Vice President Technology; Mick Roemer, our Senior Vice President of Sales is with us telephonically from the Southern Gaming Show on the Mississippi Coast.

This morning we reported GAAP net income of $1.2 million or $0.04 per diluted share and operating income of $1.4 million. This is the first time since the third quarter in fiscal 2008 that the company generated operating income. Unit sales for the quarter came in at 240 units, which represents quarterly sequential growth of 19%.

Additionally, we had another quarter where we continued to generate cash and strengthen our balance sheet. All in all, we are very pleased with our second quarter results. As you may recall, we discussed on our last report, we did not expect to see overall top volume growth in this quarter due to a few large sales orders that occurred in our second quarter last year.

However, I think it is important to note midway through our fiscal year, our top line is slightly ahead of last year, which is very encouraging given the industry challenges as well as the challenges in both Mexico and Alabama. In addition to these top line results, this quarter was very strong from top to bottom as we posted both operating income and net income that was substantial enough to take us close to a break-even level of profitability year-to-date.

Our improved operating results reflects progress on all fronts including first, growth in core markets such as New York, California and Washington and additional placements in the state of Oklahoma outside of our major customers properties. Second, the placement of improved Class II products within most of the properties in Chickasaw Nation.

Third, unit sales to customers in six different stages, which we believe is a clear and early indication of our growth and diversification strategy. Fourth, continued discipline on the expense side and fifth lower depreciation and amortization that is a result of several factors including the shifting away from our dependence on third-party products to our own proprietary products.

Despite the expected declines in our Mexico operations and the closure of the Alabama charity bingo market, revenues from gaming operations was flat year-over-year and $23.4 million and up 7% on a quarterly sequential basis. Our revenue from gaming equipment and system sales was down year-over-year 21% from $8.2 million to $6.4 million. 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 almost flat year-over-year down from $15.5 million to $15.3 million. Our recurring revenue in other jurisdictions excluding Mexico and Alabama and including the New York Lottery was up year-over-year 30% from $4.6 million to $6.1 million. Our revenues in Mexico were down year-over-year 27% from $2.4 million to $1.7 million in line with (Inaudible) results this decline is directly related to our unit count reduction as our major customer continued their transition from Class II gaming to Class III gaming.

Alabama was down the year-over-year approximately $500,000 from $853,000 to $353,000. As you may have seen in our public filings, we recently removed essentially all of our charity bingo equipment from the state and I will remind you that we're approaching the only year closure of the last charity bingo facility in August 2010. On the unit and systems sales side, our revenues were $6.4 million, which represented a year-over-year decline of $1.7 million. The decrease is mainly attributable to one factor. Last year, we had a customer order of over 120 units in that one facility.

On the positive side, we continue to see more diversified sales as this quarter we sold into six different states, one of those being our first sales in the major Class III gaming jurisdiction of Louisiana versus only three states last year.

I will 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 second quarter was another strong quarter for Multimedia Games. We continue to generate cash, solidify our balance sheet, increase our proprietary unit sales than buyback shares of the company stock. For the quarter, we recorded GAAP net income of $1.2 million or $0.04 per diluted share and operating income of $1.4 million. This quarter represents the first quarter since June of 2008, in which the company recorded positive operating income.

During the quarter, we sold 240 proprietary units and increased our domestic install base by a total of 181 units. For the first half of our fiscal year, the company sold a total of 441 units and grew the install base by a total of 605 units bringing total shipments for the first half of the year to over 1000 units that were either sold, placed in a lease or rented for placed in a lease for revenue sharing arrangements.

We continue to generate cash even as we invest back into the company to the expansion of our proprietary unit footprint to continue to refreshes of our existing footprint and through repurchases of our common stock. During our fiscal second quarter, we invested $7.7 million in capital expenditures to expand our existing footprint and to refresh certain of our lower performing machines.

Additionally, we purchased just over $4.2 million of the company’s stock or approximately 762,000 shares at an average price of $5.57 per share. Bringing our total share repurchases through March 31, 2011 to 1.2 million shares. Our fiscal second quarter end cash balances totaled $30.7 million up $4.5 million or approximately 17% from our fiscal first quarter. The company generated free cash flow of $5.3 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 plus cash used in investment activities were $6.8 million. The company's total debt, net of cash, has decreased for nine consecutive quarters and now stands at $13.5 million, down from $38.4 million a year ago and down 26% on a quarterly sequential basis. We're down to a lowest level of net debt since June of 2004.

Total revenues for our fiscal second quarter totaled $30.1 million, a decrease of $2 million or approximately 6% year-over-year and up $1.5 million of approximately 5% on a quarterly sequential basis. The year-over-year decrease in revenues is mainly attributable to the expected decline on unit sales as the company recorded a large sale transaction in its prior year fiscal second quarter.

Our fiscal second-quarter revenues included the sale of 240 gaming units with the revenues totaled $4.2 million down from 361 units and $5.3 million in revenues in the prior year period. Unit sales grew 19% sequentially from 201 units in our fiscal first quarter. Gaming operations revenues for our fiscal second quarter totaled $23.4 million, which is consistent with results in the prior year fiscal second quarter.

These results were encouraging as we are able to overcome the expected decrease in year-over-year gaming operations revenues in Mexico and Alabama, which totaled a combined $1.2 million. These declines are largely offset by increases in gaming operations revenues in all of our other major markets outside of Oklahoma, which remained flat.

Gaming operations revenues increased $1.4 million or approximately 7% on a quarter sequential basis with all major markets except Mexico contributing to the growth. SG&A expenses for our fiscal second quarter were $14.5 million an increase of $220,000 of approximately 2% year-over-year and down $1.7 million or approximately 10% on a quarterly sequential basis.

Included in SG&A for the second fiscal quarter is $3.6 million in which certain development expenses, which represents a year-over-year increase of $459,000 or 15%. SG&A expenses represented 48% of total revenues for our fiscal second quarter. Depreciation and amortization expense for our fiscal second quarter was $10.3 million, a decrease of $3.3 million or 24% year-over-year. The decrease in depreciation and amortization is attributable to lower capital expenditures over the last two years.

Net income for our fiscal second quarter was $1.2 million or $0.04 per diluted share compared to a net loss of $5.6 million or $0.20 per share in the prior-year period. The prior-year net loss included $3.1 million in pre-tax charges and $2.6 million in tax expenses related to the closure of the charitable bingo operations in Alabama. EBITDA for our fiscal second quarter was $14.1 million, an increase of $1.3 million or approximately 10% year-over-year and up $3.6 million over 35% on a quarterly sequential basis.

Looking forward for our fiscal third quarter, we anticipate total revenues will increase on a year-over-year basis. Additionally, we anticipate higher SG&A in our third fiscal quarter as we continue to invest in research and development and other expansion efforts. We also expect unit sales to be higher in the second half of our fiscal year that they were in the first half of our fiscal year. Total capital expenditures for the year will be in the range of $30 million to $35 million as we continue to invest in our install base to improve our yields and to grow our footprint.

We're pleased with the progress we have made with respect to total unit shipments, gaming operations and cash flows for the quarter. I will not that the call over to Pat Ramsey for closing remarks. Pat?

Patrick Ramsey

Thank you, Adam. Before we open up for Q&A, I think it’s important to address what we're seeing and hearing across the industry as there has been quite a lot of discussion over the last few months on the gaming industry in general and more specifically from the manufacturer standpoint.

Like other manufacturers, we aren't seeing any indication of an uptick in the slot machine replacement cycle. Despite the lack of buying activity, we have been able to sequentially grow our unit sales and increase our participation footprint. For the first half of fiscal year 2011, we have shipped over 1000 units with 440 sales units and just over 600 net expansion units.

We're not too concerned with the delayed recovery because our strategy of increasing value and strengthening our company is not overly dependent on a robust replacement cycle at this stage. Rather, our strategy hinches around various factors, several of which are fortunately more directly in our control.

First, we continue to grow our proprietary Class II footprint with our major customer, which is critical to our long-term success. Year-over-year, our Class II footprint has nearly doubled with that customer increasing to over 1300 units at quarter-end. Second, as we have spoken about, we feel there are immediate growth opportunities in what was once considered to be our markets. We have used Washington as the main event from the past so I think it's important to touch on another key state where we had a major presence at one time, California.

A year ago, there were 26 MGAM machines either owned or leased in the entire state of California. At the end of the second quarter, there were 224 MGAM units owned or leased in the state. Third, in states like Louisiana and Mississippi, it would of course be helpful to see increased capital spending by the operators, but again given our product portfolio, our pipeline and our licensing process, the overall macroeconomic factors have likely had left some impact on us compared with the factors we face internally.

In fact, we recently sold our first games in the state of Louisiana and in the month of April, we received our final approval to sell games in the state of Mississippi. Last, we remain committed to staying focused on products and markets that makes financial sense for our shareholders and strategic sense for us as we look to grow profitably. We are seeing success in expanding the footprint of our proprietary games in just about every jurisdiction in which we operate whether through leases, (Inaudible) purchases.

Before we open it up to questions, I thought it is important to note that several of our products have recently gotten. The fifth annual Casino Enterprise Management Slot Floor Technology Award have named our slot tournament system TournEvent as one of the top 10 slot floor products of 2011. This was the second year in a row TournEvent has been named as a top 10 slot floor product and the second award our 3.0 version has received.

We receive a lot of attention for this product and the results are starting to speak for themselves. In little over a year, we have almost quadrupled the number of facilities in which this particular product is deployed. Second, our side action series has also been awarded top 10 slot floor products of 2011 by Casino Enterprise Management as well as top 20 most innovated gaming technology products of 2010 by Casino Journal. This product is just now hitting stores and we're excited about its prospects.

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

Question-and-Answer Session

Operator

(Operator Instructions) our first question comes from the line of Todd Eilers from Roth Capital Partners. Your line is open.

Todd Eilers – Roth Capital Partners

Good morning guys.

Patrick Ramsey

Good morning, Todd.

Todd Eilers – Roth Capital Partners

Pat, can we start off with maybe just kind of on the unit side domestically, can you talk how many of the domestic units were in Oklahoma at the end of the period and then can you also kind of break that down between Class II and compacted games?

Patrick Ramsey

Sure. So at the end of the period, at the end of March we had around 74, close to 7400 in Oklahoma and the break down, you'll see a significant increase year-over-year between Class II and Class III on the Class II front. So of that 7400 we've grown, our Class II footprint in Oklahoma has grown about 600 year-over-year. So Oklahoma Class II we have around 1350 Class II products.

Todd Eilers – Roth Capital Partners

Okay. And then obviously you guys showed unit increases in the quarter and I believe you mentioned kind of the replacement of I guess additional or replacement of existing games with Class II games Chickasaws but are you guys also expanding, I thought I heard you mention expanding outside of the Chickasaw footprint. Can you maybe talk about that a little bit and kind of give us a sense for where the unit growth was coming from in the quarter?

Patrick Ramsey

Yeah, so there is to dynamics. One is the shift within our Chickasaw footprint that’s the footprint that could it does not grow but we are shifting to Class II products and then we are growing the footprint in just about every jurisdiction. In this quarter the majority of the growth came from Oklahoma outside of Chickasaw properties, but it really happens and obviously the numbers are smaller, but we have seen growth in just about every jurisdiction in our participation footprint.

Todd Eilers – Roth Capital Partners

Okay. And then.

Adam Chibib

Sorry.

Todd Eilers – Roth Capital Partners

Sorry, go ahead.

Adam Chibib

Washington grew, California grew, New York grew, Kansas grew, Texas grew so you have (Inaudible) across-the-board growth in participation units outside of Chickasaw country.

Todd Eilers – Roth Capital Partners

Okay and then what we're talking about Chickasaw tribe, I believe the first development agreements or I guess there is a development agreement that comes out for or expires later this year, I don't know if you guys can comment at all about that, but it would be nice to maybe get a sense for kind of the timing on that and kind of how we should look at that going forward what’s your (Inaudible)?

Adam Chibib

There are some units, close to 600 of them across three properties in Chickasaw Nation that are up for renewal expiration in around September of this year and we're currently working with them on the next steps. So no details on that, but working on that.

Todd Eilers – Roth Capital Partners

Okay. And then I guess last question, Adam, in the other income, it looks like you guys had about 677,000 there, can you maybe tell us what that was in the quarter?

Adam Chibib

Yes, we had a contract in Canada with OLG for some R&D work that we did on their behalf and it's really just to recognizing of that revenue on the amortized basis, that was the majority of that in the second quarter.

Todd Eilers – Roth Capital Partners

Okay. And should we expect, I mean is that the kind of carry forward into the next couple of quarters?

Adam Chibib

Yes. We've got one more month coming up in our current Q3 fiscal quarter, but it's pretty small, so I would not count on that going forward.

Todd Eilers – Roth Capital Partners

Okay. All right. And then I guess just one last question if I might, can you may be, can you guys give us an update on you I guess new operating system, when do you expect to have that I guess approved and ready for deployment and can you maybe talk to us about what that does for you, does it open up new markets, etcetera?

Patrick Ramsey

Yeah. It is still in the development phase. And so not ready to get into detail on timing at this point. But I think it will be a lot of things for us it will help us on the game development side, help us on the service side. As you mentioned, it will help us getting into new jurisdictions, so there is a hosted benefits in a lot of reasons why we are putting money into that, but it's a few quarters at least off from being able to sort of talking into some more details of timing.

Todd Eilers – Roth Capital Partners

Okay. All right. Thanks guys.

Patrick Ramsey

Okay. Thanks Todd.

Operator

Thank you. (Operator Instructions) And as there are no further questions in the queue I would like. Now we have a question from the line of Peter Jeffer from Jeffer Management. Your line is open.

Peter Jeffer – Jeffer Management

Congratulations for the big turn around and the positive things that are happening in your company and I was wondering if you could give us an update on the (Inaudible) launch and timing of that.

Patrick Ramsey

Sure we are actively involved in getting that going and the it looks like the first phase of that will open and the first phase we will likely have around 25000 games which will be opening very late in our fiscal year at the end of September. Phase II is planned to come on fairly quickly after that with around 25000 games.

Peter Jeffer – Jeffer Management

Okay, thank you.

Patrick Ramsey

Thanks Peter.

Operator

(Operator Instructions) and I show no further questions in the queue and I would like to turn the conference back to Mr. Pat Ramsey for closing remarks.

Patrick Ramsey

Thank Mary and thanks for joining the call. We look forward to continuing to share our results with you and for those of you who will be at the Mississippi show we look forward to seeing you. Thanks again.

Operator

Ladies and gentlemen thank you for your participation in today’s conference. This does conclude the program and you may all disconnect at this time.

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