| Multimedia Games, Inc.
HOST: Mr. Clifton Lind
DATE: November 17, 2004
Operator
Good day, and welcome, everyone, to the Multimedia Games fourth-quarter fiscal
year 2004 conference call and webcast. This call is being recorded. Once today's
presentation is complete, we will conduct a question-and-answer session. At this
time, for opening remarks and introductions, I would like to turn the call over
to the President and Chief Executive Officer, Mr. Clifton E. Lind. Please go
ahead, sir.
Clifton Lind, Multimedia Games - President, CEO
Thank you, operator. Welcome to Multimedia Games' Q4 fiscal 2004 conference
call. On the call with me today is Craig Nouis, our CFO. The results we're
reporting today are consistent with the preliminary results we reported last
month.
Fiscal fourth quarter revenues rose approximately 39% over last year, while
EBITDA increased about 25% to $22.7 million, resulting in an EBITDA margin of
about 53%. On a full-year basis, revenue was up 23%, EBITDA at $87.7 million was
up over 20%. Net income and diluted earnings per share are essentially flat when
compared with last year; we achieved net income of about $32.8 million, and
earnings per share of $1.07. EBITDA margin for the year is also at a healthy
57%.
We reviewed the fourth quarter operating results in detail last month, so we
won't spend an enormous amount of time covering the ground that we have already
touched on. In a minute, Craig will go over several financial and accounting
items. And I plan to address three items which have occurred subsequent to our
announcements last month - the passage of SQ 712 in Oklahoma, our placements of
a significant number of C-TILG products in California, and our first-quarter
guidance. We will then open the floor to Q&A. Julia Spencer will get us started
by making the Safe Harbor comments.
Julia Spencer, Multimedia Games - Director - Corporate Publications
Thank you, Clifton. I need to remind everyone that today's call and simultaneous
webcast may include forward-looking statements within the meaning of applicable
securities law. These statements represent our judgment concerning the future,
and are subject to risks and uncertainties that could cause our judgments to be
inaccurate, or cause our actual operating results and financial conditions to
differ materially from those expected. Please refer to the cautionary language
in our earnings release and in the "Risk Factors " section of our recent SEC
filings.
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 in our earnings release and on our website at
www.multimediagames.com, in the Investor Relations section.
I will now turn the call back over to Mr. Lind. Clifton?
Clifton Lind, Multimedia Games - Pres., CEO
Thanks, Julia. Before Craig provides additional financial detail, I want to make
a few comments. On the third-quarter call, we indicated that we thought Q4 FY'04
and Q1 FY'05 would represent periods of the highest player-station terminal
placements in the Company's history. The numbers in today's release tell part of
that story, and since we have had a significant number of installs since
September 30, and we are precluded by some customer agreements from disclosing
player terminal placements, our Q1 FY'05 conference call will fill out that
picture. Suffice it to say that we're confident that our prior statement about
our placement levels is materializing.
Also, before I turn the call over to Craig, I wanted to note that while we have
been laying the groundwork for our future revenue growth through high levels of
player terminal installations, we have incurred significant installation
expenses to support our expansion, as well as expenses for lobbying, legal, and
related costs to support our future growth. These costs were a factor in Q4
FY'04 and throughout fiscal 2004, and are projected also to be a major factor in
Q1 FY'05.
As we indicated in today's release, we're looking very carefully at many aspects
of the Oklahoma business model, which you have come to know very well. One of
our goals for 2005 is to achieve cost savings in all operating areas as long as
we can do so without slowing down the development of our new products and our
entrance into new profitable markets.
We entered several new markets in fiscal 2004, and I am proud of what the MGAM
team has accomplished during the year. Not only have we made significant
progress in our revenue diversification efforts, but it was also a year in which
we took several new products into new markets and laid a solid foundation for
our future growth. During the year, we have gone from operating three gaming
systems at 61 locations to operating seven gaming systems at 102 locations.
Revenue growth, player terminal placement and other metrics continue to indicate
that Multimedia Games is a healthy, competitive company. And the G2E Gaming Show
last month served its purpose in terms of garnering customer interest and
prospect interest in our products and capabilities. The quality of our gaming
systems, the number of gaming engines developed for specific markets, and the
variety of our content are all at record levels, and we believe that we're
well-prepared for the expected changes in our existing markets as we
simultaneously seek expansion into new markets.
We backed up our confidence in MGAM's future as, during the quarter, we
allocated $3.8 million for the repurchase of 237,500 shares of common stock.
Additionally, since we reported Q3, I have purchased about 37,000 shares of
common stock, including some option exercises which trigger tax events even
though I didn't sell the shares. I have never sold any MGAM shares, which
probably gives you a good idea of my long-term view of the Company.
My enthusiasm for our growth prospects is only slightly tempered, short-term, by
the factors in the Class II market and our decision to take the high road with
respect to the games we offer in Oklahoma. These factors weighed heavily on last
year's operating results, and will continue to do so until we can legally offer
the games under the compact in Oklahoma. I would like Craig to now provide some
additional comment on the fourth-quarter results, and then I will run through
the three items I mentioned at the beginning of the call. Craig?
Craig Nouis, Multimedia Games - CFO
Thank you, Clifton. This afternoon, we reported results in line with the
preliminary results we provided last month, with revenues rising to a record
$42.7 million for the fourth quarter of 2004, approximately 39 % ahead of the
revenue for the fourth quarter of 2003, and EBITDA rising approximately 25% over
the prior-year quarter EBITDA to $22.7 million. Both our quarterly and annual
results benefited from a substantially higher installed base of New Generation,
Class II, C-TILG, and charity player terminals of 12,558 units as of September
30, 2004, which is 43% higher than the installed base at September 30, 2003.
We provided a lot of details on our operating results in the October press
release and conference call. So let me take a few moments to review some
additional items and provide color on our new revenue recognition policy on our
income statement, and the reclassification of several items on our balance
sheet. Of course, we can cover anything else during Q&A. Reflecting the high
level of development funding advances made during the quarter, and sales of
gaming equipment on credit, notes receivable increased from $9.1 million as of
June 30, 2004 to $32.9 million as of September 30, 2004. Cash and cash
equivalents decreased to $4.8 million, and other assets, which include the
nonreimbursable amounts under development agreements, have increased to $17.9
million, primarily as a result of the funding under these development
agreements.
SG&A expenses increased $5.5 million, from $12.2 million for the September 2003
quarter to $17.6 million for the September 2004 quarter. On a sequential basis,
SG&A was $4.7 million higher than SG&A expenses for the June 2004 quarter. As a
reminder, SG&A for the third quarter benefited from a reduction in our fiscal
2004 incentive accrual, which resulted in the reversal of $1.4 million in
compensation expense for the first six months of the year.
As described in our press release and as many of you are aware, historically,
Multimedia Games has entered into agreements with our tribal customers that,
among other things, guarantee certain prize payoffs and required the Company to
account for and collect all revenues from its games. Following the collections,
we would then disburse funds to the facilities for their share of the revenues
based on the guaranteed prize payouts. The vast majority of these arrangements
have gone away over the past few years, prompting us to evaluate our revenue
presentation.
Our new gaming arrangements typically do not guarantee prize payout levels, and
require that only the net amounts due the Company be remitted. In reviewing both
GAAP and SEC literature, management has determined the net amounts remitted by
the tribes should be reported as our revenue and not presented on a gross basis.
As a result, we have presented our 2004 revenues in accordance with our new
policy, and reclassified amounts from 2003 to conform with our current-year
presentation.
You may have also noted a few reclassifications on our balance sheet. I'd like
to take a few moments now to review those with you.
We have historically presented inventory on both a current and non-current
basis. "Non-current Inventory" has always represented finished goods, with both
new and used component parts that were used in the deployment and service of our
gaming equipment under participation agreements. "Current Inventory" has always
been reserved for items in which the Company intended to sell over the next 12
months, and has typically included some of the used components that we believed
would be sold or consumed under service contracts. As a result of its
["Non-current Inventory's"] long-term nature, the Company has collapsed
"Non-current Inventory" into its PP&E for both fiscal years presented.
Management has also evaluated its policy on used inventory, and has determined
that a vast majority of the used inventory or swap stock is related to servicing
player terminals under participation agreements which are presented in our
Property and Equipment. Based on this data, we have reclassified certain amounts
in 2003 and classified all swap stock in 2004 as "Property and Equipment."
Furthermore, we have historically amortized the swap stock balance over a
three-year straight-line method, which we will continue to do. However, this
expense was presented as a "Cost of Sales." With the reclass to Property and
Equipment, management has determined that the proper income statement
classification for the swap stock is Amortization and Depreciation. For the
fiscal year 2004 and 2003, income statements have been properly classified to
reflect this new policy. EBITDA was likewise affected by these same amounts.
Additionally, any write-ups or fiscal adjustments to inventory were historically
reported as "Cost of Sales." These amounts have been reclassified to SG&A, as
they represent more of an operating cost than a cost of sale. We have also
reclassified certain amounts that were previously included under the balance
sheet caption "Other Assets." Specifically, we have reclassified prepaid
third-party licenses for our player terminals that we intend on placing under
participation arrangements into our Property and Equipment account.
As a result of all the items I just discussed, PP&E now includes our originally
stated PP&E balance, as well as what was considered "Non-current Inventory" and
swap stock and third-party licenses, which were reclassified from "Other Assets.
"
And finally, in the 10-K that will be filed for fiscal 2004, we intend to
separately disclose our gaming equipment under participation arrangements under
a caption classifying it as "Leased Gaming Equipment" for both years presented.
This will not require any reclassifications in our income statement.
I will now turn the call back to Clifton for a little more commentary on the
September 2004 quarter, our Q1 fiscal 2005 guidance, and our strategic
initiatives.
Clifton Lind, Multimedia Games - Pres., CEO
Thanks, Craig. First, SQ 712 has passed in Oklahoma. And many have asked us
about the positive and negative implications for MGAM.
Oklahoma is our largest market, and the new gaming legislation includes a model
compact that redefines legal games for Native American tribes choosing to enter
into the Tribal-State Compact, and allows limited expansion of gaming to four
racetracks in the state.
The positive implications are that the passing of this legislation should
provide additional structure to the market and an opportunity for us to finally
deploy a broad range of games that we have developed in anticipation of this
outcome. The negative is that it will take the state some time to put in place
the appropriate regulatory processes to allow vendors to legally offer the new
games permitted under this compact.
In the short term, we have an environment in Oklahoma where little has changed.
We are prepared to convert our existing game offerings to include those covered
by the compact. But we currently do not anticipate placing any games until they
are approved under the compact and it is absolutely legal for us to do so.
Another outcome of the passage of this legislation is that we have undertaken a
review of all of our player terminal placements at all locations throughout the
state. This [evaluation] may lead us to modify our pricing, placement, and
win-per-day expectations, and our plans for further market expansions.
While we are aggressively working to maintain and even build our market share,
the performance of the player station terminals at each location must satisfy
certain economic expectations. Once we can offer Oklahoma customers our new
compact-compliant products featuring well-developed gaming engines and
market-proven content, we will compete based on the merits of those products,
which we believe will prove to be among the best-earning games in the market.
We also plan to offer new gaming platforms which we have not offered before in
that market, and we expect these new platforms to be very well received by our
tribal customers in Oklahoma.
When I say that we may modify pricing, I think most people immediately think
lower pricing. This may be true from a gross percentage standpoint, or in fact,
we may move in some cases to fixed pricings, other matrix pricing, or other
models which we have not formerly offered in Oklahoma. We will review every
opportunity that we have with each of our customers and each of our prospects,
and make the decision that we think is most appropriate for our shareholders.
We will look at many pricing models with our customers as well as the
anticipated win per day associated with the launch of our new "compacted" games,
and the benefits of the new platforms that we will be introducing, and we will
strive to deliver the very highest value to our customers, as we have done in
the past. We may also choose to remove terminals from some locations where our
analysis indicates that the economic returns will not warrant our expected
returns.
Merely reacting to lower pricing or reduced placement, if that occurs, will not
be prudent unless consideration is also given to the fact that we may reduce the
level of ancillary benefits that we have included in our current bundled
pricing. And again, anticipated higher earnings from our new compact products
will be an important factor in the overall yield realized by the Company from
each player station.
We will continue to offer all legal Class II games and compacted games, and
believe that both the Class II and the Class III Oklahoma market will continue
to be an important and growing market for MGAM. I ask you to recall that during
Q4 FY'04, approximately 33% of our Oklahoma revenues were derived from
facilities where we have development agreements in place which facilitate
long-term relationships.
The second item I would like to discuss is our recent California placements. We
have added a significant number of units to our installed base of
recurring-revenue C-TILG player stations at two California tribal casinos. This
has been well documented in the press, in Wall Street research, and has been
noted by the state. We are precluded by customer arrangements from disclosing
exact player terminal placements, so you will have to wait to confirm what you
have read or heard until you see our Q1 2005 release in late January. In any
case, the installs were, as expected, quite significant.
Additionally, we're generating recurring revenue from several hundred units
supplied by other publicly traded licensed vendors who are all operating on our
central determinant system. The pricing model for C-TILG both encourages other
vendor units to be placed on the system, and recognizes the potential earnings
power of those units installed in those expanded facilities. MGAM's pricing is
focused on making sure that each and every unit that is placed in the field or
is operated on our system is accretive to the Company's earnings.
The C-TILG placements are consistent with our goals to leverage our technology
base into new markets and bring new products and higher-earning products to
customers. It is quite impressive that, since our first two C-TILG placements in
California last December, we have grown in this market as dramatically as we
have. We will continue to be an innovator and have a proven history of gaining a
significant market share in each new market that we open up.
Multimedia was faxed a letter this morning, dated yesterday, from the state of
California, notifying the Company that the state had determined that the C-TILG
units constitute Class III gaming that is not permitted by the compact between
the tribes and the state. The state also asserts in this letter that, even were
the C-TILG units are permissible gaming devices, the tribes in question have
exceeded the number of gaming devices allowed to be operated if the C-TILG units
are counted. Further, the state has indicated that it believes the Company may
be obligated to cooperate with respect to the return of these and similar
devices to demonstrate our compliance with the state law.
Multimedia takes communications from all regulators and its obligations under
applicable laws and regulations very seriously, and invests significant
resources to ensure that our activities are compliant before we enter any
market. As we have done in the past, we will work closely with our customers and
the applicable regulators, in this case, the Office of the Governor, to clear up
these uncertainties.
MGAM is committed to providing our customers with a wide range of gaming
options. As we have stated before, all of our gaming systems, gaming engines and
game content utilize the same advanced, flexible gaming platform, and therefore
can run any class of games offered by Multimedia Games. While it is unclear at
this point how this dispute will be resolved, we believe that both on an interim
and a long-term basis these placements in California will be positive for the
Company.
The last item that I will touch on before the question-and-answer period is our
first-quarter guidance. When we reported the fourth-quarter guidance was going
to be lower than the initial guidance, I took responsibility for that fact and
asked others in our organization to help me in developing a new guidance policy.
The Board also weighed in on that effort, as well.
The Q1 fiscal 2005 guidance reflects input from the Company's Audit Committee
and the Executive Team, whose joint recommendations were considered by the
Board. Multimedia is providing guidance for the current quarter. It is important
to point out that the Audit Committee of the Board of Directors continues to
review the practice of providing guidance, in light of the many changing factors
and markets served by the Company. We will keep you informed on this evolving
process.
Our Q1 fiscal year `05 guidance reflects the fact that we expect no significant
change in the Oklahoma market during this quarter. The first-quarter guidance
also reflects the fact that we are incurring high expenses related to our
placements in Oklahoma and California, and includes significantly higher
non-cash depreciation and amortization charges that are the result of our growth
into new markets and our placement in new markets.
Special expenses for this quarter related to the G2E show, costs in support of
tribal legislative efforts that were unique to this quarter, and unprecedented
lobbying costs to support our efforts to expand into new markets in the future.
Multimedia's Q1 FY'05 guidance reflects the upfront costs, as well, of some
initial benefits from the significant new placements in Oklahoma and California.
Our guidance also considers our current estimate of the Q1 FY'05 impact from
some future anticipated reductions in placements at certain facilities.
In addition, the Q1 FY'05 guidance reflects ongoing expenses for our investment
in the New York video lottery system, which will continue to impact our earnings
until there is growth in this important deployment. Taking these factors into
consideration, we believe that the anticipated Q1 FY'05 over Q1 FY'04 revenue
and EBITDA growth is quite noteworthy, and is a direct reflection of our
resilience and ability to grow while navigating significant regulatory and
market changes.
While we are not providing specific revenue guidance for Q1 FY'05 today, revenue
levels will clearly be ahead of Q1 FY'04's $34.5 million, which included revenue
for player station sales, and will also be up on a quarterly sequential basis
when you exclude the player terminal sales that we booked in Q4 FY '04.
On the subject of growth, I want to reiterate our internal mantra of more
products to more markets, and review very quickly what it means to this Company
at this time. We believe we can achieve growth in the Class II and Class III
Oklahoma markets, based upon our ability to deploy our new games, new gaming
engines, new content, new platforms, and our ability to compete finally on a
level playing field. Our market position may change as a result of the compact,
and our own initiatives to ensure profitability from each and every location
where we operate. But there is stability in our current operations from our
long-term relationships, which are covered by the development agreements that we
have in the state. We expect such agreements, before any removal from other
sites, will result in meaningful expansions in Oklahoma and our installed base
in both FY'05 and FY'06.
We also expect further growth in expansion in the charity bingo markets. We
continue to expect one or two new charity jurisdictions will open in both fiscal
2005 and fiscal 2006, and we fully expect Multimedia Games will be a meaningful
participant in these markets. We are also working with our existing charity
bingo customers to evaluate opportunities for additional growth. California is a
vast and expanding gaming market, and one in which we have developed important
relationships and a meaningful installed base. We see many opportunities for us
to expand our role in this important state.
We are also well-positioned for growth in both domestic and international
lottery markets, where we can be very quick and very cost-effective in providing
the states [with] immediate new revenue by providing both turnkey systems and
content, which enable them to operate a large variety of gaming systems and
types.
There are, of course, well-entrenched competitors also seeking to gain market
share in these markets. But within a world where the adoption of new,
leading-edge technology has become the norm, we see an important role for MGAM
based upon our ability to be first to market with many of these systems.
Operator, let's open the floor up to everyone's questions.
Questions and Answers
Operator
(OPERATOR INSTRUCTIONS) Ryan Worst, C.L. King.
Ryan Worst, C.L. King - Analyst
A couple questions. Could you talk about what you expect the California impact
to be in the first quarter, given all your startup costs in that market?
Clifton Lind, Multimedia Games - Pres., CEO
Ryan, we will not go into any details at the current time, just that we have
analyzed that impact both before and after the receipt of this letter, Ryan. And
we expect that the current guidance we have given has reflected the range of the
potential impacts that we see in that market. But I will not give you any
specifics at this time. It has a great earning potential for us, and we are
going to be, of course, working with our tribal customers to see what the
resolution is of this apparent dispute with the state. And it would be unwise
for me to speculate on how we will be impacted by this current dispute.
Ryan Worst, C.L. King - Analyst
But you are including that in your guidance?
Clifton Lind, Multimedia Games - Pres., CEO
Yes, we have. We have included within the range of guidance our expectations for
a variety of outcomes, including outcomes where the tribes are successful in
resolving their issues with the state, and also we include a range of outcomes
of our expected experience if they are not.
Ryan Worst, C.L. King - Analyst
And then could you say whether or not - since the referendum passed in Oklahoma,
whether or not you have had to renegotiate any existing contracts for
development agreements in Oklahoma?
Clifton Lind, Multimedia Games - Pres., CEO
There have been no renegotiations of any development agreements since the
compact passed, nor do we have reason to believe that there will be any in the
immediate future.
Ryan Worst, C.L. King - Analyst
Are there any risks to the suppliers who supposedly have illegal games in the
market in Oklahoma? Are there any risks for them, going forward, as the state
compacts with the tribes?
Clifton Lind, Multimedia Games - Pres., CEO
Since the regulations are not yet drafted, it is impossible for me to say. But
at one time, the state said that anyone who is guilty of "gun-jumping" could not
operate their games at any of the racetracks. And of course, the state has no
authority one way or the other over the vendors who do any gun-jumping at the
tribal facilities. So it is not clear that there is any apparent downside. Once
the regulations are completed, and drafts of the regulations could be out in
early December, we will be able to make a better evaluation of that.
Ryan Worst, C.L. King - Analyst
In December, you will reevaluate whether or not you should offer them one-touch
machines?
Clifton Lind, Multimedia Games - Pres., CEO
If the regulations do not have any penalty, and if NIGC has not voiced any
further objections, we will reevaluate our position vis-a-vis what the tribes
are willing to do and what the tribes ask us to do. But at this point in time,
we do not foresee offering any of the games covered by the compact until we are
licensed by the state and it is legal for us to offer those.
Ryan Worst, C.L. King - Analyst
Again, what's your expectations on timing with that? And also, if you could go
over where you stand on your credit facilities and share repurchases?
Clifton Lind, Multimedia Games - Pres., CEO
Okay. Let me say that there has been a committee appointed by the Governor [of
Oklahoma] to draft the regulations. Their current goal is to get the initial
draft of the regulations out by the end of the month and have a final regulation
drafted by the end of the month - sorry, by the 15th of December. If they are
able to do that, that would enable the tribes to very quickly assign a model
compact. Each tribe that signs one of those compacts will submit that to the
Bureau of Indian Affairs. The Bureau of Indian Affairs will have 45 days to
review the first compact. So, even if the first tribe signed on December 15, the
Bureau of Indian Affairs normally takes 45 days. So it would be the end of
January before they will have commented.
If they approve it, then it has to be run for 30 days in the Congressional
Record, and so that would take it through the end of February. So it looks like
the first of March could be the first time that vendors could legally be
offering games - that is, if the state does as expected and accepts initial
tribal certification of games, and lets the vendors have a period of six months
to get the gaming labs to certify the games. So I think that the first of March
is probably a reasonable time to expect when the first vendor could legally run
these new compacted games.
Ryan Worst, C.L. King - Analyst
And then on just your credit facilities and your plans as far as share
repurchases?
Clifton Lind, Multimedia Games - Pres., CEO
We - Craig is going to field that question.
Craig Nouis, Multimedia Games - CFO
Ryan, as I think you know, we have a $25 million credit facility. As of
September 30, 2004, we had $10 million available under the term loan portion of
that, and $4 million available under the credit facility, line of credit.
Clifton Lind, Multimedia Games - Pres., CEO
And I have no specific comment to make about share repurchases, other than there
is a large quantity of shares approved by the Board of Directors for repurchase,
and they have put final decisions on the timing of those purchases in Craig's
hands and my hands, and we will evaluate those repurchase opportunities in light
of our commitments to our tribes and our new market opportunities. And when we
can, as we did last quarter, I think, [when] Craig and I agree that it is
advantageous to do so, we will opportunistically pick up shares.
Ryan Worst, C.L. King - Analyst
Okay. What's the authorization currently? And that's it.
Clifton Lind, Multimedia Games - Pres., CEO
We currently have over 1 million shares authorized.
Operator
Michael Friedman, Sidoti & Co.
Michael Friedman, Sidoti & Co., LLC - Analyst
A couple of questions. I think, Craig, you mentioned in your earlier remarks
that you spent money for development agreements. How much did you spend in
total, did you say?
Craig Nouis, Multimedia Games - CFO
It was a little bit over $16 million during the quarter.
Michael Friedman, Sidoti & Co. - Analyst
And so how many game placement guarantees do you have at this point? Do you
know?
Craig Nouis, Multimedia Games - CFO
If you include in that number the facilities that may be operating with some
units [already] in there, even though they have signed development agreements,
expansions, it will be a total of over 6,000 units.
Michael Friedman, Sidoti & Co. - Analyst
And then, I know you mentioned that there were some lobbying costs in the fourth
quarter, and then you're expecting some in the first corner of this fiscal year.
Could you give us a better idea of how much was actually spent in the fourth
quarter, how much you're expecting in the first quarter, and what the run rate
might be for the remainder of the year?
Clifton Lind, Multimedia Games - Pres., CEO
Legal and lobbying is broken out on the report as a line item. And the run rate
is growing each quarter during this next year.
Michael Friedman, Sidoti & Co. - Analyst
Okay. And what was your CapEx for the full year 2004?
Craig Nouis, Multimedia Games - CFO
Hold on one second. You could go to your next question while I pull that number.
Michael Friedman, Sidoti & Co. - Analyst
That was pretty much the bulk of it. Essentially, looking out for earnings, you
are projecting a down year-over-year quarter first quarter. Would be reasonable
to think that you might be able to follow a similar pattern, earnings-wise, as
the past? Or is there going to be some extra lobbying costs and some extra
rollouts in some of the new markets that would cause that to be a little
different than in the past?
Clifton Lind, Multimedia Games - Pres., CEO
I think that you will see the relationship between SG&A expenses and revenue
improving over the last three quarters of the year as we realize some of the
benefits of these player stations that have been rolled out late in Q4 2004 and
are being rolled out in Q1 '05. And I think that the reason that we have chosen
to give only quarterly guidance is that there are a number of these regulatory
and market transitions that are underway. And we just think that looking beyond
this first quarter requires a great deal of speculation at this time, and we are
not willing to do so currently.
So I think that we feel that there are good earnings growth opportunities for us
in the future, and that when we return to that path, we hope it to be sooner
than later. But we want to first solve some of these new opportunities that
presented themselves in the last few hours, and sort of see where all that leads
before we make a commitment.
Craig Nouis, Multimedia Games - CFO
Michael, to answer your prior questions, [we spent] roughly $60 million for
CapEx for the entire year.
Michael Friedman, Sidoti & Co. - Analyst
60?
Craig Nouis, Multimedia Games - CFO
Yes.
Operator
(OPERATOR INSTRUCTIONS) David Fondrie, Heartland Advisors.
David Fondrie, Heartland Advisors - Analyst
I wanted to try to get clarification. I'm not sure that I really understood what
you were talking about in Oklahoma. To the extent that people have illegal games
in today, or presumed illegal games in today, not yet approved under this new
referendum, do you believe that the tribes will be allowed to retain those games
until the regulations are finalized? Is that what you are saying?
Clifton Lind, Multimedia Games - Pres., CEO
I see no evidence to the contrary.
David Fondrie, Heartland Advisors - Analyst
Okay. So we had kind of had status quo of what we had prior to that, but they
will probably be excluded from - or potentially be excluded from putting games
into the racetracks when the racetracks open?
Clifton Lind, Multimedia Games - Pres., CEO
The racetracks are a small part of the market, and the tribes will certainly
encourage the state not to put any penalty in for the people who have been
operating these machines. So there may be absolutely, in the final regulation,
no penalty at all for gun-jumping on these games. So that's why we anxiously
await the final draft of the regulations.
David Fondrie, Heartland Advisors - Analyst
Then, in California, could the state take, I guess, proactive steps to try to
have these games removed?
Clifton Lind, Multimedia Games - Pres., CEO
There is a compact resolution process that is spelled out in the compact that
these two tribes have signed with the state. And it would appear that the state
and the tribe would try to follow that outlined process for dispute resolution.
However, I don't presume to speak either for the state or to presume to speak
[about] what the tribes' reaction might be to some proactive intervention by the
state.
David Fondrie, Heartland Advisors - Analyst
You don't expect the California State Patrol to swoop in and try to extract
these games?
Clifton Lind, Multimedia Games - Pres., CEO
I don't presume speak for them. I would hope that both parties would go through
the dispute resolution process.
David Fondrie, Heartland Advisors - Analyst
Okay. And then, lastly, will you provide revised numbers for each of the
quarters last year? Particularly on the income statement, but also the balance
sheet, so that we have some basis of comparison, as opposed to just fourth
quarter versus last year' s fourth quarter?
Craig Nouis, Multimedia Games - CFO
What we will do on that is post the revised numbers on our Internet website.
Operator
David Bain, Merriman Curhan Ford.
David Bain, Merriman Curhan Ford - Analyst
The regulatory environment in Alabama - you expect expansion. Is there anything
else out there that should worry us? Should we be looking to add into our
numbers in Alabama going forward?
Clifton Lind, Multimedia Games - Pres., CEO
I think I heard three questions, David. I think we have all read the reports
that the Attorney General in the state of Alabama, Attorney General Troy,
intends to issue statements concerning all of the gaming in Alabama within the
next two weeks. And so we are interested in what his statements will be. We are
confident that in the locations that we are operating, that the games that we
are operating are legal charity bingo games. And so we look forward to his
comments. There is every reason for us to be confident that our games will not
be found to be in violation of any state requirements or regulations.
And so, certainly, as you are aware, in Alabama, it's a little bit of an unusual
charity gaming situation, in that the constitutional amendments are passed and
ratified on a county-by-county basis. There was statewide legislation proposed
last session that did not pass. And so one has to look at each of the individual
constitutional amendments to see if the type of games that we are offering are
legal forms of charity gaming. And we are confident that all of our games are
legal forms of charity gaming. But we look forward with interest to the results
of the analysis of the Attorney General, because he is going to look into
broader questions, we understand, rather than just our games that are being
offered - are they legal games in the counties where they are being offered? So
we look forward to the clarity that will be brought to this market as well.
David Bain, Merriman Curhan Ford - Analyst
And the guidance for work Q1 - does that include any one-time sales?
Clifton Lind, Multimedia Games - Pres., CEO
No.
David Bain, Merriman Curhan Ford - Analyst
So is it safe to assume, given that you have always had some one-time sales in
there during the quarters previous, that there could be upside to your guidance?
Clifton Lind, Multimedia Games - Pres., CEO
David, I have looked very foolish in the last two quarters predicting one-time
events. And so we did not include any in our guidance. We certainly think that
one-time events are in our future, but I won't repeat the same mistake of the
last two quarters by publicly predicting them anymore, and certainly not for
this quarter.
David Bain, Merriman Curhan Ford - Analyst
Okay. And you stated that you expect market share gains in Oklahoma in `05. Did
I catch that ? With development deals?
Clifton Lind, Multimedia Games - Pres., CEO
I think in the long run, after all of the dust has settled, it is our goal and
our expectation that we will continue to be a very substantial player in
Oklahoma, and even increase our presence once we can offer the same games that
are being offered by other players there today.
David Bain, Merriman Curhan Ford - Analyst
And the 40% that was mentioned in the past, locked in from development deals in
Oklahoma - that still stands. Can that increase, now that you have even, maybe,
more development deals going on?
Clifton Lind, Multimedia Games - Pres., CEO
David, that is the number that - we currently said 33% of last quarter's
[Oklahoma] revenue, and we thought that with the deals that we had in place, it
would grow to be 40% of Oklahoma revenue. If we continued to do development
deals in Oklahoma, well, then, certainly that would grow. There is going to have
to be a period of time where we see where the Oklahoma market is going to land
vis-a-vis - there are a meaningful number of significant gaming facilities
already in Oklahoma. And so the ultimate number of player stations needed in the
Oklahoma market is somewhat in question, and is going to be somewhat influenced
by what happens over the next two or three years in the surrounding states.
So we are going to be watching very carefully the growth opportunity in Oklahoma
as it specifically relates to facility expansions. We are comfortable with all
the ones that we are involved with, and of course, don't know how many others
might be planned or might not yet be planned, but might get on the drawing board
later next year. So we are going to be cautious about our expansion to make sure
that that market doesn't get overbuilt.
And so I can't tell you what we are going to do about additional development
opportunities in that market at this time. We are going to see how that market
develops and proceed cautiously. But we are very happy with the relationships
that we have secured at this point, and they represent the foundation we wanted
to achieve in that market.
David Bain, Merriman Curhan Ford - Analyst
And last question - is there any new market out there that you're looking at
that could impact `05 that is a market that you have not talked about publicly
that could be substantial to earnings in `05?
Clifton Lind, Multimedia Games - Pres., CEO
We are operating in a vast number of charity markets that we - as we said, we
expect at least one or two of those to roll over in `05; one or two of the very
significant ones. If they have any `05 impact, it will be in the last quarter of
FY'05.
David Bain, Merriman Curhan Ford - Analyst
Okay. But nothing outside of charity?
Clifton Lind, Multimedia Games - Pres., CEO
Oh, no - we are working a like number of opportunities in other state-related
expansion of gaming opportunities. Likewise, they will either be FY'06 events or
late in FY'05. And we also continue to look at Class II development
opportunities, but we are going to proceed cautiously there, as the NIGC's game
classification process plays out and we find out what types of games the NIGC
and the tribes are going to agree will be legal Class II gaming in the future.
So I think most of the big growth opportunities will be late `05 or early `06
events, not early in `05.
David Bain, Merriman Curhan Ford - Analyst
Okay. But they could be substantial to earnings?
Clifton Lind, Multimedia Games - Pres., CEO
Yes.
Operator
(Operator instructions) Eddy Costa, Shumway Capital.
Eddy Costa, Shumway Capital - Analyst
I just went to ask - given all the growth that you guys are experiencing in
California right now, is it safe to assume that there is going to be a material
expansion in SG&A in Q1 fiscal `05?
Clifton Lind, Multimedia Games - Pres., CEO
I think you will certainly see growth in SG&A in Q1 of `05 over Q4 `04. That
will be primarily related to a rather significant amount of installation expense
that we always absorb when we have the kind of installations that we have had,
both in Oklahoma and California during a quarter like this.
Eddy Costa, Shumway Capital - Analyst
Okay. So does that mean that, for the remainder of the year, given a sort of
normal installation cycle, that your SG&A could be down?
Clifton Lind, Multimedia Games - Pres., CEO
We expect to make progress in decreasing very substantially the rate of growth
in SG&A quarter to quarter. And it remains to be seen if it will actually drop
from quarter to quarter. But the rate of growth will go down materially.
Eddy Costa, Shumway Capital - Analyst
Great. And then the other question was, you guys have talked about the machines
that you are placing as part of your development deals. You put in something
like, I think it was, 1,256 or something in this quarter pursuant to development
deals. How many are remaining, and how many of those would you envision would
get placed in the first quarter of `05?
Craig Nouis, Multimedia Games - CFO
Under future deals that need to be completed yet, there are roughly 2,000
incremental machines. There were two new facilities that were completed during
the current quarter, Q1, which were contemplated in the guidance. So two of the
facilities opened up wi th roughly a total of 500 machines combined. But that
would be it. There's no more additional facilities that will open up this
quarter.
Eddy Costa, Shumway Capital - Analyst
And just your comment about the machines being - they are unfinished deals? I
didn't understand what that - does that mean that the deal isn't finished
negotiating, or that the...?
Craig Nouis, Multimedia Games - CFO
No, no, no. They are signed deals in which the facility is either in a planning
stage or in the process of being constructed.
Operator
David Fondrie.
David Fondrie, Heartland Advisors - Analyst
Just to come back to SG&A expense for a minute, I understand that you reversed
in Q3 some SG&A that made it unusually low. But it looks - it went up about $2
million. And some of that is installation of machines. What kind of assumptions
are you making relative to legal and lobbying costs, I guess, associated with
the placements in California and in Oklahoma going forward into future quarters?
Clifton Lind, Multimedia Games - Pres., CEO
Okay. First, I am going to let Craig give some numbers. But the fact is that
very little of our going-forward lobbying cost will be associated with either
California or Oklahoma. Those are not the two markets where we have significant
lobbying efforts underway. And as far as legal costs, legal costs in all markets
are just an ordinary part of our business. And we don't see any specific
extraordinary growth in legal costs because of our activities in either the
California market or the Oklahoma market. Our total growth per quarter is going
to be about $500,000, and so - and Craig might want to give some color on that.
Craig Nouis, Multimedia Games - CFO
Yes. Roughly, like Clifton was saying, we do have some growth in those accounts.
But if you look at the last quarter, the total legal and lobbying was roughly
$1.5 million combined. And again, some of that - we do expect some growth there.
David Fondrie, Heartland Advisors - Analyst
Well, it's hard for me to believe that with California coming out with a letter,
that you're not going to have fairly significant legal costs in trying to - I
mean, I don't know, do the tribes bear all that cost?
Clifton Lind, Multimedia Games - Pres., CEO
Well, we certainly - this is a state and tribal dispute about what can be
operated under the compact. We did not anticipate, as a vendor, any significant
legal cost associated with that. It is the tribes' and the state's
responsibility to work together through the process and resolve that. We will
certainly be prepared to be informed, but would not specifically be budgeting
any particular cost for that event.
David Fondrie, Heartland Advisors - Analyst
Okay. And then in Oklahoma, you mentioned that you will evaluate all of these
pieces of equipment in order to determine their economic feasibility, and that
there may be some that are withdrawn or some that are repriced, whatever. Is
there any risk that the equipment that you have put in under development
agreements that are being repaid through the holds on those machines - is there
any risk that you may not recapture the cost of those machines?
Clifton Lind, Multimedia Games - Pres., CEO
Well, we don't feel that there is any significant potential for anything like
that at all.
Operator
Joel Capka, Pruneyard Financial Group.
Joe Capka, Pruneyard Financial Group - Analyst
I quickly read over the press release in listening to the questions in your
presentations. And I wonder if I could just summarize things here for myself,
just to get a clearer overview picture here.
It looks like what you said about the revenues for the first quarter of `05,
that they are going to be greater than the first-quarter revenues of 2004, but
that it sounded like the implication was they could well be below the revenues
for fourth quarter `04.
Clifton Lind, Multimedia Games - Pres., CEO
I don't think that's what we tried to say, no. That's not the case.
Joe Capka, Pruneyard Financial - Analyst
So the revenues - it should be an incremental gain, or at least not a big
decline from Q4 of -
Clifton Lind, Multimedia Games - Pres., CEO
Our expectations or that revenue in Q1 [`05] will be equal to or larger than
revenue in Q4 `04.
Joe Capka, Pruneyard Financial - Analyst
All right. If that's the case -
Clifton Lind, Multimedia Games - Pres., CEO
That's excluding the player station sales. This is recurring revenues.
Joe Capka, Pruneyard Financial - Analyst
Correct; I understand that. So, obviously, if there were some one-time sales,
they might add to those revenues, but you have not forecast any?
Clifton Lind, Multimedia Games - Pres., CEO
And the more important thing is there were significant sales in Q4 `04.
Joe Capka, Pruneyard Financial - Analyst
Can you tell me roughly put those were? The amount of those?
Craig Nouis, Multimedia Games - CFO
Yes - roughly, $3.7 million in sales.
Joe Capka, Pruneyard Financial - Analyst
It sounds like there should be some nontrivial revenue increases, then, in Q1'05
over Q4'04. Obviously, you have forecast a significant decline in EBITDA and net
income. And I know you've addressed some of these issues here, but I guess I'm
left wondering like where are all these additional - I don't feel like I have a
good handle of where all of these additional expenses are coming from that are
going to reduce the EBITDA and net income to such a fairly dramatic extent. Can
you just say, okay, category 1, 2, 3 - roughly what these are? I know you've got
SG&A. I know you have got development costs. Have those ramped up significantly
from Q4?
Craig Nouis, Multimedia Games - CFO
I' m sorry, Joe; I'm having a hard time hearing you. I think you said something
about the net income and EBITDA sequentially from last quarter to this quarter's
guidance?
Joe Capka, Pruneyard Financial - Analyst
Yes.
Craig Nouis, Multimedia Games - CFO
And on a net income standpoint, we do have that forecasted at a lower amount.
But the EBITDA is not forecasted at a - I mean, it's relatively flat.
Joe Capka, Pruneyard Financial - Analyst
Okay. Well, what is the reason for the lower net income, then?
Craig Nouis, Multimedia Games - CFO
Really, the driver was depreciation.
Joe Capka, Pruneyard Financial - Analyst
Depreciation?
Craig Nouis, Multimedia Games - CFO
Yes. Depreciation continues to increase every month as we keep placing machines
out there. So depreciation is a big driver on a monthly and quarterly basis.
Joe Capka, Pruneyard Financial - Analyst
Can you give me a rough idea of what the number of machines in Q4 was and what
the total number will be that you are anticipating in Q1 of `05?
Clifton Lind, Multimedia Games - Pres., CEO
In terms of units installed?
Joe Capka, Pruneyard Financial - Analyst
Yes, just a rough, round number.
Clifton Lind, Multimedia Games - Pres., CEO
Roughly 13,000 units, total - a little bit more than that.
Joe Capka, Pruneyard Financial - Analyst
Okay, was that for Q4, or what you expect to have in Q1?
Clifton Lind, Multimedia Games - Pres., CEO
No, no; I'm sorry. That's for Q4.
Joe Capka, Pruneyard Financial - Analyst
And you expect the number to go up in Q1 '05?
Clifton Lind, Multimedia Games - Pres., CEO
Certainly, the number is going to go up. As we have said earlier, we are not
going to give you the exact numbers because of confidentiality agreements that
we have with our tribal customers. But consistent with our statement last
quarter that we said the installs in Q4'04 and Q1'05 would be the most
substantial in any 6-month period in our history, you can sort of do the
approximate math yourself.
Joe Capka, Pruneyard Financial - Analyst
Well, it sounds like you have got something on the order of a $5 million whack
here in net income, I gather because of this depreciation. Is that because of
the big influx of new machines? And how long does that - if I can call it this,
bubble of depreciation last? Over what period of time do you write off the
machines?
Clifton Lind, Multimedia Games - Pres., CEO
Three years.
Joe Capka, Pruneyard Financial Group - Analyst
Is it front-loaded, or -?
Craig Nouis, Multimedia Games - CFO
No, no, no. Straight line, three years.
Joe Capka, Pruneyard Financial Group - Analyst
What I am getting at is it seems like you all of a sudden have a big bump in
depreciation expense. Is this level going to now continue?
Clifton Lind, Multimedia Games - Pres., CEO
Well, if you'll look at the net increase in the number of machines in Q4'04 and
Q1'05, then one would certainly expect an increase in the amount of
depreciation. We deploy those on a monthly basis, so each month, it will
continue to go up, as long as we are making net new deployments, and so long as
the rate of net new deployments is exceeding the rate of deployments three years
ago.
Operator
There appears to be no further questions at this time. I would like to turn the
call back over to Mr. Lind for additional comments or closing remarks.
Clifton Lind, Multimedia Games - Pres., CEO
Thank you, operator. I want to think everyone for their interest in Multimedia
Games. I think it is evident from our comments and responses to your questions
that we believe there is substantial growth opportunities for Multimedia Games
as we continue to provide innovative, new products for new and existing markets.
At the same time, we continue to manage the possible challenges which we are
facing in the Class II markets in California, and in light of the fact that we
do not intend to jeopardize our licensing process in new, emerging markets by
running games that would not be legal until a compact is in place.
We believe that the setback that we have endured because we have made the
conscious decision to continue to offer only multi-touch, standard-sequence
bingo games while other forms of gaming have proliferated in the Oklahoma market
will prove, in the long run, to be a good decision.
We look forward to reporting to you again on our future progress. This
management team remains enthusiastic about this Company, about this team and
about the markets that we are in and the markets that we are entering, and we
ask for your continued support. Thank you for your time today. We look forward
to reporting our progress in the future. That will be all, operator.
Operator
This does conclude today's conference call. At this time, you may disconnect.
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