Multimedia Games' CEO Discusses F2Q 2012 Results - Earnings Call Transcript

May. 3.12 | About: Multimedia Games, (MGAM)

Multimedia Games, Inc. (NASDAQ:MGAM)

F2Q 2012 Earnings Call

May 3, 2012 9:00 am ET

Executives

Jerome R. Smith – Senior Vice President, Chief Compliance Officer and General Counsel

Patrick J. Ramsey – President, Chief Executive Officer and Director

Adam D. Chibib – Senior Vice President and Chief Financial Officer

Analysts

Todd Eilers – ROTH Capital Partners LLC

Stephen Altebrando – Sidoti & Co. LLC

David Ehlers – Las Vegas Investment

Operator

Good day, ladies and gentlemen and thank you, for standing by; and welcome to the Multimedia Games Incorporated Second Quarter 2012 Conference Call and Webcast. At this time, all participants are in a listen-only mode. Later we’ll conduct a question-and-answer session, and instructions will follow at that time. (Operator Instructions) As a reminder, today’s conference maybe recorded.

And now it’s my pleasure to turn the call over to Jerry Smith. The floor is yours, sir.

Jerome R. 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 limitations the Private Securities Litigation Reform Act of 1995. These statements are based on management’s current belief, 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 or financial conditions 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 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 such as EBITDA within the meaning of Regulation G. A reconciliation 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, www.multimediagames.com in the Investor Relations section.

Financial and operating metrics provided during today’s call and webcast maybe approximated. Please refer to the company’s financial statements as provided in today’s SEC filings and earnings release for more definitive numbers.

And now, it’s my pleasure to turn the call over to our President and CEO, Patrick Ramsey.

Patrick J. Ramsey

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

We are joining you today from the fantastic Pechanga Resort and Casino in Southern California, which is noteworthy, because our product position on this property is very representative of where we’ve been as a company over the last decade. Years ago, we were a major force on this casino floor as an equipment supplier, and after a long hiatus, it is great to see over 150 MGAM games, both Class II and Class III back in action at this facility.

This morning we reported first quarter revenues of $39.5 million, up over 31% year-over-year, and diluted earnings per share of $0.24 versus $0.04 last year, obviously a strong quarter for us. It is in fact our tenth consecutive quarter of increasing our operating income. As usual, I will start at the top because truly it our top line that’s most encouraging.

As noted in our press release this morning, our growth this quarter was significant and diversified. Said differently, we grew in every market outside of Mexico. First, we saw very strong results in our core Oklahoma market, where revenue increased 11% year-over-year from $15.3 million to $17 million. I believe this growth was driven by several factors.

First and foremost, we saw some very strong business results from our largest customer, the Chickasaw Nation, which was likely a result of the combination of factors that typically drive operating results, smart marketing, a focus on customer service and the effective usage of the amenities, as well as the benefits from our investments and new product development over the last few years. We’ve been investing millions of dollars in our footprint there. So we were able to capitalize on their growth as our machines continued to yield better results year-over-year.

Outside of the Chickasaw Nation, our results in Oklahoma were also impressive. Our footprint increased almost 300 units year-over-year as we continue to gain traction around many parts of the state through our own product expansion. Outside of Oklahoma, I won’t go through each and every market, but I’ll tell you that overall, the results are incredibly positive.

The New York Lottery has clearly been a big driver for us, but there are other great stories as well. We are seeing growth rates in our gaming operations revenue of well over 100% in several parts of the country, and thanks to those strong products and relationships in those regions. They are becoming significant revenue sources for us.

As for our sales business, we were conservative in adjusting our annual guidance after our first quarter. However, given another strong quarter where we essentially doubled our sales revenue year-over-year, and given our visibility into our third quarter, we have decided to significantly raise our annual EPS estimate to a level of approximately three times that we have projected before we began the year.

This directly reflects what we’ve been saying for a couple of years. We can create products that customers enjoy, and we have and we’ll continue to work our way into many new jurisdictions. We feel we have one of the most impressive sales and field service teams in the industry, teams that are growing as we add new markets and new customers, and an incredibly talented group of game designers, developers, and engineers who are the backbone of the strategy.

Before Adam goes into the detailed financial results, and now that we are mid way through our fiscal year, I wanted to quickly touch on the four initiatives that we articulated at the beginning of the year. First, the expansion of our MGAM footprint in the U.S. is clearly underway, and in fact growing faster than we had projected. Second, it is strategically and financially important that we continue to grow the proprietary MGAM Class II footprint within the Chickasaw Nation, and we have continued investment here.

In fact year-over-year, we’ve grown our Class II footprint by almost 500 units, which represents a significant portion of our footprint. And of course, we have done so with a careful eye on maintaining and growing revenues there.

Third, we need to continue to be prudent with both of our capital and our expenses, and I think both our year-to-date profitability and cash flow reflect a diligent management in these areas. We are spending more money to grow our business, but believe we are doing so appropriately with an eye on our bottom line.

Fourth, we continue to be focused on creating great games and technologies. Although the financial results have not yet at this point had a material effect, the recent introduction of our High Rise Games in my opinion is nonetheless significant. It essentially represents the first time that we have developed the line of products to target the premium participation segment. Although it is early, we’re encouraged at the initial results. In fact MoneyBall, which is a bonusing feature of certain High Rise Games, recently was recognized as one of Casino Journal’s top 20 most innovative gaming and technology product.

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 D. Chibib

Thank you, Pat. Revenues for our fiscal second quarter totaled $39.5 million, an increase of $9.4 million or approximately 31% year-over-year. The year-over-year revenue growth came from an increase in unit sales and an increase in our gaming operations business.

Our fiscal second quarter revenues include the sale of 472 gaming units, with revenues totaling $8.5 million versus 240 units and $4.2 million in revenues in the prior year period. Unit sales occurred in 11 states, with Washington and California accounting for the majority of the sales, followed by Mississippi and Louisiana.

During the quarter, we added Wisconsin and North Dakota to our list of states with unit sales, bringing our total number of states with sold units to 17. Gaming operations revenues for our fiscal second quarter totaled $29 million, an increase of $5.6 million or approximately 24% year-over-year. The increase in year-over-year gaming operations revenue is attributable to 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 $1.1 million year-over-year.

The New York Lottery revenues grew by $1.9 million or approximately 90% year-over-year, driven by the opening of Resorts World and Queens and the addition of electronic table games and extended hours at Yonkers Raceway.

Our domestic installed base was 9,891 units at the end of fiscal Q2, an increase of over 1,000 units or approximately 12% over the prior-year period, and an increase of 258 units or approximately 3% on a quarterly sequential basis; with the majority of this sequential unit growth coming from outside of Oklahoma.

Gross margins for our fiscal second quarter were approximately 84%, which represents a slight improvement over the prior-year period and our fiscal first quarter. The gross margin improvements relate to a higher percentage of our revenues coming from gaming operations.

Selling, general and administrative expenses for our fiscal second quarter were $13.1 million, an increase of $3.7 million or approximately 40% from the prior-year period, and up approximately $1.6 million or 13% on a quarterly sequential basis. The increase in SG&A expenses is related to higher compensation as we continue to add sales and service personnel throughout the U.S., higher variable compensation, and higher marketing and events cost associated with our TournEvent of Champions and other customer promotions.

Research and development expenses were $3.9 million, an increase of $698,000 or just under 22% from the prior year period, and that’s $418,000 or 12% on a quarterly sequential basis. The year-over-year and the quarterly sequential increase is attributable to higher salary and benefit expenses as we continue to invest in retaining and attracting engineering personnel, and an increase in game submission costs paid to testing labs for game approvals in an increased number of jurisdictions.

Depreciation and amortization expense for our fiscal second quarter was $9.5 million, a decrease of $820,000 or approximately 8% from the prior year period, and down $178,000 or approximately 2% on a quarterly sequential basis. The decrease in depreciation and amortization is attributable to lower capital expenditures over the last two years.

Income tax expense for the quarter totaled $181,000 with an effective cash tax rate of just under 3%. We expect our cash tax rate for the second half of fiscal 2012 to range from 2% to 5% of our pre-tax income. Looking forward to fiscal 2013, we expect our effective tax rate to range from 36% to 40% as we expect our remaining net operating losses will be fully utilized by the end of fiscal 2012.

Net income for our fiscal second quarter was $6.8 million or $0.24 per diluted share, compared to net income of $1.2 million or $0.04 per share in the prior year period. EBITDA for our fiscal second quarter was $18.2 million, an increase of $4.1 million or approximately 29% from the prior year period, and up $1.9 million or approximately 12% on a quarterly sequential basis.

We continue to generate cash, even as we invest back into the company, with the expansion of our proprietary unit footprint, continued repurchase of our existing footprint and repurchases of our common stock. Also during the fiscal second quarter, we invested $13.2 million to renew several previously announced long-term placement agreements with the Chickasaw Nation and $11.5 million of net capital expenditures to expand and refresh our existing footprint.

We made no share repurchases under our share repurchase program. Since the inception of the share repurchase program in December 2010, the company has purchased a total of $2.2 million at an average price of $5.36 per share. Our fiscal second quarter end cash balances totaled $57.7 million, an increase of just under $4 million from our fiscal first quarter, and up almost $27 million from the 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 $22.2 million.

As a result of our strong first half of the fiscal year, we’ve increased our earnings per share target to a range of $0.72 to $0.76 per diluted share. For the full year, we believe revenues to be in the range of $144 million to $147 million, with unit sales in the range of 1,650 to 1,700 units. We are pleased with the progress we’ve made with respect to cash flows, unit sales and gaming operations for the quarter.

I’ll now turn the call back over to Pat for some additional commentary before we get to Q&A. Pat?

Patrick J. Ramsey

Thanks, Adam. Like I concluded in our last call, we are proud of what we have achieved, but the reality is that we still have a very small piece of the U.S. gaming market and we have lot of work ahead of us over the next several years. In the future, we expect to enter some major jurisdictions including Nevada, and to do so with our new gaming platform.

Our product timing and acceptance in many of these new markets are still unknown. So even though our recent results have given us confidence, we want to also remain realistic about our growth going forward. We have several headwinds, among them the previously announced unit reductions at the Chickasaw facilities as well as the pricing adjustment at Windstar and the challenging Mexican operation. Not to mention our competitors, almost all of them are substantially bigger and more intrenched than we are. But we will continue to push for growth, and we believe we will continue to emerge as a formidable competitor in all major U.S. gaming markets.

Finally before opening up to Q&A, I would like to thank Buddy Frank and his team here at Pechanga for hosting us on this call, and further support his customers. Having said that, I’ll now open it up to Q&A. Operator?

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions) Our first question here in queue is Todd Eilers with ROTH Capital. Please go ahead. Your line is now open.

Todd Eilers – ROTH Capital Partners LLC

Hi, guys. Good morning.

Adam D. Chibib

Good morning

Todd Eilers – ROTH Capital Partners LLC

Congratulations on another really strong quarter. Several questions, first of, I guess on game sales, I think in your comments you mentioned the majority of unit shift were from the Washington and Californian markets this quarter. Can you may be give us a sense for how much each of those markets represented in terms of the shipments. And then, can you also may be give us a sense for how much of the North American market you’re currently addressing or approved to address?

Adam D. Chibib

Yeah, so I think the market share penetration in our available markets is pretty consistent with what it has been in the past quarters, with the exception of those two mistakes that came online. So my guess is, it’s between 25% and 30% right now and we’re waiting on Nevada obviously. As far as the total percentage for those two states, I believe it’s about 56% of total unit sales were from those two states during the quarter.

Todd Eilers – ROTH Capital Partners LLC

Okay. And then, I know on past calls you’ve kind of mentioned TournEvent as kind of a percent of sales. Can you give us a sense for how much of your sales, I guess were under the TournEvent umbrella this quarter?

Adam D. Chibib

Yeah, this quarter was higher than the last couple of quarters, which I think those were around 25%. For Q2, we were 30% of total unit sales and as you know, we just opened up the Washington market back for TournEvents, that was probably why it spiked this quarter relative to the past quarters.

Todd Eilers – ROTH Capital Partners LLC

Okay. And obviously a very strong game sales or unit sales number, can you maybe give us a sense, I don’t know if you have this number. But it would be nice to know maybe what the average order size is or if you had any very large orders in the quarter, just to kind of get a sense for kind of the make-up of that would be helpful as well?

Adam D. Chibib

Well, I think on average 10 to 14 is the size of an order in any given quarter. I don’t know that we had any extraordinarily large orders; I don’t think any orders were over 50 this quarter. So they were under 50 as far as large orders.

Todd Eilers – ROTH Capital Partners LLC

Okay, and let’s see on the gaming op-side, can you give us how many of the units installed at the end of the period were in the Oklahoma market?

Adam D. Chibib

Yeah, the ending Oklahoma unit count was 7,679 units.

Todd Eilers – ROTH Capital Partners LLC

Okay and, then, I think you guys gave some numbers, but I might have missed it. Can you also tell us how much of your installed base at the end of the period for the domestic installed base was Class II? So excluding Mexico, just the domestic number, how much of that was Class II games?

Adam D. Chibib

Yes, it’s around 3,500.

Todd Eilers – ROTH Capital Partners LLC

Okay and, then obviously High Rise is kind of a new product introduction for you guys. You haven’t had a premium game in a while. Can you maybe give us a sense for maybe what the backlog looks for that game at this point? And I know it’s a fixed fee revenue model for you guys, but to the extent you can kind of give us a sense for the performance of some of the first installs that might be helpful as well.

Adam D. Chibib

Yeah and I want to be cautious here, because we’re really early on. At the end of the quarter, we had 11 units, so I don’t want to take 11 units and extrapolate from there. I mean if – the demand looks good, we’re happy with it. The early product performance looks very good across the several facilities [ph] we’ve been (19:10), but again, I think it’s little too early to kind of give an indication on that.

Todd Eilers – ROTH Capital Partners LLC

Okay, that’s fair. And then I guess last question, just in general on your whole per day up select within an recognized increase in quarter. You know, obviously look like a nice increase in the quarter. Can you maybe speak to what was some of the primary drivers there? Was that just in general the markets are improving or was it the mix of game type or was it just better content that you guys are pumping out? Just kind of give us a sense for what’s driving kind of the revenue yield increase there?

Patrick J. Ramsey

Yeah, well – I think you stole my thunder. I think all three there are the answer. And remember, I’d mentioned this when I opened we saw some really strong numbers out of Southern Oklahoma in particularly Windstar. So they’re just – they’re really performing quite well and obviously with the big footprint there, that’s going to drive our numbers as well. So I think you summarized it pretty well, Todd.

Todd Eilers – ROTH Capital Partners LLC

Okay, all right. Well, perfect, guys, thanks again and I appreciate the time. Thanks guys.

Adam D. Chibib

Thanks Todd.

Operator

Thank you sir. Our next question in queue is Steve Altebrando with Sidoti. Please go ahead. Your line is open.

Stephen Altebrando – Sidoti & Co. LLC

Hi, guys, nice quarter.

Adam D. Chibib

Thank you, Steve.

Stephen Altebrando – Sidoti & Co. LLC

Back to the yields – we could – I mean part of mix is – part of the improvements due to mix, but could you give kind of a year-over-year improvement and win per day, what it would be domestically or kind of on a same-store basis?

Adam D. Chibib

Yeah, that’s – I’ve got a very rudimentary average that I track, that’s not a perfect number, but it’s almost $3 a day increase year-over-year from where we were in Q2 of last year. Again, I use a very simple weighted average when I calculate my numbers, that when you take a daily average will be different. But it is pretty significant year-over-year on the yield, and part of it like Pat said is due to just really strong growth in Oklahoma and also the other half that we’re entering new jurisdictions that just have higher yields in general. So California market, it’s a pretty strong market and so, the more units we have there, the better pick up we have with the yield.

Stephen Altebrando – Sidoti & Co. LLC

Okay, that’s just very helpful. And then back to TournEvent, I know it’s mostly a – I believe it’s mostly a per sale game, but is that a meaningful driver of the installed base on the participation side?

Adam D. Chibib

Sure. As we’ve expressed, I mean that’s a critical part of our strategy. So you’re right, it’s driving sales, but like we’ve said in the past, it’s a bit of our common card to help expand our footprint in around the country. So, yeah.

Stephen Altebrando – Sidoti & Co. LLC

Do you – I’m sorry. Do you have I mean, is it a significant portion of the installed base currently or is it meaningful?

Adam D. Chibib

Yeah, the only place that’s on rev share is predominantly in the Oklahoma market, and it does not make a significant percentage of that installed base. It does not.

Stephen Altebrando – Sidoti & Co. LLC

Okay. And then, is there any update on Nevada platform license?

Patrick J. Ramsey

No, nothing official. I mean, we continue to do the process and continue working with a lab there. So we’re still not standard on product hitting the Nevada floor for this fiscal year.

Stephen Altebrando – Sidoti & Co. LLC

Okay. And then I noticed there is a sequential jump in intangibles on the balance sheet? Is there any color you can give on that? Is that licensing teams or technology?

Adam D. Chibib

Yeah, remember the ad, we did the Chickasaw renewal, and we paid for that renewal in our second quarter and that was $13.2 million. So that’s – the effect of that renewal of that placement agreement, that $13.2 million goes on the balance sheet…

Stephen Altebrando – Sidoti & Co. LLC

Okay.

Adam D. Chibib

…as the intangible asset. And then we’ll eventually be amortized against revenue when those contract period starts. So that’s exactly what it is with the dollar-for-dollar increase for that Chickasaw placement fees.

Stephen Altebrando – Sidoti & Co. LLC

Okay. And then just the last one, I know you guys have been seeing a little bit of a shift towards Class II. Is that continuing?

Patrick J. Ramsey

Yeah. I don’t know if I’d call it a shift towards Class II. I mean, if you’re referring to the growth in the footprint, a lot of that, a significant portion of that is, us proactively replacing some of that footprint in Chickasaw Nation. But we are seeing good customer acceptance and good performance around United States, where there is Class II product. So I think that’s…

Stephen Altebrando – Sidoti & Co. LLC

Okay. Thanks a lot, guys.

Adam D. Chibib

Okay. Thank you, Steve.

Operator

Thank you, sir. (Operator Instructions) Our next question in queue is David Ehlers with Las Vegas Investment. Please go ahead, your line is open.

David Ehlers – Las Vegas Investment

Yes, good morning and congratulations for the great quarter.

Patrick J. Ramsey

Thank you, David.

David Ehlers – Las Vegas Investment

Can you give us some light generally, when you guys go to produce a machine, obviously you’re going to produce like 20, 30 different titles this year somewhere around there?

Patrick J. Ramsey

Yeah, we’ll be up higher than that.

David Ehlers – Las Vegas Investment

Okay. The quite – it looks like our estimates of R&D and so forth, it looks like it crosses approximately $1.5 million or there about. When you come out of a game period, can you give us any indication what you’d expect over the life of the game in terms of total units sold or placed?

Patrick J. Ramsey

That is a tough one to answer David, just because the variability is huge. As you know, from studying this industry for a while now, a game, we can came out with a game and then it also varies a lot by jurisdiction. So in general I’d say, if you had to pin me on a number of how long a game can be out there, unless it’s maybe 12 months to 24 months, but we have games that don’t last nearly that long and obviously there are games in the industry that lasts a lot longer and we have those as well such as Meltdown, which has been a product that’s been around for 10 years now. And if you’re looking at the R&D cost per game, it’s actually about $100,000 per game, not $1.5 million per game, if you’re strictly looking at our R&D costs divided by total number of new games produced.

David Ehlers – Las Vegas Investment

Okay I got, it’s pretty much higher. Now, I presume if you at this point you disclosed the number of TournEvents – the TournEvents with some drop there (25:56). Do I presume you’re not mentioning means, it probably for competitive reasons, you’d feel comfortable with might not saying anything.

Patrick J. Ramsey

No.

David Ehlers – Las Vegas Investment

I think you tell us the number of TournEvent systems out there now.

Adam D. Chibib

I think by the end of the quarter, we were at 61 at the end of Q1, I believe we’re – Q2, end of – our Q1 number. We’re probably closer to 70 as of right now, that’s my guess, 75 as of today.

David Ehlers – Las Vegas Investment

Okay and there is only a 11 of the High Rise progressive games at the end of the quarter or is it at the present time is only 11.

Adam D. Chibib

At the end of the quarter, there were 11 revenue producing High Rise games. We have more on trial about a 11 are producing revenue at the end of the quarter.

David Ehlers – Las Vegas Investment

Can you give us an idea what that number might be?

Adam D. Chibib

At the end of the quarter, it was only 11 unit deals and we’re going to keep the same cut offs. So we are going to continue to report the end of period numbers and not during the (inaudible). That would be to be competitive.

David Ehlers – Las Vegas Investment

Okay, very good. Well, congratulations again. I’m just sure bringing this trigger back to life.

Adam D. Chibib

Thank you.

Operator

Thank you. And, it looks like that concludes our time for questions. I’d like to turn the program back over to Mr. Ramsey for any additional or closing remarks.

Patrick J. Ramsey

Thank you, Operator. Thanks for those who have joined us on the call. This concludes our second quarter earnings update and we appreciate your interest in our business. Thanks.

Operator

Thank you again. Again ladies and gentlemen this does conclude today’s program thank you for your participation and have as wonderful day. Attendees you may disconnect at this time.

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