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Multimedia Games Inc. (NASDAQ:MGAM)

F3Q2011 Earnings Call

August 4, 2011 9:00 am ET

Executives

Uri Clinton – General Counsel

Patrick Ramsey – President and CEO

Adam Chibib – CFO

Analysts

Steve Altebrando – Sidoti & Company

Todd Eilers – Roth Capital Partners

Operator

Good day ladies and gentlemen and welcome to Multimedia Games third quarter 2011 conference call and webcast. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session with instructions following at that time. (Operator Instructions) As a reminder, this conference call is being recorded.

And I will turn the call over to Uri Clinton, General Counsel. Please begin.

Uri Clinton

Thank you. Welcome to today’s call. 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 condition to be materially different from the expectations of future results, performance or financial condition. Please refer to the Risk Factors section of 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 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 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. Thank you.

And with that, I will turn it 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 has joined us telephonically from the State of Washington.

This morning we reported strong financial results our third fiscal quarter with 15% revenue growth representing our highest quarterly year-over-year improvement this year. Our momentum continues as we grew sequentially from $1.4 million in operating income in the second quarter to $2.6 million in this third quarter. Similarly, diluted earnings per share rose sequentially from $0.04 to $0.10.

In addition, our cash position improved significantly and now stands at $49.2 million, driven primarily in the quarter by the receipt of approximately $18 million for the United States Treasury Department, which added to the consistent cash flow we have been generating from operation. For the first time in seven years our cash levels exceed our debt levels.

The top line growth reflects year-over-year improvement in both our gaming operations revenue and our revenue from unit sales, which is clearly the result of so much hard work from our team members and our laser focus on developing new proprietary products and technologies that are increasingly resonating with our customers and their players. I will go through some of our key markets in more details after Adam’s financial overview, but it is important to note that our top line growth continues to be driven by our own products being placed in markets that are core to our long-term strategy and profitability. This growth has been strong enough to counter balance some of the declines we are seeing in markets such as Mexico and Alabama. We are pleased with our third quarter results because there is reflect continued success in what we believe is a critical transition year for our company.

To summarize, our revenues through our first three quarters are up over 5%. Through the first three quarters last year, we had a net loss of $9.4 million, this loss has been reversed and our year-to-date net income for fiscal year 2011 is $2.6 million. Our year-to-date financial results reflect our simplified and focused strategy of selling or placing our own proprietary products in all gaming markets to which we have access. With continued positive feedback for our newest products, a healthy game development pipeline and access to more gaming markets we continue to be optimistic about our future.

Finally, before Adam walks you through our more detailed financial results I want to briefly summarize our recent extension of games that we highlighted in our press release this morning. Overall, we have approximately 5200 games on the floors of the Chickasaw Nation properties, which represent approximately 35% of their current floor share. At three other smaller properties where we have had approximately 600 games representing 50% of each floor the agreements were set to expire next month. We work with our customer to develop a unit placement plan for these facilities that allows us to focus on providing our best proprietary content going forward on a smaller percentage of the floor.

This plan includes establishing a timeline that provides minimal disruption to our business and to the operating properties as well. We look forward to enhancing this very important long-term relationship with our largest customer over the coming years while continuing to expand the markets and customers that we serve.

Now, I will turn the call over to Adam for more detailed financial results. Adam?

Adam Chibib

Thank you, Pat. The third quarter was another strong quarter for Multimedia Games. We recorded our second consecutive quarter of operating and GAAP net income, our third consecutive quarter, in which our U.S. installed base expanded, our tenth consecutive quarter in which our net debt has decreased and our first quarter since June of 2004 where the company has had more cash than debt.

Additionally, we were able to amend our existing credit agreement significantly reducing our interest expense and extending the maturity into 2016. The amended terms of our credit agreement reduced the total facility to $74 million and will provide the company with increased flexibility to allocate capital while significantly reducing our cash interest expense.

As Pat mentioned, we recorded GAAP net income of $2.8 million or $0.10 per diluted share and operating income of $2.6 million. Net income increased $2.4 million year-over-year and $1.6 million or 135% on a quarterly sequential basis. Net income for the nine months ended June 30, 2011 was $2.6 million or $0.09 per diluted share compared to a net loss of $9.4 million in the prior year nine month period.

Total revenues for our fiscal third quarter were $33.4 million, an increase of $4.3 million or 15% on a year-over-year basis and up $3.3 million or 11% on a quarterly sequential basis. Total revenues for the nine months ended June 30, 2011 were $92.1 million, an increase of $4.7 million or 5% from the prior year nine month period. During the quarter, we sold 251 proprietary units generating $4.4 million in revenues versus 128 units and $2.1 million in revenues in the prior year fiscal third quarter.

For the first nine months of the year, the company has sold 692 units generating $12 million in revenues, compared to 621 units and $9.4 million in revenues in the prior year period. This represents a year-over-year increase of 11% in units sold and a year-over-year increase of 27% in revenues generated.

Gaming operations revenues for our fiscal third quarter totaled $24.6 million, which represents an increase of $747,000 or 3% year-over-year and an increase of $1.1 million or just under 5% on a quarterly sequential basis. The year-over-year increase in gaming operations revenues is attributable to strong growth in Washington, California, New York and other markets outside of Oklahoma. These results were encouraging as we were able to overcome the expected decrease in year-over-year gaming operations revenues in Mexico and Alabama, which totaled a combined $1.2 million.

For the fiscal third quarter, total revenues included revenue recognized deferred revenues for the sale of player station and system licenses totaling $3.4 million versus $1.2 million recognized from deferred revenues in the prior year fiscal third quarter. We continue to generate cash even as we invest back into the company through the expansion of our proprietary unit footprint to continue refreshing of our existing footprint and through repurchases of our common stock.

During our fiscal third quarter, we invested $10 million in capital expenditures to expand our existing footprint and to refresh certain of our lower performing machines. Additionally during the fiscal third quarter, we purchased just over $3.7 million of the company’s stock or approximately 668,000 shares. Through June 30, 2011 we have purchased approximately $10 million or the company’s stock or approximately $1.8 million shares. The company has $5 million remaining under its $15 million stock repurchase program.

Our fiscal third quarter end cash balances totaled $49.2 million, an increase of approximately 60% on a year-over-year and quarterly sequential basis. The company’s cash now exceeds its total debt for the first time since 2004 with the company’s net cash position totaling $5.2 million as of June 30, 2011. The company generated free cash flow of $19.3 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 less cash used in investing activities was $21.5 million. For the first nine months of the fiscal 2011 the company have generated $28.1 million in free cash flow and $34.7 million in total cash flow. Fiscal 2011, third quarter and year-to-date free cash flow and cash generation includes an $18 million tax refund from the US Treasury Department.

Total operating cost and expenses for our fiscal third quarter were $30.8 million a decrease of $3200 or approximately 1% year-over-year and up $2 million or approximately 7% on a quarterly sequential basis. Included in total operating cost and expenses our third fiscal quarter is $10.5 million in SG&A expenses an increase of $760,000 or approximately 8% year-over-year and up approximately $1.1 million or approximately 12% on a quarterly sequential basis.

The increase in SG&A expenses is primarily attributable to higher compensation costs as the company adds headcount to support expansion into new territories. Also good in operating expenses and operating cost is research and development expenses, which totaled $3.3 million for our fiscal third quarter an increase of $291,000 or 10% year-over-year and up $134,000 or 4% on a quarterly sequential basis. Increases in SG&A and research and development expenses were attributable to an increase investment and headcount and were more than offset by declines in depreciation and amortization.

Depreciation and amortization expense for the fiscal third quarter total $10.2 million, a decrease of $2.6 million or 20% on a year-over-year basis and down $125,000 or 1% on a quarterly sequential basis. The decrease in depreciation and amortization is attributable to lower capital expenditures over the last two years.

EBITDA for our fiscal third quarter, which was $14.8 million an increase of $2.5 million or approximately 21% year-over-year and about $686,000 or approximately 5% on a quarterly sequential basis.

For our fiscal fourth quarter we anticipate total revenues will decrease on a quarterly sequential basis and will be in line with our prior year fiscal fourth quarter. We expect to sell over 1000 proprietary units in fiscal 2011 and total revenues for fiscal 2011 should come in higher than fiscal 2010 revenues.

Total capital expenditures for the year will be in the range of $33 million to $37 million as we continue to invest in our install base, to improve our yield to grow our footprint. We have to increase our free cash flow guidance from the previous range of $20 million to $25 million up to a range of $25 million to $30 million. Additionally, we expect to generate operating and net income for the year.

We are pleased with the progress we have made and the milestones we have reached as a company this year. We are now in a net cash position for the first time in seven years; we have generated operating income on a year-to-date basis and expect to be profitable for the year. We have close to $50 million in cash and we are on track to sell over 1000 games in fiscal 2011 and we expect to grow total revenues despite expected declines in Alabama and Mexico.

I’ll now turn the call over to Patrick Ramsey our Chief Executive Officer for closing remarks. Pat?

Patrick Ramsey

Thanks. I have been into the details to describe the large year-over-year growth in revenue on the gaming equipment and system sales side and obviously this is a critical component of our strategy as we provide new product to new customers in new jurisdiction. I would like to give a bit more color on the gaming operations revenue, which grew $747,000 or 3% year-over-year. In Oklahoma, our revenues declined slightly year-over-year from $15.8 million to $15.4 million. Excluding a one-time revenue benefit recorded in Q3 of fiscal 2010 our revenues grew driven by both an expanded footprint in the state and then increase in revenues coming from our largest customer.

Our recurring revenue in other jurisdictions excluding Mexico and Alabama increased more than 45% year-over-year from $4.9 million to $7 million. Both California and Washington continue to be highlights for us. But we are also achieving success in many other jurisdictions from Western New York to the states across the Midwest. And finally our revenues in Mexico and Alabama were down a total of $1.2 million or 33% year-over-year.

Before we open it up to questions, I wanted to summarize the quarter.

In a snapshot, our overall financial performance was strong from revenue growth, profitability and a cash perspective. We continued investing in the repurchase of our shares and we recently renegotiated our credit agreement, which coupled with our cash balance provides us flexibility to grow our business. We continue to sell or deploy our newest games across the nation and continue to receive feedback from our customers, which is resulting in expansion in the number of Multimedia Games developed products that are on Casino source today.

Finally, the renewal of our contract that were scheduled to expire next month within the Chickasaw Nation at several properties is an indication that we remain an important long-term strategic partner for them. I would like to remind those interested in seeing our newest product to visit us at our (Inaudible) at the Oklahoma Indian Gaming Association Show in Tulsa on August 16th and 17th. And we are all gearing up for what I believe will be another great (Inaudible) this year for us in early October in Las Vegas.

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We have a question from Steve Altebrando of Sidoti & Company. Your line is open.

Steve Altebrando – Sidoti & Company

Hi guys, how are you?

Adam Chibib

Hi Steve.

Steve Altebrando – Sidoti & Company

Can you give some color on the deferred revenue recognition; is it something that you view as one time and it’s like the margin that business goners?

Patrick Ramsey

Sure it was definitely a one-time, we had a credit, a company on credit watch that we didn’t feel comfortable collecting and we did collect the cash and it will be a one time. The gross margin on that deal was about $1.5 million and the revenue on the deal was $3.4 million.

Steve Altebrando – Sidoti & Company

Okay, perfect. And then in terms of the new Chickasaw agreement, could you provide I guess, I’m probably just qualitative commentary versus your prior arrangements with them for that specific contract and also versus the other contracts you have with them that expire in the out years?

Patrick Ramsey

Sure, like we said in that press release, we at those three smaller properties we had about 50% the slower, which included a bit of our product and third party product. So we worked with them on a plan where we extended for half of those units we extended it for a period of three and a half years. And then it allows us to focus on the majority of our own proprietary product in that footprint.

And then on the remainder we are going to transition out of those four period that extends over two and a half years. So, it’s a - we are happy with that obviously it’s the large percentage of the foot that we continue with our proprietary product and we are working obviously with them on a transition plan as we get away from remaining third party product. And in terms of terms, obviously it’s a smaller deal and I’m not going to get into all the details but it’s really in line with in terms of the placement fees it’s in line with other deals we have done, when you just for the timing of the deal.

Steve Altebrando – Sidoti & Company

Okay, and then just lastly. When did your repurchase window open after these results were shared?

Patrick Ramsey

We are in a 10b 5 [ph] plan, so we could purchase.

Steve Altebrando – Sidoti & Company

Okay.

Patrick Ramsey

So also limitations on the plan that, are obviously included in the plan. But from a open window, close window perspective we are not prohibited from buying right now.

Steve Altebrando – Sidoti & Company

Okay, thanks for taking my questions.

Patrick Ramsey

Thanks Steve.

Operator

Thank you, your next question is from Todd Eilers of Roth Capital Partners. Your line is open.

Todd Eilers – Roth Capital Partners

Good morning guys. Congrats on a nice quarter, one is to ask a follow-up on the Chickasaw agreement as well, with respect to the reduction I guess of the remaining 50% of the footprint, how should we kind of look at that going forward or modeling that? Will that be pretty consistent kind of spread equally along each quarter or should we expect higher amount in their early quarters or just how should we look at that going forward?

Patrick Ramsey

Just like you said in the first comment, it’s pretty much spread equally over that two and a half year period.

Todd Eilers – Roth Capital Partners

Okay, and then I would presume the remaining 25% with that, the eventual goal is to kind of replace the majority of that with your or if not all of that with your own proprietary products is that the goal?

Patrick Ramsey

Yeah, that’s right.

Todd Eilers – Roth Capital Partners

Okay. And then can you refresh our memories, when is the next I guess important Chickasaw tranche coming up for renewal.

Patrick Ramsey

Yeah, there are two important tranches coming up in 2013 towards the later part of our fiscal year and Riverwind is one of them, we have a over 900 units at that property and then the first tranche of Winstar comes up where we have just over a 1000 games they are both around that same time. So it’s about 1900 games around the same time in 2013.

Todd Eilers – Roth Capital Partners

Okay and then is the, I guess how other than a greater number of units how might that sort of contract be looked at differently than the one you just extended. I mean should we expect you guys to look to kind of do something similar or you would have a reduction of about 50% of your footprint or might this be a little bit different.

Patrick Ramsey

Well, it’s hard to predict into 2013, so I can give you some facts that are probably a little bit different and reasons why I think it is a little bit different. We have over 900 games at Riverwind, which represent 35% of the floor and so that’s obviously different from what we do with smaller properties where we just came from and that at Winstar its different completely and I mean we have two different tranches there one in 2013 one in 2015, the first tranche represents 16% of the floor and the second tranche represents 22% of the floor. So obviously and then the factorial [ph] performance obviously that’s important to our customer and to us as well, so its I don’t want to look at that and I don’t want to project there is each property is different and time is different but I think that probably helps you get an idea of sort of where we stand at these property and the timing.

Todd Eilers – Roth Capital Partners

Sure that’s helpful, and then. Sorry go ahead.

Patrick Ramsey

This is the first property we had the highest percentage of total floor versus all the other properties, so that’s why this one is slightly different than may be going forward.

Todd Eilers – Roth Capital Partners

Okay. And then I guess moving on to game sales I think in the press release you mentioned about half of units shipments or sales coming from the state of Washington can you may be obviously you guys got approved to sell under Mississippi Commercial Casinos. Can you give us a sense for how many games you shipped into the Mississippi Commercial Casinos in the quarter?

Adam Chibib

Well we sold 12 in the Mississippi in during the quarter and we added some on participation during the quarter. I think it’s kind of 10 and we’ve got a bunch on trial there as well.

Todd Eilers – Roth Capital Partners

Okay and so should we expect I guess increased sales than I would presume may be in the fourth quarter or I guess what’s driving the increase and expectations for unit shipments in the fourth quarter what markets is that coming from?

Adam Chibib

It’s really coming from you know how it starts low and try to build so it’s coming from all markets spread equally. I think Washington will still be a driver in the fourth quarter, but we see, we are seeing success in every market right now and as we alluded to in the press release we are into eight new gaming markets for this past quarter and we expect eight as well to drive the numbers for the fourth quarter.

Todd Eilers – Roth Capital Partners

Okay and then last question, it sounds like the TournEvent slot session product continues to gain traction can you may be review with us how you generate revenue form that product and you mentioned I guess installs but I guess how may slot machines is that or I guess how many slots per install is there and what are your expectations I guess going forward for that product?

Adam Chibib

So the expectations going forward are you are right it’s a more key product that generates a lot of excitement with customers and end users as well. So it’s, we expect to see that to continue to grow. I think on average we are selling 12 to 14 machines with each installation so that it pulls through a lot of games as well. We are not even licensed in Washington yet to sell that product so that’s something that will open up for us over the next couple of quarters. So we do expect that to be a big driver of unit sales going forward and it is something that we can tell as a more key product that most of competitors don’t have anything too similar to that.

Patrick Ramsey

And I will add on to that Adam just summarized the direct effects I think there we also look at as we spoken many times there are indirect effects where it helps us get on the floor for the first time and expand our other products from that. So it’s obviously important to us.

Todd Eilers – Roth Capital Partners

Okay and then in terms of revenue you are still there is an upfront kind of sale and then a small piece of kind of recurring revenue for that product is that right.

Adam Chibib

We simplified it to where the fee for the, the service fee for the system is upfront as well that just helps simplify it for the customer and its actually worked pretty well from a pressuring perspective and obviously are inscribing we’ve got very strong margins during the quarter and high ASPs and that’s a part of it.

Todd Eilers – Roth Capital Partners

Okay, Okay. All right thanks guys congrats on a great quarter.

Patrick Ramsey

Thanks Todd.

Operator

(Operator Instructions). All right Mr. Ramsey please go ahead with your closing remarks.

Patrick Ramsey

Well thank you for joining the call and we look forward to continuing to share our results with you. Thanks again.

Operator

Ladies and gentlemen thank you for your participation in today’s conference. This concludes the program.

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