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

Multimedia Games, Inc. (NASDAQ:MGAM)

F3Q08 Earnings Call

August 6, 2008 9:00 am ET

Executives

Howard Chalmers - Senior Vice President for Corporate Communications

Anthony Sanfilippo - President, Chief Executive Officer

Randy Cieslewicz - Chief Financial Officer

Gary Loebig - Executive Vice President for Sales

Analysts

Michael Friedman - Noble Financial Group

Ryan Worst - Brean Murray, Carret & Co.

Justin Orlando - Dolphin Capital Management

Chris Pereece - Foxhill Capital

Chris Dechiario - ISI Capital

Operator

Welcome to the Multimedia Games third quarter 2008 conference call and webcast. (Operator Instructions) And now at this time for opening remarks and introductions, I'd like to turn the call over to Multimedia's Senior Vice President of Corporate Communications, Howard Chalmers.

Howard Chalmers

On this morning's call are Anthony Sanfilippo, our President and CEO, Randy Cieslewicz, Chief Financial Officer, and Gary Loebig, Executive Vice President for Sales.

I'd like to remind everyone that today's call and simultaneous webcast include forward-looking statements and these statements are based solely on present information and are subject to risks and uncertainties that could cause actual results to differ materially. 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 SEC 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 on our website, www.MultimediaGames.com, in the Investor Relations section.

I'd now like to turn the call over to Anthony Sanfilippo.

Anthony Sanfilippo

I'm very pleased to meet with you this morning for the first earnings call since I assumed the CEO role at Multimedia Games, and I'm glad to have with me my colleagues Randy, Gary and Howard.

As you probably know, the company has built an impressive number of solid and long-standing customer relationships, a formidable installed base of games and an impressive platform of IP to serve the domestic and global gaming markets. When I was first appointed, my first order of business was to focus on reviewing the company's portfolio of products and services and to conduct an analysis of expenses and to meet with multimedia team members and business partners in order to understand our current strengths and most likely opportunities for future success.

Our long-term success is predicated on our ability to provide products and services that are highly valued in the marketplace and which can drive profitable revenue streams, and I'll emphasize the profitable revenue streams. We're going to be highly focused on driving profitable revenue streams. I won't say it again, but know I'm thinking that in everything that we do at this company.

We're in the process of completing a comprehensive strategic review of our company and crafting an organization capable of building long-term sustainable value for our shareholders, and I look forward to sharing this evolving strategy in future discussions.

We have strong positions in each of our primary markets and each has potential for upside growth. We also have solid gaming technologies and systems, and I believe there's opportunities for our company to move into additional markets and to expand with more emphasis on innovative methods to serve the gaming industry. However, I do recognize that our company has to focus on a set of core competencies and to execute on those items very well to set ourselves apart from competing companies.

On this morning's call, Randy will review the quarter's operational highlights and financial results, and I'm going to walk you through some of my observations from the first 50 days that I've been on board. Now I ask our Chief Financial Officer, Randy Cieslewicz, Multimedia's financial officer for the last year or so, to review the highlights.

Randy Cieslewicz

As noted in our press release this morning, total revenue for the June 2008 quarter decreased approximately 2% year-over-year and on a quarterly sequential basis by 6%. The quarterly sequential revenue decrease was primarily driven by the fact that our fiscal second quarter is historically our highest performing quarter.

Revenues generated from the Oklahoma market were $19.2 million for the June 2008 quarter compared to $19.3 million for the March 2008 quarter and $17.8 million in the June 2007 quarter.

Revenues from Mexico were $2.4 million for the June 2008 quarter compared to $1.2 million in the June 2007 quarter, largely reflecting the year-over-year growth in the installed base in this market.

These year-over-year revenue improvements were offset by declines in revenues from Alabama and California of $1.6 million and $1.3 million, respectively.

With respect to our activities in Washington State, in Q3 we delivered 420 of the 600 player terminals sold in connection with the Spokane agreement, resulting in an increase in notes receivable of $6.7 million and an increase in deferred revenue of $3.5 million.

Gross deferred revenue of $6.7 million was offset by cost of sales of $3.2 million.

We have begun receiving notes receivable payments in Q4 and expect the notes to be paid off within 18 months. The revenue is recognized over the four-year term of this contract from the date in which all deliverables associated with this contract have been delivered, which is now expected to occur in Q1 FY '09. The deferral of revenue is related to revenue recognition and fair value for the new products allowed under the expanded compacts. Although we did not sign any new significant contracts in Washington State in Q3, we remain optimistic about our prospects for additional meaningful sales into this market.

SG&A expense of $16.1 million for the June 2008 quarter reflects a quarterly sequential decrease of approximately $0.5 million due to the inclusion in the second quarter of the charges related to the CEO transition. SG&A expense in the June 2008 quarter increased $0.7 million from the June 2007 quarter primarily as a result of additional personnel related to product reliability and Mexico operations. We expect SG&A of approximately $17 to $17.5 million in the September 2008 quarter. The anticipated increase in SG&A for the current quarter is primarily related to additional personnel and stock compensation expense associated with recent stock option grants.

We are evaluating our organizational and expense structure to make sure that each of our products and markets we serve are delivering the financial results that were expected or expect to deliver in the future.

Depreciation and amortization expense of $13.6 million increased $1.2 million on a quarterly sequential basis. We expect depreciation and amortization in Q4 to increase approximately $300,000, primarily related to the ongoing conversion of our Class 2 units in the Oklahoma market to Class 3 games. Beyond Q4 we expect depreciation and amortization to peak in Q2 FY '09 as all 1,400 additional units at WinStar to be in service.

Net income in Q3 included interest income of $1.3 million, of which $1.2 million was related to imputed interest for capital advances associated with our development grants. This compares to imputed interest income of $0.6 million in the year ago period and $1 million in the March 2008 quarter. We expect to record imputed interest income of approximately $1.2 million in the current quarter. The amount of imputed interest income will start to decline once the WinStar expansion is complete and payments start being applied to the note receivable.

We expect capital expenditures in the current quarter of $11 to $13 million, inclusive of CapEx related to the purchase of approximately 500 third-party stand-alone units, CapEx related to the component parts for our proprietary MGAMe cabinets, and maintenance CapEx. As previously communicated, our CapEx will decline substantially once we have completed the 1,400 unit addition to the WinStar facility. All CapEx purchases of third-party stand-alone units for the WinStar expansion are anticipated to be completed by the end of Q1 FY '09 or December 31, 2008.

Cash flows from operations in the June 2008 quarter were $15.7 million compared to $4.5 million in the March 2008 quarter and $11 million in the December 2007 quarter. Improvements in cash flow from operations were impacted by a decrease in the accounts receivable balance and an increase in the accounts payable balance. Cash used by investing activities of $17.5 million includes $13.4 million of CapEx and $6.1 million in advances for the WinStar expansion development agreement, which completed our funding obligation and was offset in part by development agreement note receivable repayments of $3.1 million.

During Q2 FY '08 we had net borrowings under our credit facility of approximately $3.8 million and we had total outstanding borrowings under our credit facility of approximately $105 million at June 30th. As of today, we have approximately $102 million outstanding on our credit facility.

We expect Q4 interest expense to be flat with Q3 levels, and we now anticipate that our total outstanding borrowings will not exceed $105 million.

One final housekeeping note related to the reported numbers. Reported Okalahoma compact revenue, SG&A and diluted earnings per share for the fiscal 2008 third quarter were negatively affected as a result of adjustments made to correct an overstatement of Okalahoma compact revenue and SG&A for the three most recently reported quarterly periods, Q2 and Q1 of fiscal 2008 and Q4 of fiscal 2007. These adjustments had the effect of reducing Oklahoma compact revenue by $600,000, SG&A by $300,000 and earnings by approximately $150,000 in Q3.

The company evaluated the adjustments both from a quantitative and qualitative perspective and determined that the amounts were not material to require restatement of previous quarters' financial statements, but was relative to the discussions regarding the sequential decrease in net revenue per unit as it relates to the Oklahoma compact revenues.

Finally, as we near the cash flow inflection point, I want to ensure our shareholders that we will deploy capital in a manner that is diligent and thoughtful. We will make decisions on the use of cash going forward that is in the long-term best interest of our company and its shareholders.

I will now turn the call back over to Anthony.

Anthony Sanfilippo

Since joining the team not too long ago, I have been working closely with the leadership of the organization and we've been focused on a number of things, and I would like to take you through that. We've been looking closely at our customer relationships. We've been looking closely at our product lines, the things we do well, the operational strength and the appropriateness of our organizational structure to support and maximize return from each business relationship that we have.

Among our high priorities are the close examination of what products and systems we can provide, where we deploy those products and whether our internal resources are aligned with both our present commitments and upcoming business opportunities. I visited customers and their facilities in Oklahoma, Washington State, Mexico, had discussions with charity bingo customers in Alabama, and I'll soon be in the Alabama market as well as in New York visiting with the New York lottery operations. Without exception, it is evident to me that there is meaningful value to be realized by strengthening relationships with each of our business partners and customers and by seeking to generate maximum revenue from the substantial gaming floor space committed to our company.

We are committed to actively supporting the performance of Multimedia's game placements, most of which are covered under revenue sharing agreements. Towards this end we're going to focus on new or expanded marketing and promotional services to our customers. These efforts will be overseen by our newly hired Chief Marketing Officer, Ginny Shanks, who brings to the company more than 25 years of marketing experience and is a leader in the gaming industry. Ginny's going to also play a pivotal role in the future development of our products and services from inception to deployment. She has keen insight into really what the end user, the customer who plays the machine, thinks about and will be very valuable as we look to develop these future products.

I'm encouraged by Multimedia's year-over-year increase in revenue derived from the Oklahoma market. This increase, combined with the previously disclosed expected increase in unit count for quarter four of this year as a result of the opening of the expansion of the Chickasaw Nation's WinStar facility in Southern Oklahoma, really bodes well for our performance in this market.

The market in Mexico has really been puzzling to the industry. I am delighted we have a key relationship with an outstanding organization, Televisa. Their management team is committed to making gaming entertainment a viable form of entertainment in Mexico. We are going to work closely with Televisa and other customers in Mexico to thoughtfully unlock value for both our customers and our shareholders. I don't think today that there's any one company who has figured out Mexico, but we are going to put the right resources against trying to make Mexico a success today and in the future for our company.

The creation of our new Legal Affairs Department and the announcement yesterday of the appointment of Uri Clinton as General Counsel represents another example of our efforts to recruit broadly experienced gaming industry talent to our management team. Uri's going to lead the effort in our licensing process in many jurisdictions where today we are not licensed, and he will also ensure that appropriate patents and trademarks are recognized and recorded, increasing the value to our company.

Now, we talk about SG&A and what happens from an expense side with SG&A. That is an area, too, that has legal expenses in it and we have had sort of a mix of how we have managed our legal expenses, so I am excited about Uri joining our team also to make sure that as we look at legal, licensing and other methods of expense that ends up being a general and administrative expense, he will also provide leadership over that area.

Both Ginnie and Uri had tremendous experience in our industry and this will help us to broaden the portfolio of knowledge that we have today at Multimedia Games.

The first seven weeks as CEO we started to turn over enough stones to know that our company holds untapped value and opportunities in markets both domestically and in Mexico and Canada. Our assets include our strong and growing installed base, truly our customer relationships - and Gary Loebig is here with us today; he and his team have done a terrific job in establishing relationships with customers all throughout the United States and in Mexico and Canada, and we've got to make sure that we can continue to build on the relationships that we've established and grow to establish new relationships in markets that we have not been in yet.

We do have some compelling intellectual property. The bingo-based games from Class 2 that we really pioneered is a great intellectual property for us and we need to continue to look at ways not only domestically but internationally that we can leverage that technology and be a meaningful player in the development of Class 3 products.

And finally I'll tell you, before we open it up for questions and answers, I've been very impressed with the Multimedia Games' team that's in Austin and other locations. They are dedicated to having a quality company and they are very eager to prove not only to our customers but also to our investors that they are a terrific team. And I couldn't be more pleased with the people that I've interacted with both in Austin and throughout the country that are part of our Multimedia Games' team.

Now we're going to open up the call to questions and then I will close the conference call after that.

Question-and-Answer Session

Operator

(Operator Instructions) Your next question comes from Michael Friedman - Noble Financial Group.

Michael Friedman - Noble Financial Group

First of all, you didn't really talk much about charity. Can you tell us what you're doing there to combat the decrease in the charity revenue?

Anthony Sanfilippo

I didn't talk much about charity. As I mentioned, I'm going to be in Alabama next week. My view, without having spent time directly there, is that that market as is the Southern markets, whether you look at Mississippi or those markets in that general area, have seen a decrease in revenues. I know Mississippi has seen a pretty dramatic decrease in revenues.

There's been some additional equipment that are nonMultimedia Games equipment put in at VictoryLand, and we also need to look closely at a player tracking system there with our games, connecting that to the system at VictoryLand and some other locations there.

I don't have a good answer for you right now on Alabama and charity bingo in general. I can tell you, though, that we are looking closely. I'm bringing with me some marketing talent to look at how can we assist the Alabama market in trying to attract additional customers into their facility, and I'm meeting with their key management there.

So it's something that has concerned us that we've seen a decline there, and that is up next on the immediate discovery list of trying to see how we can help the turnaround in the decline in revenues there.

Michael Friedman - Noble Financial Group

Turing to Mexico, do you expect any changes or [group hotel use] as far as the hall rollouts and the percentage of the floor going to Multimedia, and can you give us any insight as to, you know, your interactions with the customer there?

Anthony Sanfilippo

Yes. You know, I was delighted by my trip to Mexico. And I went to a couple of cities there and was surprised at how vibrant the cities are and the strong population base that's there and really was ashamed at my preconceived notion of what I'd find in Mexico. What I found in Mexico was a lot of commerce, a lot of people that were enjoying all different forms of entertainment, a lot of new growth that was happening with other forms of entertainment, whether it's movie theaters or malls being built, and had great interactions. We spent a full day with Televisa staff, their senior staff, talking about how we can work better together and what are some of the things that we could do to help them from an experience standpoint in moving along the learning curve from a maturing market in Mexico.

They have a very aggressive plan for development over the next couple of years, and they've got an impressive number of branded licenses at this point. We are in discussions on what is the best way for us to work together and mutually benefit one another.

So that's sort of the best way for me to tell you that I've just started my discussions with them, but I couldn't ask for better business partners than Televisa. They are a major public company there and the people that are overseeing the gaming side of it, they are very astute and keen business people and they've got a great vision to have gaming as a part of entertainment in that nation and all throughout Mexico.

So it is - if, you know, somebody would just say hey, let me just tell you about the number of licenses that are down there, let me tell you about the population base, let me describe the cities to you that are in Mexico, most people would say I've got to be in Mexico. Now when you start to look at how Mexico has started off, I think part of that is because they really haven't found a formula yet, whether it's through marketing or site selection or facility layout on how to really have gaming entertainment presented to their customer base.

So that's an update on Mexico.

Michael Friedman - Noble Financial Group

Can Multimedia Games help in that regard? I mean, it sounds as though everyone in that market's trying to figure out the floor layouts and the marketing, etc. Can MGAMe show up with any expertise?

Anthony Sanfilippo

Well, absolutely. And, you know, my background from being in the industry for the last 25 years, Ginnie Shanks, you're going to see me have a habit of hiring people a lot smarter than I am and she's one of them, as is Uri Clinton. And Ginnie Shanks and her background and other people that we've already brought down there to take a look at it clearly will help Mexico or, from an advice standpoint, look at how do we position Mexico to get beyond sort of the normal trips and falls that a new market will make and help them have a much more viable product that will be appealing to customers down in Mexico.

And more than just one dimensional, more than just video units that are down there. Thinking about when somebody wants to escape from their normal world and go into a casino environment, it's not all about just playing the unit in front of you. It's about the environment that gets set within the four walls of that facility. And I think you're going to find we are going to be able to bring more insight to our customers beyond just a machine somebody would sit in front of.

Michael Friedman - Noble Financial Group

But do you still expect the same sort of rollout and percentage of MGAMe on Televisa's floors?

Anthony Sanfilippo

I think it's premature for me to say to you yes or no at this point.

Michael Friedman - Noble Financial Group

And you have, what, about two years left on that contract? You know, are there any thoughts about how you may approach them two years down the line?

Anthony Sanfilippo

You know what? We're going to reposition in Mexico how we deal with them and everybody else. It's an opportunity with me coming into the company and also with others that are joining us to step back and say what's the best way for us to be great business partners and really not have it limited within a contract right now. And that's part of the process we're going through.

Michael Friedman - Noble Financial Group

When you come in and you make the assessment, you're there a relatively short period of time, did anything jump out at you as far as low-hanging fruit and is there something that can be done within the next quarter, for instance, good or indifferent? In other words, bring on new customers or cut some costs somewhere or bring on some new products that are on the precipice or something like that? Is there something like that that jumped out at you immediately, that this is just obvious that we can do something with?

Anthony Sanfilippo

Yes, a number of things did. And what I would want you to focus on, first of all, is the recent additions of Ginnie Shanks and Uri Clinton because the low-hanging fruit on the legal side was to have a General Counsel in place. We on the legal side really had not had a - we've had people put forth a good effort, but we've been all over the place in how we've looked at handling any type of legal cost and we've been spread across the board. So that was an easy thing to look at and say we need to have one person who not only can oversee our legal side but also, you know, is a great thought leader join our team.

And then from a marketing side, one of the very first things that hit me when I start looking at the number of games that we're allowed to have via our agreements with customer-shared revenue games, that we had a woefully inadequate marketing presence to add value to our customers, whether it was globally, for how they run their facilities or whether it was specifically on the number of games that we have on gaming floors.

And I'll give you two Oklahoma examples which I know you know is over 60% of our quarterly revenue. We have 900 machines in a Casino, Riverwind, in Norman, Oklahoma, and then WinStar, we're going to have over 2,400 machines. That's a lot of committed floor space and we need to be putting a lot of thought against how do we, since we're revenue sharing, how do we help our customers drive people into their casinos through a variety of ways, and specifically how do we better market our machines.

Now from an inception to deployment standpoint, we have had virtually no marketing influence as we develop our products and then as we deploy our products or as we talk about our products and bring them out into the marketplace. We are not licensed in most commercial jurisdictions, and so as we start to go into the Class 3 markets, you can't sell what you've got unless you're able to sell it in that market. And so the ability to license or to receive license in states like Louisiana and Mississippi and on and on and on will help open up our revenue pipeline.

Now, you know, more from a parochial standpoint, if you start to look at expenses within the organization, by taking a different look at it, yes, absolutely we can look at ways to - are we using our labor resources correctly, are we focused on the right things? There's a number of things that you start to look at to say, with a fresh look at an organization, you can make changes that will make sure you're using your resources in a much better way.

I looked at third-party both consultants, lobbyists, etc., and we went through that list carefully to make sure that everybody that we have affiliated with us is adding appropriate value. And in some cases we have ended relationships with third parties, whether they're consultants or whatever they might be. But with every dollar we spend we're taking a look and saying is it adding value to our company?

So that's a pretty broad answer but the answer is absolutely, in many ways. But the bigger ways are really redefining who our team is and how we think about the business. It's not going to be me that comes in and makes the business better. It's going to be a collection of existing Multimedia Games talent and new talent that we bring into the company that helps us think much broader about how we do business, who we do business with and where we do business.

Operator

Your next question comes from Ryan Worst - Brean Murray, Carret & Co.

Ryan Worst - Brean Murray, Carret & Co.

Anthony, you had mentioned your thoughts on pursuing profitable revenue streams. I take it that means there's some unprofitable revenue streams, and maybe you could expand on what you see at the company now and whether or not you could, you know, get out of some of those profitable revenue streams or how much is there.

Anthony Sanfilippo

When I started, I asked the team to present to me, Ryan, where we are and, you know, what our businesses are. And as they started to take me through and they [inaudible] told me we're an international company and I said, great, where are we and they said Malta, I didn't tell them at the time, but I had to go back to a map and figure out where Malta was. And when I figured out where Malta is, then I asked the question, well, do we make any money in Malta? And the answer was no, we don't make any money in Malta.

Now, as we start to look at a Malta, as we start to look at some other places and we're listing what would be most profitable and least profitable and where we place the resources, there are some things that we've gotten into that don't seem to quite equate to the resources we place against it. You know, my fear is somebody from Malta's listening to this call and probably 2:00 in the morning and are going to be upset with me, but that would be an example.

Now, we don't have a lot of expense against Malta, but we probably don't have a lot of business being in Malta at this point. And where we make a lot of money or where we drive a lot of revenue - Oklahoma, Washington, Alabama, the New York lottery, Mexico - we need to first focus on those markets to make sure that we're doing what we're supposed to do there extremely well and leveraging our opportunities in those locations and at the same time starting to look at some areas that we're possibly in it's just not worth the resource we're putting against it.

Ryan Worst - Brean Murray, Carret & Co.

And then in terms of you guys providing more input to your customers, you know, what have you seen on their end that they're open to receiving more input from you? I mean, is there going to be, you know, more of MGAMe personnel, you know, down in Mexico or on the gaming floors in Oklahoma?

Anthony Sanfilippo

Well, you know, I think you ought to separate the two. Are they interested in what we have to say and want to see us as a business partner because expertise that we might be able to provide or insight that we might be able to provide will make their businesses better? Absolutely. Everybody I've talked with has said we welcome your input, we welcome you helping us be a - in our thoughts and how we think about positioning our property and driving revenues. There is no question about that.

When I look at Mexico and having talked with Televisa, they have said to me, you know, we welcome your input in site selection. They have 65 licenses there - 65 licenses. That's a lot of licenses. They've opened up 16 casinos. They've got plans right now over the next year for, I don't know the exact number but it's probably 12 or 18. And they have said we'd like you to be here with us when we look at site selection. It's in our best interest to be there with them. We currently don't have someone in Mexico who has the skill set to really evaluate site selection. They don't have the skill set to really help provide insight into floor layout, into thinking about product offerings within a casino. There's a number of things we can do to help make those facilities a lot better.

So do I expect that there would be somebody who is seasoned that will be a resource that is exclusively focused on Mexico? Absolutely. We can't help them or help ourselves get to where we need to get unless we've got the right talent in place to do that.

Ryan Worst - Brean Murray, Carret & Co.

And then maybe you could just expand on the accounting adjustment that you made, you know, what happened there, in the previous quarters? And then also it still looks like the performance of the Class 3 games declined, you know, on a win-per-day basis year-over-year and, you know, if you could provide some insight into, you know, why that's the case.

Anthony Sanfilippo

Yes. Randy will give you what happened accounting-wise, but all of you need to know that when that adjustment came up, we thought it was extremely important that we reveal that to you, that we talk with you about that.

It is important to all of us that we are very transparent on how we run this business and that we want you to know if there's going to be an adjustment that affects - and this is not a material adjustment, and in any one of the quarters, it's insignificant, but from a cumulative standpoint in the third quarter it has a couple of dollar affect on winperunit in Oklahoma - and as we prepared for this call we said we want to make sure those who are interested and invest in our company understand even things that are considered insignificant because we want you to understand the full financial situation of our company and outcome of our operations as well as how we're looking to the future.

Randy Cieslewicz

Well, in summary what happened was we've been moving from our back office system in [inaudible] off site to a third-party back office system, and as we bring the data back, it's more of a mechanical process. Similar contracts have a reimbursement for service and marketing reserves and through the changing over the way we receive data and import data into our general ledger, we made a mechanical error in the journal entry, and it's happened since we've been migrating off the system.

And as Anthony said, it didn't amount to a material amount over the last three quarters. It was less than - like $20,000 in '07, 4Q '07. And it was, in the first fiscal quarter of the year, the adjustment was like $200,000 of revenue, compact revenue, that was overstated and $100,000 in SG&A that was overstated. So the net effect of that was about $100,000 pre-tax. And in Q2 it was double that, it was about $400,000 in revenue and $200,000 of SG&A that was overstated, so it's about $200,000 pre-tax.

So when you talk about the EPS effect, it was about $300,000 gross or $150,000 net tax effective.

So on a year-over-year comparative basis, the net revenue per day on, say, for example, our compact revenue units, if you calculate it, it's about 3180 right now. This adjustment would have put it about 33 had it not been recorded in this period. And the win per unit in the year ago period was about 3350. So there was a very slight decline, but not much in terms of the net revenue per compact unit.

Ryan Worst - Brean Murray, Carret & Co.

And then it looks like your Class 2 win per day or revenue per day is up. Is that just basically because you lost the lowyielding California units?

Randy Cieslewicz

Well, it's even more than that. It's also the low-yielding units in Oklahoma. And keep in mind we still have over 300 Class 2 units at WinStar that perform very, very well. So to the extent that the Class 2 units come outside of places outside of WinStar, the average revenue per unit for [inaudible] Class 2 is going to go up.

Ryan Worst - Brean Murray, Carret & Co.

And then as far as stock comp goes, what was that number in the fiscal third quarter and then how much of that $17 to $17.5 million in the fiscal fourth quarter is expected to be stock comp?

Randy Cieslewicz

It was a little more than $300,000 in Q3. I expect that to double in Q4.

Operator

Your next question comes from Justin Orlando - Dolphin Capital Management.

Justin Orlando - Dolphin Capital Management

I wanted to just ask very briefly, you know, now that we've got the WinStar expansion in our sights here, what are you all expecting the fiscal 2009 to look like in terms of free cash flow?

Randy Cieslewicz

Well, Justin, we don't give guidance on that, but we certainly can talk about it from a high level. We look at our CapEx; our CapEx is going to go down to basically maintenance CapEx. We said in prior periods, I think, $30 million on a CapEx basis is a good figure for fiscal 2009.

So to the extent that we generate, let's just throw out there, let's just it's base, $60 million in EBITDA, you've got $30 million plus or minus your cash taxes and cash interest. So it could be, you know, conservatively I think it could be $20 million.

Anthony Sanfilippo

I wouldn't even answer that. I mean, we've got, I think, so much work to do in front of us and so much opportunity that, you know, I personally wouldn't give an answer on that, what we think it's going to be, because I think it's going to look much different in three months. But it's going to be, clearly from the standpoint of governing our CapEx, the outcome is that we think it's going to please our shareholders.

Justin Orlando - Dolphin Capital Management

I assume that with the numbers that Randy just went through there that he's not including numbers coming back from notes receivable in that number?

Randy Cieslewicz

Yes, that example I gave, I wasn't talking about - yes.

Anthony Sanfilippo

That's where I think people would get confused if we try to put a number out there right now.

Justin Orlando - Dolphin Capital Management

Well, I think it's a very important thing and, you know, when we can get a handle on it, for investors I think it's an extremely important piece of the puzzle for the story on this company.

Anthony Sanfilippo

I agree with you, Justin. Justin, you know, I fully expect, as we go through the next couple of months and clearly by the next conference call, there'll be a lot more clarity on what the opportunities look like, how we're going to leverage, you know, current opportunities that we have. There'll be other thought leaders that have been part of the process. We'll have a better understanding on where those expense opportunities have been because we'll have taken advantage of them by then. And, you know, I'd ask you and other investors to give us a little bit of time to work through that.

Our goal, again, as I said, is that we are very transparent. We aren't going to provide guidance as we haven't in the past. I think that's typically something that leads to disappointment for people. But we are going to share with you our plans as they develop, but they're still developing. And the company is going to be much different how it looks at things with myself involved and others involved. We're going to hold onto the core of what we've done well, but we're going to also look at what we think are untapped opportunities.

Justin Orlando - Dolphin Capital Management

I appreciate that and I know you're new on the job, so we look forward to hearing, you know, your fully baked plan in some form next quarter.

I want to just go back to what you were talking about in terms of Mexico and just to make sure I understand what it is you meant and that everybody else does as well. So with respect to Mexico, the contract just goes out two years, but you are all trying to make that contract better for Multimedia Games and for Televisa today. And so I assume that some of these discussions you're talking about are talking about potentially altering the way you all work together and making that more profitable for both Televisa and MGAMe?

Anthony Sanfilippo

You captured what I was trying to say very well.

Operator

Your next question comes from Chris Pereece - Foxhill Capital.

Chris Pereece - Foxhill Capital

I wanted to just get some clarification on your Class 2 games on the average installed player terminals. The number you guys listed was 2,352 and just looking at where you started the quarter and where you ended the quarter, you ended more towards, you know, 2,600/2,700. I just wanted to see the reason the average was lower than where you ended and - where you began and ended.

Randy Cieslewicz

Well, that's a difficult question to answer. We have to pull some numbers out here just to figure out.

Chris Pereece - Foxhill Capital

Were you moving games?

Randy Cieslewicz

Well, in general, we're converting units, but let me try to find if we can pull the calculation on the average units.

Chris Pereece - Foxhill Capital

I wanted to follow up on a question that was asked earlier on the Oklahoma compact, the win per day. Because I'm calculating it as, I mean, year-over-year, that it's closer to like a 10% decrease even - you know, maybe like 8% or 9% - even adding back the $600,000. I just wanted to get clarification on that because I think you said it was roughly flat.

Anthony Sanfilippo

Yes. It was $300,000. The net was $300,000. And it was 10% but then when you take the adjustment, it brought it back up to - Randy, I thought we had like a - 5% was market, just general market decline of 5% was this adjustment when you looked at it.

Randy Cieslewicz

Are you talking about the net revenue adjustment.

Anthony Sanfilippo

Yes. He's talking about our win per day per unit in Oklahoma for the quarter. The adjustment had about a 5% impact on that, and then we saw about a 5% decline year-over-year.

Randy Cieslewicz

Well, just - it's different. The net revenue per unit is - on the absolute numbers report a net revenue year-over-year real-time bingo was up significantly, as Ryan pointed out - that was up 30%, 35%. The compact net revenue per day was down 5% on the reported numbers. And then on a gross basis we were - on a sequential basis we were basically flat; it was like $100,000 or less than that down in Oklahoma. I'm not sure if I'm answering the question.

Chris Pereece - Foxhill Capital

I mean, I guess we could follow up because I guess I just have some different numbers. I mean, maybe it's better if we just follow up offline.

Anthony Sanfilippo

Yes.

Randy Cieslewicz

I think that would be better so I can pull out the schedules.

Anthony Sanfilippo

Do you mind if we follow up on Class 2, too?

Chris Pereece - Foxhill Capital

That's fine.

Operator

Your next question comes from Ryan Worst - Brean Murray, Carret & Co.

Ryan Worst - Brean Murray, Carret & Co.

Just in terms of your third-party vendor machine purchases, how many games did you purchase in the fiscal third quarter and then, you know, after the - and how many do you have, you know, what are you required to purchase? You know, I think you said 500 more in the fourth quarter, but what about beyond that?

Randy Cieslewicz

Yes. Well, we purchased 450 or so in the third quarter. And we do, Ryan, we have to buy 500 WMS in the fiscal fourth quarter by Q1, by the end of Q1, which is December 31. And we'll buy 500 WMS units between now and the end of the calendar year, and that will meet our commitments to WMS. And we're about to - we have a couple hundred more that we're required to buy as part of the Aristocrat agreement.

Anthony Sanfilippo

And let me separate required to desire because, if you think about our company from the standpoint of our ability to have relationships with customers to place product on their floor, the outcome of having the right mix of products on the floor to maximize, on a revenue share basis, the most profitable win per unit, I would tell you that there's both a desire as well as what's required right now, and how we are going to look at things moving forward is what's the most profitable product to have on the floor in relationships that we have with customers.

Now, were are going to continue to work diligently to develop content and produce products that are highly competitive and relevant, but I don't want to be so blind that if there is a competitor who has a better product where we have so much floor space that it makes more sense to look at - and I'll call it a competing partner - that we don't look to the competing partner if ultimately it's going to be a higher win-per-unit net for us and for our customer to have that product on the floor. And so it's going to be important that we have strategic alliances with those who also produce product and might be able to, on floor space that we have a contract for, help us with a better mix of products.

Ryan Worst - Brean Murray, Carret & Co.

So Randy, just to get that straight, you bought 450 in the June quarter and then you're right now, you're contracted to buy 700 more, 500 from WMS and 200 from Aristocrat, by the first quarter?

Randy Cieslewicz

That's about right.

Ryan Worst - Brean Murray, Carret & Co.

And then, Anthony or Randy, maybe you guys could provide some color on the performance of your proprietary games.

And then also my last question is when do you think you could be on the player tracking system in Alabama?

Anthony Sanfilippo

Well, you know, I'll tell you that - I'll talk a little bit. We've developed a cabinet that is a wide-body unit that really has had really nice feedback from customers and it's had a higher win per unit. Now, we've obviously got to have content in that cabinet for somebody to play it, and we just introduced a game that is called Jambalaya Jackpot that really has been well received.

And so we do - and this is a Class 3 game - we do some games that have great graphics that are encouraging to me when I first started with the company that there's some possibilities there. I want us to have a much more complete portfolio of offerings of games to our customers and that's going to be helped by some additional thought input into how we produce content.

But there's a couple of bright spots out there that I feel pretty good about. We just recently put our 500th machine in service that is a Class 3 machine, and we are at a good starting point to produce much more relevant product than we've been able to produce in the past.

Ryan Worst - Brean Murray, Carret & Co.

And then the Alabama player tracking system?

Anthony Sanfilippo

Well, you know, again I'll tell you, I'm going to be there next week. And I really want to understand exactly what the issues are there. I don't want to just hang it all on the player tracking system. We think that that is something that needs to be done, but Alabama is a market that I really want to understand better and understand what are the triggers we need to pull to make that better.

Randy, do you know, on the player tracking system, about a timeframe that we've talked about - or Gary, I should ask, is there a timeframe we've looked at there?

Gary Loebig

Probably in the next 12, 14 weeks for a massive deployment; prior to that we'll be adding machines as we go forward.

Anthony Sanfilippo

I'm as concerned about Alabama that it's sort of somewhat caught into a regional downturn, and so that's why I wanted to spend time there really looking broadly at the casinos in Alabama to find out what is driving lower revenue and win per unit.

Operator

Your next question comes from Chris Dechiario - ISI Capital.

Chris Dechiario - ISI Capital

Actually, all my questions have been asked already but I just have a quick follow up on the wide-body units, just to make sure I understand. You were saying that they're a bright spot and that the win per unit is higher. Is that also relative to their size, relative to the floor space that they're taking up? I mean, do they take up more floor space instead of a traditional -

Anthony Sanfilippo

No. No, they don't take - you know what? They're just a very comfortable unit, and just a little bit different design and you're a little bit closer to the monitor when you play it. And we've gotten great feedback on the comfort level of the units, how they look, so how attractive they are. And then we put some good content into the box. But it doesn't take up any more floor space.

Operator

Your next question comes from Justin Orlando - Dolphin Capital Management.

Justin Orlando - Dolphin Capital Management

Anthony, just one more thing. I missed a little bit of the intro when you guys talked about the note receivable payback timeline. I guess it was in the opening remarks.

Randy Cieslewicz

Yes, I mean, I just talked about the amount that we did receive. I didn't talk about the expected payback. But Justin I would say that, you know, as you know, it's based on - the $65 million note receivable on the WinStar property is based on the performance of property so some of that's dependent on the performance of the property. But I would model, you know, I would model $1 million a month is what I would model.

Justin Orlando - Dolphin Capital Management

You'd model $1 million a month?

Randy Cieslewicz

Right, as inflow from that note.

Justin Orlando - Dolphin Capital Management

And that's an average you think you can hit?

Randy Cieslewicz

I would say that based on our experiences at Riverwind, they paid that, you know, the Chickasaw paid that back much faster and we've had good experiences with them as far as the repayment.

Anthony Sanfilippo

Now Chickasaw, in meeting with them - and again, I'll tell you, I was so impressed with the Chickasaw team. And they're in Ada, Oklahoma, so I went for my first time to Ada, Oklahoma and met with the Chickasaw enterprise team, and they are great partners to have. They're very thoughtful about how they think about the gaming business and they're into other businesses. And they've taken great pride in that they have paid us back ahead of schedule with every loan that we have extended to them.

Randy Cieslewicz

Justin, maybe - I did mention the note receivable from the Spokane contract, if that's what you were asking about. I don't know if you - there was specific mention - I wanted you to think about WinStar, which is the big, you know, the bulk of our note receivable. But I did mention the note receivable from the Spokane agreement, if that's what you had in mind.

Justin Orlando - Dolphin Capital Management

I guess that's what it was. I only caught a little bit of it. And I'll catch it on the transcript, and I'll come back to you.

Operator

And there are no further questions.

Anthony Sanfilippo

And I do want to thank everybody that has participated, whether you've been listening or asking questions. It's important to us that you're interested in our company and that you stay interested in our company.

There's four things that I challenge the Multimedia team members to focus on and that is, you know, every day to be dedicated to a commitment to excellence in all we do. That we just can't be spread out and do things somewhat well; we need to do everything that we do well. So that may cause us not to do as many things as the company has done in the past.

We need to be customer driven in our decision making. It's so important that, when we do something, we're thinking about the positive impact or the value it's going to have to our customer. We need to deliver value to our shareholders, that we are a public company and it's important that people who trust us with their investment that they feel like they made a good choice as time goes on.

And, most importantly, we have to act with integrity with all that we do. And those are the four principles that we talk about here on a regular basis on how we're going to run the company. We're committed to bringing you candid updates on our company's progress and committed to being open with you about the challenges. Everything is not hey, it looks great. There are some things that we need to be smarter about and continue to work hard to turn from something that's not working well to something that is going to be an advantage for us.

I'm excited about where our company can go, and it's important to all of us that we are a respected and relevant company in the gaming industry. Thanks, again, for taking the time to be part of the call, and we look forward to talking with you either at the next conference call or before.

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, Inc. F3Q08 (Qtr End 06/30/08) Earnings Call Transcript
This Transcript
All Transcripts