| Multimedia Games, Inc.
HOST: Mr. Clifton Lind
DATE: July 28, 2005
Operator
Good day and welcome, everyone, to the Multimedia Games third quarter fiscal
year 2005 conference call and webcast. This call is being recorded. 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 Lind. Please go ahead,
Sir.
Clifton Lind, Multimedia Games - President and CEO
Thank you operator, and thanks to everyone for joining us on the call. With me
today is Craig Nouis, our CFO. The third quarter operating results and the
reason for exceeding our guidance are reviewed today in today's press release.
In a moment, I'll review some other highlights of the third quarter and Craig
will provide some additional financial details. First, Julia Spencer will get us
started with Safe Harbor Language.
Julia Spencer, Multimedia Games - Director of Corporate Publications
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 actual operating results and
financial conditions to differ materially. Please refer to 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 on our website at www.multimediagames.com in our Investor Relations
section. I will now turn the call back over to Clifton.
Clifton Lind, Multimedia Games - President and CEO
There are two primary reasons for our better-than-anticipated Q3 performance.
First, there were fewer than expected conversions in the Oklahoma market, and
second, we had continued success with the cost containment measures. In Q3 FY
`05 we reported revenues that were among the highest in our Company's history,
$37.1 million. And in addition, we reported diluted earnings per share of $0.16,
and EBITDA of $22.3 million.
Continued progress in the revenue diversification effort remains one of our
highest priorities. While we continue to address the evolving Oklahoma market by
introducing new products and continuing to invest in casino development
projects, we also are continuing our investment in R&D and our cost containment
efforts, which carefully manage our operating expenses. We do this in order to
realize maximum cash flow from our operations.
We believe the lower levels of operating costs recorded in Q3 FY `05 can be
maintained going forward, even as we allocate resources to new markets and
jurisdictional opportunities. We remain committed to allocating available cash
flow to three primary areas. First, Multimedia's commitment to continuous
technological innovation and flexibility in our system architecture is No. 1 on
our list. This facilitates rapid product evolution and provides new market
opportunity by allowing us to be first to market in many cases.
These factors were important in our ability to capitalize on new growth
opportunities, including the Electronic Instant Lottery system for video lottery
markets and charity and Native American markets.
Second, we continue to utilize our financial strength to invest in growth
opportunities. During the quarter, we allocated approximately $17.8 million to
facility development projects that should lead to the placement of a significant
number of new terminals.
Third, we remain committed to strategically investing a portion of our available
cash for share repurchases. Our decision in Q2 FY `05 to purchase our stock
followed our valuation of our CapEx spending plans and other capital
commitments. Our confidence in our long-term prospects leads us to believe that
investing in our own shares represents a reasonable use of cash, and can
contribute to the enhancement of long-term shareholder value.
Going forward, our share repurchase authorization remains in place, and we will
balance that activity with our capital commitments relating to expanding our
installed base of player terminals and entering new markets.
Craig will now provide some additional insights on the third quarter financial
results.
Craig Nouis, Multimedia Games - CFO
We provided details on our operating results in this morning's press release, so
let me take a few moments and review a few items.
As noted in our press release this morning, SG&A expenses decreased $1.5
million, or 9.6%, on a quarterly sequential basis, reflecting our effort to
continue to control operating expenses. SG&A expenses for the June 2005 quarter
also reflect the reversal of approximately $350,000 of bad debt expense relating
to the collection of reserved accounts. On a year-over-year basis, SG&A expenses
increased 8.9%, or $1.2 million. The June 2004 quarter benefited from a
reduction of the Company's fiscal 2004 incentive accrual in a reversal of $1.4
million in compensation expense from the first six months of fiscal 2004. I
would also like to note that in the September 2004 quarter, SG&A expenses were
$17.6 million, compared to $14.1 million in the current quarter. So we have
reduced quarterly SG&A expenses by nearly 20% over this period of time.
Amortization and depreciation expense continues to increase as a result of the
year-over-year increase in unit placements. Accordingly, amortization and
depreciation expense rose $4.8 million, which is 50% higher compared to the
prior-year period. As expected, as a result of lower capital expenditure levels,
depreciation and amortization have leveled out, and in fact on a quarterly
sequential basis, our D&A decreased $187,000 from the March 2005 quarter.
As we pointed out in this morning's press release, the June 2005 quarter
reflects an effective tax rate of 40.2%, resulting from the inclusion of certain
nondeductible lobbying expenses.
During the June quarter, we increased our credit facility by $35 million, to a
total of $70 million, as disclosed in an 8-K filing on June 30. Borrowings under
our credit facility totaled $35.2 million at June 30, of which approximately $21
million was under the revolving line of credit, an increase of $13.4 million
over March 31, 2005. Cash and cash equivalents as of June 30, 2005 totaled $5.9
million, down from $11.3 million as of March 31, 2005. This increase in
borrowings under our credit facility and its decrease in our cash position was
primarily driven by three factors: 1) an estimated tax payment of $8 million; 2)
the repurchase of treasury stock totaling $5.8 million; and 3) development
agreement advances totaling $17.8 million.
Our cash flows from operations were approximately $12.8 million for the quarter.
Of the $17.8 million advanced for development agreements, $9.7 million was
reported as a note receivable, and $8.1 million was reported as an intangible
asset.
Accounts receivable decreased during the quarter, from $12.3 million at March
31, 2005, to $10.7 million as of June 30, 2005. The reduction in accounts
receivable relates to the timing of collections on certain accounts. The June
30, 2005 balance is in line with expected levels in future quarters.
The balances in both notes receivable and intangible assets rose as a result of
advances under the development agreements I just mentioned. We have added a new
line to our balance sheet called Deferred Contract Costs. This reflects the
costs accumulated to date on our international lottery project, and will be
recognized after the system is accepted by the customer.
As anticipated, our capital expenditures declined significantly in the third
quarter of 2005, to $6.3 million, down from $9.5 million in the March quarter,
which included $6.7 million for the renegotiation and extension for the
licensing of third-party content. The June 2005 capital expenditure run rate of
$6.3 million is in line with our expectations for the future quarters. Now, I
will turn the call back to Clifton. Clifton?
Clifton Lind, Multimedia Games - President and CEO
Thanks Craig. During the quarter, various components of our MGAMe(TM) Casino
Management System were activated at several Oklahoma tribal facilities, at the
VictoryLand charity facility in Alabama, and at Batavia Downs in New York. By
providing our customers with these advanced systems solutions, we enable them to
increase efficiency and optimize their earnings. We are now focusing on
leveraging the placements of our casino management products into the commercial
casino and Class III markets, and securing additional Class II charity and video
lottery opportunities.
Let me briefly review the status of our existing markets. As we have previously
indicated, the transition in Oklahoma from Class II games to games played under
the Compact continues to move at a slower pace than originally expected. We are
eager to have our portfolio of games played under the Compact, including our
Class III MegaReels(TM) and MegaSkill(TM) products, compete in the marketplace.
As this occurs and as the players become familiar with our new titles, features,
and gaming engines, we remain confident that we will see an improvement in our
average hold per day and [see] additional unit placements.
Construction is almost complete on our new gaming facility in North Tulsa, for
which we are providing funding. When that facility opens in early August, we
expect to place about 700 terminals. We plan to meet the demand for the initial
units for this and other new opportunities from our existing pool of player
stations.
While the Oklahoma market continues its gradual transition to games played under
the Compact, we are pursuing other means to grow the installed base. We are
presently committed to three remaining development projects in support of our
strategy at securing a significant presence in each of Oklahoma's three major
metropolitan or feeder markets: Tulsa, Oklahoma City, and Dallas-Fort Worth.
Along that line, we recently entered into a new agreement to provide 50% of the
funding for a new tribal facility in the Oklahoma City area, and this facility
may well become the premier facility in the largest metropolitan area in the
state. In California, we are in discussions with current and potential new
customers regarding Class II opportunities, as well as systems solutions for
their gaming needs. We hope to have a number of additional new placements in
California in the coming year.
We continue to be pleased with our decision to enter the charity market and with
the incremental revenue it generates. Over the next several quarters, we believe
that a number of additional jurisdictions will become available for electronic
charity offerings, and we hope to report further market progress in this area in
our next conference call.
Further success of our revenue diversification initiatives should become evident
when we recognize the revenue from the deployment of the first Electronic
Instant Lottery System, which delivers electronic instant outcomes to retail
establishments. Presently, we are completing the integration process for this
initial system, and we anticipate realizing revenue from this opportunity early
in fiscal 2006. During Q1 FY `06, we also expect to report further developments
in the commercial casino, Class III Native American casino, charity, and lottery
markets.
We are very pleased with the performance of our central system in the New York
Lottery market. As reviewed previously, our operation of the New York Lottery
Central System impacts our quarterly and annual earnings per share. This impact
to our earnings per share is due primarily to a lower number of VLTs currently
operating in New York, particularly since the two largest facilities, both of
which are located in the New York City area, have not yet opened. Once these
facilities open, and currently it is planned for the summer of FY '06, we expect
that our New York contract will be a meaningful contributor to our earnings per
share. So in effect, we have some built-in accretion to our earnings as we
eliminate the earnings drag and generate positive earnings.
Operator? Let's open the floor to questions.
Questions and Answers
Operator
(OPERATOR INSTRUCTIONS) Steve Kent with Goldman Sachs.
Chuck Minervino, Goldman Sachs - Analyst
This is Chuck Minervino. I was wondering if you could give us a sense of the
average win per unit on the compacted games in Oklahoma versus the Class II
machines?
Clifton Lind, Multimedia Games - President and CEO
First, as you know, there are very few compacted machines out there. Most of the
ones that are in the market now have only been out there for a short period of
time. Nearly all of them are in small locations. We've not done any
installations in any major facilities. So, the original installations we did
were in smaller halls, which are in the more rural areas. So Craig, can you give
us insight that you wish to do on that--?
Craig Nouis, Multimedia Games - CFO
Like Clifton pointed out, we are very pleased with the performance of those
machines. I think it is still too early to draw any conclusions on where the
holds per day will be in the future, we do expect also that we will see bigger
benefits in those major metropolitan areas. So there's various ways you can look
at it as compared to--it is not right to compare some of the rural casinos to
[halls on] the rest of the network that are operating in major metropolitan
areas--but [up] to this point, most of the facilities have seen either the same
or increased holds per day as a result of the conversion.
Chuck Minervino, Goldman Sachs - Analyst
I had one other question. I saw that there were some game removals in
California. Where does that stand as far as going forward? Will there be any
additional game removals there?
Clifton Lind, Multimedia Games - President and CEO
One of our current customers was very doing very well, and the other customer
probably has more Class II machines than they need to satisfy market demand. And
so we think that we will maintain the current level of machines with one of our
customers or possibly increase it. We would not be surprised to see additional
removals from the other customer, where the market demand is not there for the
overflow machines. As you know, three-touch Class II machines in a casino with
slots and video slots is not a very desirable product. It is always an overflow
product in those markets.
Operator
Ryan Worst of C.L. King.
Ryan Worst - C. L. King - Analyst
Just to clarify, Craig, it sounded like you said that the revenue per day, that
it is accruing to Multimedia Games for the converted games as much as [it was in
places] where the games were converted, despite the lower percentage that MGAM
receives on those games?
Craig Nouis, Multimedia Games - CFO
No, what I said was that for the most part, all of the facilities are showing as
much or more than [what] the holds per day were prior to the conversion. We
anticipate that it won't be for some period of time--a quarter, two quarters or
some period in the future--where we will get a direct offset from the reduction
in the revenue share.
Ryan Worst - C. L. King - Analyst
Okay, so revenue per day--could you provide some details on how much lower
revenue per day is for MGAM on those converted games and before the conversion?
(MULTIPLE SPEAKERS)
Clifton Lind, Multimedia Games - President and CEO
Taken as a whole for the small number of machines out there, Ryan, it is not
significantly lower, just marginally lower. And let me say that where we have
rolled these games out, we've rolled out a very small palette of games because
in all the facilities, there are so few machines that they do not need our
entire palette of games in there. I think the best indication we're going to get
is when we get some of these larger facilities to roll over to the games that
are played under the Compact. There's not a significant difference in the net to
us at the current time, but we don't go any further than that.
Ryan Worst - C. L. King - Analyst
And your percentage is lower on the compacted games than they were on the Class
II, right?
Clifton Lind, Multimedia Games - President and CEO
In nearly every single arrangement, that is the case.
Ryan Worst - C. L. King - Analyst
Even in those small facilities.
Clifton Lind, Multimedia Games - President and CEO
Even in the smaller facilities now. As you know, Ryan, there were some
facilities that were so small that we did not expect there to be any additional
patronage as a result of rolling into the games that are played under the
Compact. We chose, rather than to go to a lower revenue share on the small
number of machines, where we had certain basic fixed costs from a
telecommunication standpoint and a service standpoint, it was actually better
for us to make the decision to remove machines from those smaller halls than to
go to a lower revenue share. We are making those decisions on a case-by-case
basis, and the vast majority of those have been removed at this time.
Ryan Worst - C. L. King - Analyst
Can you just provide an outlook for the game base in Oklahoma and the number of
conversions that you expect over the next quarter?
Clifton Lind, Multimedia Games - President and CEO
I get in trouble every quarter speculating on that. The fact is that we have not
been right yet about the rate of conversions, and our customers have chosen to
continue to play Class II games as opposed to formally converting to the Class
III games. We are seeing some indications, particularly in one of the larger
markets, that in October, they plan to make some significant changes, but I will
tell you we already have the calendar of requests for conversions for the
balance of this quarter, and the pace is not going to pick up much this quarter.
So, I'd have to say that we have--we expect most of the conversions to occur in
FY '06, not in this [year's] Q4.
Ryan Worst - C. L. King - Analyst
In your guidance--I mean, is that what you are assuming in the guidance, that
not much is changing as far as the converted games? I thought that was really
the primary reason that you said you would be lower in the fiscal fourth quarter
than the third quarter, just because of the increased number of conversions.
Clifton Lind, Multimedia Games - President and CEO
That is not in total the reason, but I will let Craig give you some more color
on that.
Craig Nouis, Multimedia Games - CFO
Ryan, we do have some conversions expected. Obviously, we have been through a
month of the quarter at this point in time. We have not seen a whole lot of
conversions for this first month of the quarter. We expect, probably, the
majority of the conversions that we will see for the quarter will take place in
that last month, which would have an impact, but not a huge impact.
Clifton Lind, Multimedia Games - President and CEO
I think as we mentioned in the press release, we have not only G2E but two other
significant trade shows this quarter, all of which we expense in the quarter the
trade show takes place. So, we have anticipated higher trade-show expense, and
marketing, promotion, and travel expenses this quarter, and we have pretty good
visibility into those. So those would be a reason that should not be overlooked
that we might be taking the approach that we are taking as far as exceeding the
guidance this quarter.
Ryan Worst - C. L. King - Analyst
A final question, Israel--revenue from that system going to Israel--is that now
expected in the first quarter of `06 instead of the fourth quarter this year?
And then also can you comment on more revenues in Alabama?
Clifton Lind, Multimedia Games - President and CEO
First, that is a correct statement. We do expect the revenue early in FY '06,
and it's just a matter of the terms of the contract. We are nearing customer
acceptance, but after customer acceptance, there is a term in the contract [for
which] we chose to believe that the correct approach is to wait 90 days before
that revenue gets recognized, and so that has moved into the first quarter of
`06. In Alabama, the revenue is down because we are going to be introducing,
within 90 days, a new line of products for Alabama. We have been running our
initial introductions in Alabama since we entered that market now nearly a year,
15 months ago, and we are about to do a major revamp of our products there. So,
I think the fact is that the customers in Alabama have not been seeing anything
new recently, and some of the games have gotten a little stale for them, so we
expect to turn that around, not only with new games, but with a new gaming
system.
Ryan Worst - C. L. King - Analyst
Is there a lot of CapEx involved in that?
Craig Nouis, Multimedia Games - CFO
No.
Clifton Lind, Multimedia Games - President and CEO
Not at all. As you know our games are just software, and the modifications to
the platform have very modest costs.
Operator
David Bain of Merriman Curhan Ford.
David Bain - Merriman Curhan Ford - Analyst
You say that there was a learning curve for patrons of compacted games in
Oklahoma. If you look back at Q2, and I know it's just a small sampling, but did
you see an increase in those games' win per day going into Q3 or...?
Clifton Lind, Multimedia Games - President and CEO
We absolutely have seen improvement in the performance of those games the longer
those games stay in the halls. That is correct.
David Bain - Merriman Curhan Ford - Analyst
And it looks like there was a pretty big bump in charity units but kind of a
small increase in revenues, and I know that you just went over maybe a little
bit of a lower hold issue. Is there also a revenue share change?
Clifton Lind, Multimedia Games - President and CEO
No, there is no revenue share change.
David Bain - Merriman Curhan Ford - Analyst
With your recent systems wins, can you give us a sense of how your systems
architecture differs from competitors'? And if you see additional systems wins,
[at] maybe a little higher margin by the end of the fiscal year?
Clifton Lind, Multimedia Games - President and CEO
We do not expect any more systems wins this fiscal year. We think we'll have a
meaningful number of systems wins in FY '06. And, I want to say that our focus
for the systems business is the same thing for our gaming platform business. We
try to have the most flexible architecture so we can customize the product to
each individual user's needs. I think that is where we will differentiate
ourselves from our competitors. We will have to provide all of the basic core
features that each one of the competitors provides. And in addition to that, we
will provide additional features that makes it a more valuable tool to the user.
So that is our strategy there.
David Bain - Merriman Curhan Ford - Analyst
So you have "up sale" products in development?
Clifton Lind, Multimedia Games - President and CEO
That is correct.
Operator
Bill Lerner with Prudential Securities.
Bill Lerner - Prudential Securities - Analyst
Two questions: 1) the development agreement in North Tulsa that goes on line
within the next couple weeks or next few weeks, obviously, 700 units is a
meaningful number for you. In trying to line that up with your fiscal fourth
quarter guidance, how meaningful is that 700 units relative to what you're
guiding? If it is delayed X number of weeks, does that impact your number, or
are you just being conservative? And then a follow up.
Clifton Lind, Multimedia Games - President and CEO
Actually, we've got it in our guidance coming in a few weeks after it actually
is scheduled to open and, Bill, you have good reason to ask that question, but
that is one that we have very good clarity into the status of. And so I think
that is not one that is likely to slip. I would love for you to go down there
and take a look at it.
Bill Lerner - Prudential Securities - Analyst
I appreciate that. Okay, Clifton, one other follow up. On the other charitable
markets that you are anticipating in the next several quarters and so
forth--just to gauge a sense of magnitude--are any as meaningful as Alabama, or
are they closer to Louisiana in nature?
Clifton Lind, Multimedia Games - President and CEO
Yes. There is at least one that over a 24-month period we believe will be more
meaningful than Alabama, and the others are smaller than that, but in all cases,
larger than Louisiana.
Operator
Jeff Martin with Roth Capital Partners.
Jeff Martin - Roth Capital Partners - Analyst
Could you characterize how much you think the Oklahoma market has expanded as a
whole? There has been a lot of development activity over the past six to twelve
months. Can you take a stab at what you think the total market size is in gaming
[for] both traditional and Compact games?
Clifton Lind, Multimedia Games - President and CEO
I think there are currently from 33,000 to 35,000 units in Oklahoma.
Jeff Martin - Roth Capital Partners - Analyst
And that's up from the low 20,000s a year ago?
Clifton Lind, Multimedia Games - President and CEO
Yes. It was--this time last year it was, let's say 21,000 to 24,000.
Jeff Martin - Roth Capital Partners - Analyst
That's helpful. Thanks. You mentioned something about the first Electronic
Instant Lottery system.
Clifton Lind, Multimedia Games - President and CEO
Right. That's our system for Israel.
Jeff Martin - Roth Capital Partners - Analyst
In terms of large [hall] operators in Oklahoma going to the compacted games,
what is the decision factor? It seems like a lot of smaller ones have made the
transition. What is the catalyst for the large operators, or what's hanging them
up at this point?
Clifton Lind, Multimedia Games - President and CEO
In the Tulsa area, the three operators have to share revenue with the
county-operated racetrack there once they open. So, I think none of them want to
be the first to do that, because if only one of them starts running compacted
games, at that time they have to bear the brunt of the contribution to the
racetrack. So, I think that the three major Tulsa facilities will sort of move
in unison, and they are just, I think, evaluating when the appropriate time is
to change their focus from the table games that they have brought up this year
and [for which they] have digested the operating constraints and
responsibilities for the first time in a number of years. I think that they're
all making good progress on getting that under their belts, and they've all said
that after that was done they would start focusing on the machine gaming.
I think with each passing month, we get closer, and I'm not going to be
surprised if later this fall, we start to see the change. I think one of the
things that is, I think, becoming evident, [is] that each one of the operators
will independently make their change; and they might choose to continue to
operate with a few Class II games as long as it is in their interest to do so.
So I think there will be fewer halls that make the decision to flip the switch
and change over this month 100% to Class III games, and that it will be a
gradual process until each individual tribal operator decides it's in their
interest to do so. So, it is going to be not an en masse change but a gradual,
individual facility approach to this.
Jeff Martin - Roth Capital Partners - Analyst
Now that you've started to get a little bit of clarity into the compacted nature
of this market, any reason to believe, say, three, four, five years out, there
will be any meaningful Class II installed base left? Main reason I ask that is
you still have a sizable number of Class II games under contract under your
development agreements.
Clifton Lind, Multimedia Games - President and CEO
I would be very surprised if, when looking at the market as a whole, that there
is a large percentage of Class II games running five years from now. I think the
biggest determinant of that is going to be what's happening in the states
surrounding Oklahoma from the gaming standpoint. In all sectors of the state,
the tribes rely on some drive-in business from adjoining states, and so they
watch very closely what is going on in the adjoining states. As long as there's
not any major change in what types of gaming are offered in nearby markets, they
will probably continue to run some portion of their floor in Class II.
Other tribes that are in different parts of the state [where] they're not
getting much interstate traffic may very well make a different decision and have
a larger percentage of their floor in games that are covered by the Compact. So
we are dealing with some very astute operators and businessmen, and they'll make
this decision on a week-by-week, month-by-month basis of what's in their
financial interest and their community relations' best interests.
Operator
Nicole Jacoby, with Liberation Investment Group
Nicole Jacoby - Liberation Investment Group - Analyst
Are you getting feedback?
Clifton Lind, Multimedia Games - President and CEO
Hey Nicole, how are you? Are we getting feedback?
Nicole Jacoby - Liberation Investment Group - Analyst
[Feedback] on the call? Sorry, in any case it's just on my phone then, it's
fine. I had to fall off the call for a couple of minutes. I apologize if this
was asked already, but I wanted you to comment about where exactly in the
drivers of the average network-wide hold per day [were the] declines that were
greater than expected? If I remember correctly, last quarter you had expected a
slight decline, less than 5%.
Clifton Lind, Multimedia Games - President and CEO
There is absolutely no question that in nearly every one of our markets, we can
trace the amount of play coming from an individual household to what the other
economic impacts are that are going on in the community. If we have a major
employer shutdown, or if we have a major spike in [the price of] one of the
basic commodities that families rely on--a large number of our facilities are
purely local facilities, and the gaming dollar competes with all other form of
entertainment, and comes out of a family's disposable income. We can go back
historically and trace a direct correlation between increases in gas prices and
a decrease in the play of an individual player in our local facilities. So we
think the high gas prices and other energy costs have in fact had an impact that
was a little bit more than expected, and we can verify that because if we get a
drop in the price of oil, and therefore gasoline, we almost immediately see
those same players play a little bit more the next week. So we think the upside
economic factors were a major factor. Also, we have not been introducing new
game themes for our old games, and that was because we wanted to introduce most
of our new ones along with new compacted games. We have started to implement new
games now on the old platform, because it appears the old platform is going to
be around for a while, so it looks like part of the drop was caused by my
decision not to devote a meaningful amount of resources into bringing out new
titles on the old platform. But we are going to start doing that now, so we will
have a good test as to whether or not that helps turn those things around.
Nicole Jacoby - Liberation Investment Group - Analyst
I was just--it looked as though the revenue per machine on the Class II--again,
if I'm doing this correctly, it may have gone up, so it appears that a lot of it
may have been from compacted and charity [games]. Is that correct?
Clifton Lind, Multimedia Games - President and CEO
We certainly did see a decrease in the charity market. That is--also you may
have missed this in the call--a market where we are about to go through a major
platform change, and as I said earlier, we have basically the same game themes
on the floor that we had on the floor when we opened up that market 15 months
ago. Over the next 90 days, we will introduce a new platform, and we will
introduce some new game themes, so we expect to see the hold per day improve in
those markets.
Craig Nouis, Multimedia Games - CFO
One other point on that is in terms of the compacted games like what we've
mentioned before, if you were listening in at the time, [halls] where we
primarily converted our compacted games were in the more rural areas, and so in
essence, what you do is pull out of the Class II games, in general terms, the
lower earning games, which kind of has an impact of improving the appearance of
that hold per day on the Class II games. Did you follow that?
Nicole Jacoby - Liberation Investment Group - Analyst
Right. I guess the two things. One is on--what I'm trying to get is why it was
more than expected? I'm assuming you expected some of that because you knew
you'd be rolling out the Oklahoma--sorry, rolling out the compacted games. Was
there something different that happened than expected in the compacted [games]?
Clifton Lind, Multimedia Games - President and CEO
You will also recall that we've had some weather events in that market and any
time the facilities get shut down for a number of days, it also impacts our
average hold per day for the month and the quarter. And so Alabama seems to have
been targeted by a number of storms early in the year. So that also played a
factor, and if hurricane season continues to go as it is, will likely play a
factor again.
Nicole Jacoby - Liberation Investment Group - Analyst
So, would you say the decline in revenue in the charity market for you is
primarily due to weather and old game themes? Would those be your top two, or is
there another reason?
Clifton Lind, Multimedia Games - President and CEO
No. I believe it's the weather and the fact that we have not introduced either a
new platform or a significant number of new game themes since we opened up that
market, and we are in the process of doing that now.
Nicole Jacoby - Liberation Investment Group - Analyst
Anything else to add a bit of depth there, or no?
Craig Nouis, Multimedia Games - CFO
The other thing to keep in mind is that the calendar plays a big part in this,
and one of the things that we're projecting out for next quarter is improvement
in our hold per day to some extent. July is a great calendar month for us; it
has five full weekends of Friday, Saturday, and Sunday play, and then there was
a holiday, the Fourth of July, which was on a Monday, so a majority of those
days were actually being played in premium time. So April, May, and June just
overall [didn't have] a real big favorable calendar impact for us. Obviously, we
considered that when we came up with our guidance, but just from an investor
standpoint, you may want to keep that in mind.
Nicole Jacoby - Liberation Investment Group - Analyst
But those were the main, others than the calendar and whatnot? Higher gas
prices, the older game themes and the weather were the biggest changes from what
you expected?
Clifton Lind, Multimedia Games - President and CEO
I think that's great--I don't want to--we continue to have competition
increasing in all of our markets, both from larger and smaller competitors, so I
don't want to minimize the impact that competitors may be having on us. That is
a little bit difficult for us to gauge in all cases, because we don't get
financial details on the other vendors providing games to a facility. But,
certainly, I don't want--and I know you wouldn't--you to overlook that that may
possibly be having an impact, too, that we can't measure.
Operator
Kent Holden with Gagnon.
Kent Holden, Gilder Gagnon Howe - Analyst
I wanted a clarification. You talked about 33,000 to 35,000 total units in
Oklahoma. That is the total market of Class II as well as compacted games?
Clifton Lind, Multimedia Games - President and CEO
That is what we believe, yes.
Kent Holden, Gilder Gagnon Howe - Analyst
What number of compacted games do you feel are in Oklahoma now?
Clifton Lind, Multimedia Games - President and CEO
There are a very small number, less than a few thousand that the tribes have
declared that they are operating under the Compact, although when we look at the
way [some of their other] games play, it may appear to some that they should be
operated under the Compact. So, I think it depends on what your definition is.
The tribes have declared a very small number of games as operating under the
Compact.
Kent Holden, Gilder Gagnon Howe - Analyst
So you're thinking it is 3,000 or...?
Clifton Lind, Multimedia Games - President and CEO
I'd say that would probably be a good guesstimate right now.
Kent Holden, Gilder Gagnon Howe - Analyst
Are you getting pricing pressure on the Class II games as far as revenue share
goes?
Clifton Lind, Multimedia Games - President and CEO
No significant amount of pricing pressure, none that we haven't been getting for
the last five years.
Kent Holden, Gilder Gagnon Howe - Analyst
Then, on the new Oklahoma City facility, can you go into a little detail as far
as the scope of that facility and the timing?
Clifton Lind, Multimedia Games - President and CEO
By agreement with our tribal customer, we can give out no details on that.
Kent Holden, Gilder Gagnon Howe - Analyst
Not even number of machines or when it might open?
Clifton Lind, Multimedia Games - President and CEO
Well, it's safe to assume that any major facility, as this is, it's going to
take at least 12 months to complete the planning and construct the facility. I
think this is certainly something that will open in our next fiscal year, but in
the last quarter of our fiscal year. And trying to be more precise than that
would just be speculative.
Kent Holden, Gilder Gagnon Howe - Analyst
Your commitment on that is about $18 million?
Clifton Lind, Multimedia Games - President and CEO
No, it's more than that.
Kent Holden, Gilder Gagnon Howe - Analyst
How much is it?
Craig Nouis, Multimedia Games - CFO
It's roughly $30 million.
Operator
Mike Crawford with Barrington and Partners.
Mike Crawford - Barrington Research Partners - Analyst
Regarding the $17.8 million advance on that development agreement, you said you
put $9.7 million in notes receivable. When do you expect payment on that portion
of the advanced funds?
Craig Nouis, Multimedia Games - CFO
All of the note arrangements are a little bit different. [For] some of them, we
typically would receive more of a lump sum payment, and some of them get paid
over a period of time. I'd tell you there is a mixture, roughly half and half.
[For half], we will get paid back probably in the next 30 to 90 days, and then
the other half will be kind of systematic over a 12- to 18-month period.
Mike Crawford - Barrington Research Partners - Analyst
What type of return do you expect from the other $8.1 million that you basically
give to the tribes to make sure you get play on your units? Is that...?
Craig Nouis, Multimedia Games - CFO
Obviously, when we enter into a development agreement, the primary reason why we
do so is that we earn floor space in that facility, and in most cases, 70% to
80% of the floor space. So, the best way to look at it is that a lot of
companies have contract rights, and this gives us the right to have a large
majority of their floor space.
Mike Crawford - Barrington Research Partners - Analyst
None of this was for the Oklahoma City facility yet?
Craig Nouis, Multimedia Games - CFO
A very small amount of it was for the Oklahoma City [facility]. Not all of our
development agreements--[for] some of our development agreements, we get 100%
reimbursed. Every deal is different in the way that we structure the revenue
share and the amount the tribe has to repay.
Mike Crawford - Barrington Research Partners - Analyst
Starting from July 1 going forward, you are going to advance say, $30 million
for Oklahoma City, and what other development commitments do you think over that
period?
Clifton Lind, Multimedia Games - President and CEO
First, some portion of that, and I don't know if we're prepared to tell you the
exact number, but some portion of that $30 million has already been advanced,
both during this last quarter and a little bit in a prior quarter, because this
is a project that has been worked on for some period of time. So I just want to
clear that up. It's like there's not $30 million left to advance; [it's] some
number smaller than that number. And then I'll let Craig give you details about
the other facilities that I think you are asking about, because you are asking
about the three going forward, I think was your question.
Craig Nouis, Multimedia Games - CFO
Yes, like we said earlier, we are also in the midst and will be soon opening up
the North Tulsa project. Through the end of the month that we reported on, we
had advanced roughly half of [the money for] that facility, and we will be
making some advances there for the next couple of months. And then, as we have
always done, we are part of the North Dallas facility, and we are continuously
looking at expansion opportunities there. And we help advance funds for those
expansion projects.
Clifton Lind, Multimedia Games - President and CEO
But there's relatively little in the next quarter or two that will be advanced,
because it's in the planning phase.
Craig Nouis, Multimedia Games - CFO
But the Goldsby, the Oklahoma City facility is the one that will take the
majority of what we will be advancing; [the majority] will [go to] that
facility.
Mike Crawford - Barrington Research Partners - Analyst
I think based on that, and what you've already advanced there over the next 12
months, maybe $40 million is a good number to expect for cash out for advances?
Craig Nouis, Multimedia Games - CFO
Over what period of time did you say?
Mike Crawford - Barrington Research Partners - Analyst
12 months.
Craig Nouis, Multimedia Games - CFO
That's reasonable.
Operator
With no further questions, I'd like to turn the call back to you for additional
comments or closing remarks.
Clifton Lind, Multimedia Games - President and CEO
Thank you, operator. I want to thank everyone for their continued interest in
Multimedia Games. Based on our comments today, I hope you will agree our revenue
diversification efforts are in full force, and that we continue to evolve and
innovate our technology solutions for product innovations in new emerging
markets. In addition, we continue to be guardedly optimistic that what we see is
a gradually stabilizing operating environment in our largest market, and
continued progress toward the opening of larger facilities in New York. We also
have disciplined expense control programs in place, and believe that we have the
infrastructure that can support significantly higher levels of business.
Multimedia is on track to generate more than $87 million in EBITDA for FY '05,
and diluted earnings per share between $0.60 and $0.62.
In addition, our balance sheet can support additional growth, and we will use it
prudently as we identify more opportunities to expand and further diversify.
Thank you for your continued support and interest.
BACK
|
