Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Multimedia Games Inc. (NASDAQ:MGAM)

Q1 2012 Earnings Call

February 1, 2012 9:00 am ET

Executives

Patrick Ramsey – Chief Executive Officer, President

Adam Chibib – Chief Financial Officer

Jerry Smith – General Counsel

Analysts

Todd Eilers – Roth Capital Partners

Steve Altebrando – Sidoti & Co.

Barry Kaplan – Maple Tree Capital

Operator

Good day ladies and gentlemen and welcome to the Multimedia Games Incorporated First Quarter 2012 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. Should anyone require operator assistance on today’s conference, you may press star and then zero on your touchtone telephone. As a reminder, this conference call is being recorded.

I would now like to turn your conference over to your host for today, Mr. Jerry Smith, General Counsel. Sir, you may begin.

Jerry Smith

Thank you. Good morning. Today’s call and webcast contains statements about future events and expectations which are characterized as forward-looking statements within the meaning of the applicable securities laws, including without limitation the Private Securities Litigation Reform Act of 1995. These statements are based on management’s current beliefs, assumptions and expectations of our future economic performance, taking into account information currently available to us. Forward-looking statements involve risks and uncertainties that may cause our actual results, performance of financial condition to be materially different from the expectations of such results, performance or financial condition. Please refer to the risk factors section in our current and 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 such as EBITDA within the meaning of Regulation G. Direct conciliation of 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 and recent SEC filings and can also be found along with today’s earnings release on our website at www.multimediagames.com in the Investor Relations section. Financial and operating metrics provided during today’s call and webcast may be approximated. Please refer to the Company’s financial statement as provided in today’s SEC filing and earnings release for more definitive numbers.

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

Patrick Ramsey

Thank you, Jerry, and good morning everyone. Thank you for joining us on this call. Joining me this morning in Austin is Jerry Smith, General Counsel; Adam Chibib, our Chief Financial Officer, and Mick Roemer, our Senior Vice President of Sales.

I’m pleased to report that the momentum we had throughout fiscal 2011 has continued into 2012. This morning, we reported first quarter revenues of 34.8 million, up 22% year-over-year, and diluted earnings per share of $0.21 versus a loss of $0.05 last year, a great start to fiscal 2012. There are several items that drove these particularly strong EPS results, which Adam will review in more detail, but I’ll start at the top.

If you recall on our fiscal 2011 year-end conference call in November, I reviewed four key initiatives that would be integral to MGAM’s success in 2012. As our first quarter results indicate, we are off to a successful start in executing against each of these initiatives. First, our top priority is to continue to expand the footprint of MGAM products throughout the country, both through selling our product and expanding our pace in recurring revenue units. In the first quarter, we achieved strong results for both aspects of our business. Recurring revenue grew approximately $3 million year-over-year or 13% despite a million dollar decline in our Mexican business. We achieved good results out of Oklahoma, our largest market, where revenue increased approximately 2% year-over-year or by $300,000. The main drivers of growth in our gaming operation segment came from our central determinant system in New York (inaudible) from our recurring revenue generated by an expanded domestic footprint of both Class II and Class III products outside of Oklahoma. New York Lottery revenues grew over 1.2 million or 60% year-over-year, and domestic recurring revenue outside of Oklahoma and the New York Lottery grew over 2.4 million or 68%.

Unit sales also increased year-over-year as we sold 408 proprietary (inaudible) units in this year’s first quarter versus 201 in last year’s first quarter, and we did so by selling into 10 states, which is important as we continue to diversify our markets and customer base.

The second initiative that we previously discussed was to continue to increase the mix of successful proprietary Class II games in the footprint of our largest customer in Oklahoma. Year-over-year, we replaced over 350 Class III games with our own proprietary Class II games and we have plans to continue this game mix transition throughout the year. Our focus on this initiative and the success we are achieving in the game performance of our proprietary Class II games helps to strengthen our strategic relationship with the Chickasaw Nation.

As you may have read, two weeks ago we came to an agreement with the Nation regarding the extension of placements for over 2,000 units at several of their largest properties and we believe these extensions are a good indication of our alignment and our customers’ increased confidence in our strategic direction. These agreements were originally set to expire in the middle of 2013, and pursuant to our new agreements we have extended the majority of these units for 3.5 years beyond the original expiration date. We also worked together on a staggered re-pricing on our revenue share for our traunch of games at WinStar that was on a higher revenue share than all of the others throughout Chickasaw Nation. Working through these extensions and changes well ahead of the expiration was very important to us as our 2,000 (inaudible) game footprint generated over 25 million in revenue for our company in fiscal 2011.

We are grateful for the support of the Chickasaw Nation and we believe this new development supports what we have said over the past several years – that we will continue to grow as our business transitions and we will continue to invest in R&D to support our growth.

Third, I told you that we are focused on growing our profits and being prudent with both our expenses and our capital investments. I believe our strong EPS results reflect this commitment and that our revised guidance for fiscal 2012 demonstrates that we can continue successfully down this path.

Finally, our team in Austin is focused on creating and building new games and technologies that serve as a key to our growth into many of the new markets that we are just entering or will be entering pending approvals. Having said that, I will now turn the call over to Adam Chibib, our Chief Financial Officer, for a more detailed breakdown of our financial results. Adam?

Adam Chibib

Thank you, Pat. Revenues for our first fiscal quarter totaled $34.8 million, an increase of $6.2 million or approximately 22% year-over-year. The year-over-year revenue growth came from an increase in unit sales and an increase in our gaming operations. Our fiscal first quarter revenues included the sale of 408 gaming units with revenue totaling $7.5 million versus 201 units and 3.4 million in revenues in the prior year period. Unit sales occurred in 10 states with Washington and California accounting for the majority of the sales, followed by Mississippi and Iowa. During the quarter, we added Arkansas to our list of states with unit sales into our total number of states with sold units to 15.

Gaming operations revenues for our fiscal first quarter totaled $24.9 million, an increase of $2.9 million or approximately 13% year-over-year. The increase in year-over-year gaming operations revenue is attributable to the increased revenues from our New York Lottery business and an increase in our installed participation base across all markets, with the exception of Mexico which was down $1 million year-over-year. The New York Lottery revenues grew by $1.2 million or approximately 60% year-over-year driven by the opening of Resorts World near Queens and the addition of electronic table games and extended hours at Yonkers Raceway.

Our domestic installed base was 9,633 units at the end of fiscal Q1, an increase of over 950 units or approximately 11% over the prior year period, and an increase of 254 units or approximately 3% on a quarterly sequential basis.

Gross margins for the fiscal first quarter were approximately 82%, consistent with the prior year period and with our fiscal fourth quarter. SG&A expenses for our fiscal first quarter were $11.5 million, a slight increase from the prior year period and up approximately $721,000 or 7% on a quarterly sequential basis. The quarterly sequential increase in SG&A expenses is related to the advertising and tradeshow expenses (inaudible) G2E Trade Show.

Research and development expenses were $3.6 million, an increase of $438,000 or just under 14% from the prior year period, and up $430,000 or 13% on a quarterly sequential basis. The year-over-year and quarterly sequential increase is attributable to higher salary and benefit expenses as we continue to invest in retaining and attracting engineering personnel.

Depreciation and amortization expense for our fiscal first quarter was $9.7 million, a decrease of $300,000 or approximately 3% from the prior year period, and down $740,000 or approximately 20% on a quarterly sequential basis. The decrease in depreciation and amortization is attributable to lower capital expenditures over the last several years.

Net income for our fiscal first quarter was $5.8 million or $0.21 per diluted share compared to a net loss of $1.4 million or $0.05 per share in the prior year period. Included in that income for our fiscal first quarter were several non-recurring items totaling $0.07 per share. The first non-recurring item is a $900,000 or $0.03 per diluted share gain recorded in other income from a trade-in of third party equipment back to the original manufacturer. The second non-recurring item is a $1 million or $0.04 per diluted share income tax benefit related to the release of a reserve against an uncertain tax position.

EBITDA for our fiscal first quarter was $16.3 million, an increase of $5.8 million or approximately 55% from the prior year period, and up $673,000 or 4% on a quarterly sequential basis.

We continued to generate cash even as we invest back into the Company through the expansion of our proprietary unit footprint, continued refreshes of our (inaudible) footprint, and repurchases of our common stock. During our fiscal first quarter, we invested $8 million in net capital expenditures to expand our existing footprint and to refresh certain of our lower performing machines. Additionally, we purchased $1.9 million of Company stock or approximately 393,000 shares at an average price of $4.78 per share. Since the inception of the share repurchase program in December of 2010, the Company has purchased a total of 2.2 million shares at an average price of $5.36 per share. As of December 31, 2011, we had approximately $3.1 million remaining under the $15 million common stock repurchase plan.

Our fiscal first quarter end cash balance totaled $53.7 million, an increase of $7 million from our fiscal 2011 fourth quarter and more than double our quarter-end balance in the prior year period. The Company is currently in a net cash position, which is defined as total cash less total debt, of $17.7 million. As a result of our strong first quarter, we have increased our earnings per share targets for the year from a range of $0.23 to $0.26 per share to a range of $0.42 to $0.45 per share.

We are pleased with the progress we have made with respect to cash flow, unit sales, and gaming operations for the quarter. I will now turn the call back to Pat for some additional commentary before we get to Q&A. Pat?

Patrick Ramsey

Thanks, Adam. We are proud of what we’ve achieved over the last several quarters, but the reality is that we still have a very small piece of the U.S. gaming market. To us, this means we have a great opportunity for continued success and growth. In 2012, we will continue to focus on our core initiatives and of course on developing and releasing great products for an expanding number of markets. The $13.2 million investment we made in the Chickasaw Nation in Oklahoma is a great example of putting our money to work in our core business, and I believe it is an important step to take for our future.

Our TOURN EVENT product continues to be in high demand by our customers as we now have over 60 deployments. Our first High Rise games are being tested in several markets as we speak and the initial results are strong; and many of our other games, including Side Action and (inaudible) mechanical wheels are seeing very strong results.

Having said that, I’ll now open it up to Q&A. Operator?

Question and Answer Session

Operator

Thank you. Ladies and gentlemen, if you’d like to ask a question at this time, please press star and then one on your touchtone telephone. If your question has been answered or you would like to remove yourself from the queue for any reason, you may press the pound key. Once again, to ask a question please press star and then one now.

And our first question comes from the line of Todd Eilers from Roth Capital Partners. Your line is now open. Please go ahead.

Todd Eilers – Roth Capital Partners

Morning, guys. Congratulations on another really strong quarter. Several questions – first off, on guidance, the new guidance range of $0.42 to $0.45, I’m assuming that includes the $0.07 non-recurring items in the quarter. Is that correct?

Adam Chibib

That’s correct.

Todd Eilers – Roth Capital Partners

Okay. And then with respect to game sales, obviously pretty strong quarter. You mentioned Washington and California being the majority of sales, I believe. Can you maybe give us a sense for what the percentage contribution was for each of those markets?

Adam Chibib

Yeah. (Inaudible) calculating the total sales, it’s slightly over 50% for the quarter so it’s probably 30% coming from Washington and 20% coming from California.

Todd Eilers – Roth Capital Partners

Okay. And then I think you guys mentioned on TOURN EVENT that you had 60 deployments now. Can you give us a sense for how much of the game sales in the quarter were related to TOURN EVENT sales?

Adam Chibib

Yeah, just over 30% related to TOURN EVENT for the quarter.

Todd Eilers – Roth Capital Partners

Okay. And then, let’s see—on the New York Lottery, you guys said that was up, I think, 1.2 million or 60% year-over-year. So if we track the revenue on the Lottery website for the VLT business, it looks like it was up about 40% in the quarter; and I know you guys had, I believe, changed the contract in terms of what you guys receive for running the central system. I guess you now get a little bit higher rate there, which presumably is part of the reason why you guys grew faster than the market there. Can you talk a little bit about that?

Patrick Ramsey

Yeah, sure. No, you hit the nail on the head – there was a pricing change. And we don’t track exactly to those stats because of also some marketing expenses as well, but (inaudible) of how we’re paid. But that explains—the majority of that item would be the variance and is explained by the re-pricing.

Todd Eilers – Roth Capital Partners

Okay. And then I guess one area that still hasn’t been all that great—I guess it’s been ramping down, Mexico. Can you talk a little bit about that market? At what point would you look to just shut that business down, and is it currently profitably, break-even, or a drag on the business?

Patrick Ramsey

Yeah, we’re constantly looking at the business and making sure it does make sense financially, and we’ll just keep looking at it. Right now, it’s profitable and it’s generating cash, and we’re going to keep on the path and be careful about investing more capital in it and keep a close eye on it to make sure that it makes sense before we go and make any decisions on it.

Todd Eilers – Roth Capital Partners

Okay, great. And then last question related to the new Chickasaw extension, obviously nice to see that. Think it removes a lot of potential risk to the business model transition, even better than we were looking for in terms of renewal rate there. When should we expect the placement fees, I guess, to hit; and then now that you have kind of this situation resolved and you’ve got a fairly large cash balance, what should we expect for deployment of capital here going forward? I mean, would you look to reduce debt, buy stock, pay a dividend, small acquisitions? Just what’s your thought process at this point?

Patrick Ramsey

Yeah, I’ll let Adam answer the latter right now; but we’re definitely happy with that agreement. And I know you mentioned we got it resolved – remember, we have a lot of work to continue to do to, to put great product in that footprint. So the first part of your question was about the payment, which is going up this second quarter, our fiscal second quarter. You’ll see that reflected in our next quarter, and I’ll address the second part a little bit and then Adam can add to it. We’re going to continue to look at—obviously we’re still in the process of our share repurchase program, and we’re going to look at other uses of cash. If it makes sense and if it’s prudent, we’re going to do that; but we want to be pretty focused on getting our core objectives and sticking to our core strategy.

Adam Chibib

Yeah, I think what I would add to that is that all the options you mentioned, which are share repurchases, continued investment in the footprint, dividends – all those will be on the table for consideration at the Board level and certainly at the upper level of management. It’s also important to remember, you know, a few short quarters ago we had about a couple million dollars of cash and a lot of debt, and we’re still working through and making sure that we have a strong balance sheet, which we know we do; but certainly, continuing to maintain a strong balance sheet is important to the Company as the Company expands into new markets.

Todd Eilers – Roth Capital Partners

Okay, great. Thanks, guys.

Patrick Ramsey

Thanks, Todd.

Operator

Thank you. Our next question comes from the line of Steve Altebrando from Sidoti & Company. Your line is now open. Please go ahead.

Steve Altebrando – Sidoti & Co.

Hi guys. Most have been answered, but just a couple quick ones – what’s the tax rate you’re assuming in your guidance? And then secondly, obviously last quarter you guided shipments up about 10 to 15%, and you crushed that – doubled them in the first quarter. So how much upside is there to that estimate, and how much of it is just kind of the lumpiness from quarter to quarter? That’s it, thank you.

Adam Chibib

Yeah, for tax rate we’re about 4% is the rate – 4 to 5% effectively is the cash tax expense that we’re tracking, and that’s relatively low. As far as your second question, I think you hit the nail on the head is that we have 10 sales guys and a very lumpy sales forecast, and so sometimes they hit and sometimes they don’t. It’s a little hard to predict, so we did have a really strong Q1. We expect some momentum to carry over, but I think guiding above the 10 to 15% growth that we had before, guiding above that now doesn’t make sense. Maybe as we get through the first half of the year, then we may revisit that; but I think that lumpiness and (inaudible) several sales (inaudible) that we have now (inaudible) point in time can really make that number lumpy on a quarter-to-quarter basis.

Steve Altebrando – Sidoti & Co.

Okay, thanks guys.

Adam Chibib

Thank you.

Operator

Thank you. Once again ladies and gentlemen, if you’d like to ask a question, please press star and then one now.

And we have a question from the line of Barry Kaplan from Maple Tree Capital. Your line is now open. Please go ahead.

Barry Kaplan – Maple Tree Capital

Hi, good morning. I was just curious on your thoughts how the New York governor has a proposal to redevelop the Aqueduct site into a big convention center, entertainment complex. I was just curious on how you’re thinking about that, to what extent it might potentially be an opportunity or risk (inaudible).

Patrick Ramsey

Well, I think—you know, I’m not going to predict what happens, what the ultimate decision is; but I think any additional development is good for the business and is good for (inaudible) and the people involved. So I’ve seen of the initial proposals as to what they’re considering, and I think it’d be great to draw business to that area, which is ultimately good for gaming as well and good for us.

Barry Kaplan – Maple Tree Capital

Okay, fair enough. Thank you.

Patrick Ramsey

Thanks.

Operator

Thank you. And with no further questions in queue, I would like to turn the conference back over to management for any closing remarks.

Patrick Ramsey

Thank you, Operator. Thanks to those who joined us on the call. This concludes our first quarter earnings update. We appreciate your interest in the business and we’ll talk to you again in the next quarter. Thanks.

Operator

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

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.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Multimedia Games' CEO Discusses F1Q12 Results - Earnings Call Transcript
This Transcript
All Transcripts