| Multimedia Games, Inc.
HOST: Mr. Clifton Lind
DATE: August 8, 2006
Operator Good day, and welcome, everyone, to the Multimedia Games Third Quarter
Results Conference Call and Webcast. This call is being recorded. Once today's
presentations are complete, we will conduct a 30-minute question-and-answer
session. At this time, for opening remarks and introductions, I would like to
turn the call over to Mr. Clifton Lind. Please go ahead, sir.
Clifton E. Lind, Multimedia Games, Inc. - President and Chief Executive Officer
Thank you, Operator. I want to thank everyone for joining us on the call. With
me today are Randy Cieslewicz and Shannon Brooks. Fiscal 2006 Third Quarter
Operating Results are reviewed in today's announcement, and we will provide some
additional financial details for you on today's call. Revenues for the quarter
were $32.2 million. EBITDA was $15.1 million, and we reported a loss of 2 cents
per share for the quarter, inclusive of 2 cents per share for share-based
payment expense. Q3 FY '06 results were below our guidance, primarily because
the hold per day of our Oklahoma installed base declined from Q2 FY '06 levels
by a higher percentage than we had anticipated.
Revenue and EPS were also impacted by Class II removals, for we had anticipated
a relatively stable installed base, and by new gaming options that compete
directly with facilities in Oklahoma and other markets in which we have a high
percentage of the floor space. Before we continue, I will ask Julia Spencer to
review the Safe Harbor language for us. Julia?
Julia E.S. Spencer, Multimedia Games, Inc. - Director of 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 actual operating
results and financial condition to differ materially from those expected. 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, multimediagames.com, in the Investor
Relations section. I will now turn the call back over to Clifton.
Clifton E. Lind, Multimedia Games - President & CEO
Thank you, Julia. I would like to spend a few minutes discussing the recent
trends in hold per day, in both the June quarter and the current quarter. As I
noted earlier, Q3 FY '06 Oklahoma hold per day declined from second-quarter
levels at a greater rate than we had anticipated, almost entirely because of the
steep declines during the month of June. In addition, we had net Class II
removals in Oklahoma during the quarter, also predominantly in June. While we
had anticipated a relatively stable installed base, it was not possible to
immediately put in place additional overhead reductions to respond to these
trends. The hold per day and removal issues appear to be related to the rapid
increase in the large number of stand-alone gaming units, and other
non-standard-sequence bingo offerings in the Oklahoma market.
The installation of these intensified in June. For an increasing number of
players, these games are preferred to our linked standard-sequence bingo
offerings. We also believe that consumer cautiousness and other regional
competitive issues influenced the Q3 performance.
A major priority for everyone at Multimedia Games is to reinvigorate player
interest in our product offerings, and thereby become more competitive in
Oklahoma, as well as in several other markets. Our engineering team and game
development teams have been tasked with developing new innovative products that
help us to achieve this goal, and I'm proud of the initial progress that we're
making. We took swift action to address the stand-alone issue, and by the end of
June,(1) we had installed two new stand-alone platforms in that market. And we
also began to replace our older Class II game themes and platforms with new Reel
Time Bingo(R) offerings, and these offerings are generating higher holds per day
than their predecessors.
At these early stages, both consumer and player response is very favorable
toward these new games. We continue to convert our Class II installed base to
this offering in Oklahoma and other markets, even though this process can only
be undertaken at a measured pace, as the platform is ideally modified on our
factory floor. So we are currently projecting that we will modify and convert
approximately 600 to 700 units each quarter. Even at this pace, based upon the
results we are seeing today, this conversion process will benefit Multimedia in
the immediate and intermediate future, in terms of improved hold per day.
(1) Mr. Lind misspoke during this sentence of the teleconference. He intended to
refer to the month of July rather than June.
In summary, we've expanded our gaming product offerings in Oklahoma, and we now
offer more choices than ever before. These include our Class II Legacy games,
our Class III high-speed Reel Time Bingo games, Class III skill games, Class III
video lottery and mechanical reels, and Class III non-linked instant bingo game.
Other efforts such as developing interfaces to other vendors' casino management
systems are facilitating our deployment of new game themes and new gaming units,
and in some instances, the reinstallation of our player stations in facilities
where we are not currently present. This should help to further improve our
competitive footing in Oklahoma, as well as in other markets.
In mid-July, as many of you are aware, a new gaming facility opened near
Oklahoma City, with approximately 2,100 gaming units, 880 of which are our own
units. This facility is one of the state's premiere gaming facilities, and we
are very encouraged by the level of customer interest and patronage there to
date, most importantly with the performance of our product offerings so far.
Reflecting efforts of our organization, I believe our competitive position and
prospects in Oklahoma are improved today compared to what they were just 39 days
ago at the end of June. In addition to the new platforms and new game themes and
new unit placements, we continue to focus on reducing costs related to our
ongoing operations.
At this time, I'm going to ask Randy to provide some additional insights into
the Q3 FY '06 operating results, after which I will provide a more detailed
review of our near- and long-term opportunities, including discussions of the
other markets in which we are currently operating, and those we are very
aggressively pursuing. Randy?
Randy S. Cieslewicz, Multimedia Games, Inc. - Interim CFO, Vice President of
Tax, Budget, and Corporate Compliance
Thanks, Clifton. As noted in our press release this morning, total revenue for
Q3 declined year over year and on a quarterly sequential basis to $32.2 million.
The year-over-year decline primarily reflects lower Class II revenue, as a
result of a lower hold per day and declines in installed base. This decline was
partially offset by contributions from Oklahoma compact game placements, and
revenue from our sweepstakes system that we did not have last year.
On a quarterly sequential basis, gaming equipment, system sale, and lease
revenue declined from $11.1 million in the March 2006 quarter to $1.8 million in
the June 2006 quarter. This decline was attributable to the recognition of the
Israel lottery system, and the sale of 338 player terminals in the Class III
market in the March quarter, compared to the sale of 78 player terminals in the
June quarter. Our installed base declined by a net 66 units from the March 2006
quarter. The net decline in player terminals included a net decline of 296 units
in Oklahoma and 383 units in Iowa. In addition, we had net removals of 104 units
in other markets. These declines were offset by an increase of 117 units in
Alabama and 600 units in Mexico.
On a quarterly sequential basis, SG&A expenses for the June 2006 quarter were
relatively flat compared to the March 2006 quarter. Compared to the March 2005
quarter, SG&A expenses have increased approximately $3.3 million, primarily due
to the higher levels of legal expense, higher stock compensation from the
adoption of 123(R) and higher salaries and wages. Salaries and wages have
increased as we have increased head count from 451 full time employees at June
30, 2005, to 489 full-time employees at June 30, 2006. The year-over-year
increase is primarily related to additional staff needed to address the Mexico
market and additional staff for our development gain in systems.
The June 2006 quarter included a write-off of capitalized software of
Fapproximately $342,000, compared to no write-offs in the June 2005 quarter.
Lastly, we increased our reserve for bad debts in the current quarter by
$276,000, compared to a recovery of bad debt of $358,000 in the prior-year
quarter. On a go-forward basis we expect that our SG&A expenses will be in line
with the Q3 FY '06 level.
Depreciation and amortization expense increased approximately $254,000 on a
quarterly sequential basis. This increase was due to a full quarter of
sweepstakes operation and upgrades to our existing rental pool. We expect a
modest increase in depreciation and amortization in the fourth quarter, based on
our projected capital expenditures of $11 million to $13 million for the current
quarter.
Our expected capital requirements consist of maintenance cap[ital]
ex[penditures], our contractual purchase of player terminals, and some advances
under development agreements. We expect that our maintenance cap ex will be
approximately $4 million to $7 million this quarter. In addition, we will spend
approximately $1.7 million for player terminal purchases under a contractual
commitment this quarter, and we expect to purchase up to an additional $5
million of stand-alone games.
Cash and cash equivalents at June 30, 2006 were $6.8 million, compared to $2.0
million March 31. Cash flow from operations in the June 2006 quarter was $18.7
million. During the fiscal 2006 third quarter, we advanced $13.2 million for
development agreements, which is partially offset by $2.3 million of repayment
of notes receivable for development agreements.
In addition, during the quarter, we had net borrowings under our revolving lines
of credit and capital lease obligations of approximately $4.3 million, primarily
reflecting borrowings to fund the completion of a development agreement facility
in early July. We did not repurchase any shares of our common stock during the
quarter.
Accounts receivable declined by $3.2 million, to $13.6 million as of June 30,
2006, from $16.8 million as of March 31, 2006, due in part to a collection of
$2.5 million of receivables from our development agreement. The noncurrent
portion of our notes receivable increased from $30.3 million at March 31, 2006,
to $56.5 million at June 30, 2006. This increase primarily reflects an $11.9
million reclass between intangible assets and notes receivable, due to the
reclassification of the Oklahoma City project, with the remaining $14.3 million
increase generated from development funding during the June 2006 quarter.
During July 2006, we installed 880 player terminals into a new facility which
opened near Oklahoma City. For this facility, we advanced one half of the funds
to construct a facility for 40% of the floor space. During June 30, 2006, we
have advanced approximately $33 million under this development agreement, and
expect to advance an additional $3 million during the fourth quarter.
For this facility, the customer will be reimbursing 100% of the advances and we
will be receiving 20% hold per day for the units that we have deployed. During
our fiscal fourth quarter, we expect to advance approximately $5.4 million
towards development projects, of which $3.8 million will be recorded as a
receivable and $1.6 million as an intangible asset. As a reminder, for those
development agreements for which we do not receive full reimbursement, we
capitalize and amortize the intangible asset related to the development
agreement over the life of the contract, which is typically six and
three-quarter years.
The amortization or accretion of contract rights is offset against revenue, and
can be found as a reconciled item on our cash flow statement. On June 27, 2006,
we amended our credit facility, increasing the revolving line of credit from $15
million to $25 million, and added an additional reducing revolving line of
credit from $9 million to $5 million, bringing the amount we can borrow up to
$65.4 million. As of June 30th, 2006, $51.3 million was outstanding, leaving
availability of $14.1 million, which was further reduced by letters of credit
totaling $1.1 million.
Finally, as a part of our ongoing effort to provide better disclosure, we will
be evaluating our income statement presentation during this quarter. If we
conclude and our audit committee approves that changes to the income statement
presentation are necessary, the changes will take effect in the upcoming 10-K. I
will now turn the call back to Clifton. Clifton?
Clifton E. Lind, Multimedia Games - President & CEO
Thanks, Randy. Earlier on this call, I spent some time reviewing the challenges
we face in Oklahoma and the initiative we have already put in place to rebuild
our competitive position in this market, so I will now review our operations in
other markets. Most of you are very aware of the market opportunity that exists
for Multimedia in Mexico. There is a number of you have even made trips there
recently or have spoken directly to us or our customer, therefore, I think the
significance to Multimedia of this opportunity is becoming more evident to the
investment community every day.
We currently have approximately 600 units installed in four facilities,
including three in Mexico City. As we indicated at the time we reported our Q2
FY '06 results, the initial costs for setting up our operations in Mexico
outweighed the revenue contribution for Q3 FY '06. However, our customer has
spoken publicly about how pleased they are with the initial response to their
new facilities, although our initial projections included a higher hold per day
for the first quarter of operations. We have every confidence that as players in
the market become more accustomed to what is a new entertainment experience for
them, that we will see both increasing levels of play and revenue. Our customer
has also communicated its plans to add six additional facilities and to expand
three of the existing facilities by May 2007, and we are prepared to support
them in meeting their schedule.
Based on our lower cost to support this market in Q4 FY '06 compared to Q3 FY
'06, the benefit of a full quarter's contribution from the current installed
base and the expectation that hold per day will continue to improve at a
measured pace as players become more familiar with this form of entertainment,
we hope to see break-even results from this market in Q4 FY '06. Then with the
additional facilities coming online in FY '07, we expect that our operation in
Mexico will be earnings positive. Our opportunity to place a significant number
of units in Mexico over the long term is a meaningful growth opportunity for
Multimedia, and we continue to believe that this opportunity will be
transformational for the company.
Moving on to our charity operations, which are predominantly in Alabama, the
installed base increased in Q3 FY '06. However, the benefit from this higher
installed base was offset by a quarterly sequential decline in hold per day from
these units, which we believe was the result of a more general decline for all
competitive electronic charity bingo locations throughout the state. As in other
markets, we recently introduced updated game titles and platforms in Alabama,
and these have been met with favorable initial player response. With a higher
installed base and improving hold per day, we believe charity revenue will grow
in Q4 FY '06 compared to Q3 FY '06 levels.
This quarter, our revenue will also include a contribution from the launch of
the Minnesota MegaBingo(R) system, which went live at 16 locations last week,
and which received favorable customer and player response. We look to expand the
number of facilities where we offer this game over the next several quarters,
and we will be increasing the number of games offered each week. In addition, we
believe this product and our other electronic bingo products have applications
in many other charity jurisdictions where we are aggressively marketing these
solutions.
The outlook for contributions from the central system which we operate for New
York Lottery, which drives the video lottery devices at the racetracks
throughout the states, continued to improve. There are now approximately 6,200
units throughout the state, and the win per day, and therefore our revenue from
this market, continues to improve. We expect an additional 3,000 units to be
added to the system by the end of calendar 2006. Yonkers is now expected to open
with 1,900 units, and to expand by approximately 3,600 units in 2007. Aqueduct
is now expected to open by the end of calendar 2007, with up to 5,000 units. The
expanding unit base is leading to improvements in results from the New York
Lottery market, and we now expect the impact to our EPS from this market to
continue to decline in the current quarter, and then to be break even in Q1 FY
'07, with contributions to EPS in Q2 FY '07.
In terms of new market opportunities, we were recently notified by a state
lottery agency that we have qualified as a VLT provider in their market, and we
expect to place an initial group of 50 test units in this market early in FY
'07. We also recently filled in a stand-alone slot platform in a Native American
casino in California, where 20 units are currently undergoing a field trial. We
expect further installation of this Class III gaming product will be
forthcoming, after the successful completion of the field trial. Our revenue
diversification efforts continue in steady pursuit of these other opportunities
as a high priority for Multimedia, because we believe this strategy offers the
best avenue for reducing our reliance on major markets where we have a large
focus of revenue, and for returning to revenue growth and to net income growth.
Regarding our CFO search, we are working diligently with our search firm to
identify appropriate candidates. Our search has been nationwide in scope, and we
have looked at candidates that possess a broad variety of strengths, including,
but certainly not limited to, public company experience, financial expertise,
and gaming experience and technology experience. As I have stated before, we are
focused more on the quality of the candidate recruited than the speed at which
we make the appointment. I would also be remiss if I did not add that during
this time Randy Cieslewicz has stepped capably into the role of interim CFO, and
Shannon Brooks and the entire finance and accounting team have performed
admirably under his direction.
Before we open the floor to Q&A, there is one final initiative this company has
recently undertaken and I would like to review it with you now. Multimedia
recently engaged Bear, Stearns as the company's exclusive financial advisor. As
many of you know, we have had a long-standing relationship with Bear, Stearns
and in engaging them, we have asked them to assist management and the Board of
Directors in identifying and evaluating a wide range of opportunities to enhance
shareholder value. Many of you know that Bear, Stearns has an excellent
long-term track record of success in working with companies in the gaming
sector, and we look forward to working with them to identify opportunities to
unlock additional value for our shareholders. Operator, let's turn this over to
the floor for questions, please.
QUESTION AND ANSWER SECTION
Operator
Thank you.
[Operator Instructions] And we will take our first question
from David Katz, CIBC World Markets.
David Katz, CIBC World Markets - Analyst
Good morning, guys.
Clifton Lind, Multimedia Games - President & CEO
Hey, Dave.
David Katz, CIBC World Markets - Analyst
Couple things. I notice in the
guidance that you have for next quarter, maintenance cap ex is shooting up. How
should we think about that headed into the next fiscal year? Should that be
ramping back down? Or is this the new--is this going to be the new normal for
maintenance cap ex?
Randy Cieslewicz, Multimedia Games - Interim CFO
Hi, David. Well, David, it's
Randy. That has a lot to do with our upgrades that we are rolling out into the
field with respect to the new [Reel Time Bingo] 1.2.1 games.
David Katz, CIBC World Markets - Analyst
Yes.
Randy Cieslewicz, Multimedia Games - Interim CFO
I would expect that it is
going to vary greatly, that's why we have--we generally say maintenance Cap Ex
is anywhere from $4 million to $7 million.
David Katz, CIBC World Markets - Analyst
Yes.
Randy Cieslewicz, Multimedia Games - Interim CFO
So it really depends on a
quarter-to-quarter basis, but that range is, I would expect to remain
consistent.
David Katz, CIBC World Markets - Analyst
That $4 million to $7 million range?
Randy Cieslewicz, Multimedia Games - Interim CFO
Right.
David Katz, CIBC World Markets - Analyst
Is what you expect that is still the
normal. In the charity market, Clifton, if you could just talk a little bit
about what you are seeing trend-wise, and are we seeing some similar economic
impact there? And if you could update us on some units that I think you maybe
adding in that market this quarter?
Clifton Lind, Multimedia Games - President & CEO
Sure. We will be adding
additional units in the charity market this quarter. We believe that that market
is impacted by both the return of some gaming options along the Gulf Coast that
had been out of the mix since the hurricane, and also by the economic impact of
these higher gas prices. We have relatively good data, as we have talked about
before, that shows that local spending rates at the local casinos, which in fact
we primarily serve in the charity market, react to peaks in gas prices and other
economic conditions, and we continue to believe that's the case and is in play
today. However, we have been, for the first time in a long time, we are rolling
out a new platform and new game themes in the charity market, and the initial
response has been very positive, so we are excited about the growth potential
for us, not only in the markets that we serve today, but in other jurisdictions,
Dave.
David Katz, CIBC World Markets - Analyst
Okay, and then last one and then I'll
let someone else have a chance, but in New York State, you discussed the notion
of placing some units--is there still being some consideration [given] to
potentially extending that contract given that it's ramped up a little bit
slower than I think everyone expected, or is this unit placement perhaps in lieu
of that?
Clifton Lind, Multimedia Games - President & CEO
Okay. I'm sorry, David. If I
gave the impression that Multimedia itself was going to place units on the
lottery system, I did not mean to give that interpretation. I meant that the
other racetracks were either expanding or finally opening that had been approved
for that system.
David Katz, CIBC World Markets - Analyst
Okay. Sorry if I misinterpreted that
but...
Clifton Lind, Multimedia Games - President & CEO
I'm so sorry.
David Katz, CIBC World Markets - Analyst
No problem. But in terms of the New
York State contract, is there some consideration being given to extending that?
Clifton Lind, Multimedia Games - President & CEO
Well it's...
David Katz, CIBC World Markets - Analyst
During this term.
Clifton Lind, Multimedia Games - President & CEO
Yes, David I think you know
there is a--that contract was for an initial term of three years, and at the
lottery's discretion it automatically extends for another three years, and so we
certainly will be in discussion with the New York Lottery as this system expands
to the size that they thought it would be within one year, and will be
aggressively working to extend the contract to certainly regain the economic
value that we have forgone during this relatively slow rollout of the system.
But, as you know, there is an election underway, and we will be working with the
existing administration as well as the new administration if there is a new
administration, and as you know, there will be at least a new governor in your
state. And so one way or the other, we will continue to try to extend that
contract and try to as, I said, regain some of the economic value that's been
forgone.
David Katz, CIBC World Markets - Analyst
Okay. Thanks very much.
Operator
And we'll go next to Manny Pearlman, Liberation Investments.
Emmanuel Pearlman, Liberation Investments
Hi, Clifton.
Clifton Lind, Multimedia Games - President & CEO
Hey, Manny.
Emmanuel Pearlman, Liberation Investments
I have a couple questions I'd like to
address. One is, we got a little bit more color for everybody in regard to the
game losses, the net game losses you discussed that happened in June; since then
early May, when you updated us on the last call you told us that we had expected
machines to be about flat. I want to understand what's exactly happening. I also
think we should--given you've now pointed out the difference between the old
[RTB] 1.1s and the new [RTB] 1.2s some kind of breakdown about how many of the
1.1 units are currently deployed in Oklahoma versus the 1.2. And then lastly I'd
like to ask about Bear, Stearns and the retention; exactly what their mission is
that they've been given and who exactly are they going to report to. Are they
going to report to a special committee of the Board who can make decisions, or
are they going to be reporting directly to you?
Clifton Lind, Multimedia Games - President & CEO
Well, let's see. Taking those
questions in order, Manny, we have fewer than 1,000 Reel Time Bingo games
deployed on the new platform in Oklahoma, and they're doing very well; not only
better than our older Reel Time Bingo games, but also better than some of our
other competitors that we're doing better than our older games. So we're very
pleased with what we've rolled out there.
The losses in the units, as we said, we expected it to be flat. They were
scattered. There were not any significant portion of them taken out of one
facility, but a few in a large number of locations and those were related, we
believe, primarily to the placement of new stand-alone gaming units in those
facilities. And finally, Bear, Stearns has been retained with the very broad
vision to help us build shareholder value. They will be reporting to the Board
of Directors through me, and as you know, I am a Board member and so all of our
communications will be with them. If there is a need at any point in time for
them to have private consultations with only the independent members of the
Board, I will do what I have always done, always make it possible for them to do
so. And we have had that relationship and that communication channel for many
years, and find that it has served us well.
Emmanuel Pearlman, Liberation Investments
Well, my comment in regard to that is
we at Liberation feel strongly that Bear, Stearns should have--be reporting to a
member of the Board directly and not through the CEO, for two reasons in this
case, particularly. One is that you clearly have a lot of work to do, as you
have pointed out to us today on the call, in regard to the competitive situation
in Oklahoma. Two, is we think that that tends to be the best approach for
shareholders, as we have seen historically that investment bankers report[ing]
directly to a special committee of the Board is the appropriate way to handle
something like this and not going through the CEO, so that the Board can hear
directly if--what they may have, because there are things that may potentially
be conflicts of interest.
Additionally, I would like to get some color on the cost to upgrade to [RTB]
1.2s, versus whether we should not be just going out and purchasing machines
from third parties, because you have some, what I would call very valuable real
estate in Oklahoma, being that you have development agreements that allow you to
place games, and I would like to get an understanding for how you have thought
through the internal rate of return about doing one versus the other, because
currently it is our understanding that people are paying real money for floor
space in locations in Oklahoma, and that we may have a very valuable asset, and
it's a question of whether we should be more aggressive in terms of whether we
should be using Class III games rather than upgrading our own machines?
Clifton Lind, Multimedia Games - President & CEO
Okay. Thank you for that
question, Manny. As I think you heard me report earlier, we are doing a
combination of both. Obviously, there are not any other vendors who provide, in
our opinion, the quality of Class II gaming platforms or themes that we do, and
for the new platform, it is a retrofit. It includes less than $500 worth of
hardware, and so we have found that that investment has a very high rate of
return based on the acceptance by the players and the increases that we are
getting, so it appears to be a very wise investment to retrofit those. We will
continue to do that because we are going to continue to offer Class II games to
all of our tribes who want them. In addition to that, we have two of our
platforms available for stand-alone games, some that we had purchased from an
outside vendor. And we have deployed the first of our two stand-alone gaming
platforms in Oklahoma, and this fall we will be deploying another one. So I
think the right approach--we are following a good approach, which is to provide
a mix of games, and that seems to be certain as well...
Emmanuel Pearlman, Liberation Investments
Are there no costs for hardware? You
say there's only $500 cost to upgrade the machines. So you are saying, I am
sorry, you said $500 for hardware? Is that what you said, or $500 for software?
Clifton Lind, Multimedia Games - President & CEO
The primary addition in a Reel
Time Bingo Class II machine is the addition of a half-VGA screen and a harness,
and the cost of those two things is less than $500.
Emmanuel Pearlman, Liberation Investments
And that would be the total cost to upgrade the machines?
Clifton Lind, Multimedia Games - President & CEO
If all of the machines are--if
all of the CPUs are up to our current production standards, which, as you know,
we have a habit of every time we touch a machine, we upgrade the CPU video card
as well as upgrade the memory in the CPU, and the chip in the CPU to whatever
the current production standard is. And if the CPU is up to the current
production standard, that is the total hardware cost for the machine, and so,
that has turned out to be a very good investment.
Emmanuel Pearlman, Liberation Investments
Okay. Thank you.
Operator
And we will go next to Nic Van Broekhoven, with Foyer Asset Management.
Nic Van Broekhoven, Foyer Asset Management - Analyst
Yes, hello. I was
wondering more about Bear, Stearns. Are you going to update us every quarter,
what is going on with that? Or are you just going to, is this kind of an effort
to drag out any investor activism that might force you to do something sooner?
Clifton Lind, Multimedia Games - President & CEO
Well, let me say, I am not
sure that--I heard two parts of the question. First thing, we will update the
market at least every quarter, and any other time that there is anything
relevant to update them on, regarding our retention of Bear, Stearns. The second
thing is, we are not attempting to drag out anything, and are just as interested
in building shareholder value as any other shareholder or any other shareholder
group. So we are delighted to hear ideas about how shareholders might think we
may build shareholder value, and certainly are not at all reluctant to court, to
communicate in a broad, public forum our activities in that regard.
Nic Van Broekhoven, Foyer Asset Management
Okay. I think it was two conference
calls ago, that you said that you felt you were at an inflection point. You
know, that things were going to look brighter now. Well, this quarter you
obviously still are making a loss. So, how would you--how do you feel about that
statement now? Do you think the inflection point is really now? This was, like,
this is where you see the worst quarter, has just passed? Or do you--how should
we think about this?
Clifton Lind, Multimedia Games - President & CEO
Well, it is--what I said
before, was what I believed at that time, and I believe that we are at the
inflection point again. We are not happy about the rather radical drop in the
performance of our games, and we are delighted that in July, that returned to
levels that are more appropriate, and let us get back on the track of rebuilding
both our revenue and our earnings per day. So yes, between new installations and
new markets and a stabilization of the Oklahoma market, we do believe that this
last quarter, compared to our guidance giving for this coming quarter, was an
inflection point.
Nic Van Broekhoven, Foyer Asset Management
Okay. Thank you.
Operator
And we will go next to Ryan Worst, with Brean Murray.
Ryan Worst, Brean Murray - Analyst
Thanks. Good morning. Randy, just could you
clear up the cap ex guidance for the fourth quarter? You gave $11 million to $13
million. Does that include the development agreements? And also, you said that
you could purchase up to $5 million of player terminals. Is that also included
in the $11 million to $13 million?
Randy Cieslewicz, Multimedia Games - Interim CFO
The $11 million to $13 million
does not include the development agreements. The amount for development
agreements, we only expect [there] to be about $1.6 million that will be
capitalized in this quarter.
Ryan Worst, Brean Murray - Analyst
Okay.
Randy Cieslewicz, Multimedia Games - Interim CFO
And the $11 million to $13
million, we expect, I think I said in my transcript, $4 million to $7 million
for the maintenance cap ex, $1.7 million from a contractual player terminal
purchase, and then possibly up to an additional $5 million of stand-alone games,
so that is where I get the $11 million to $13 million.
Ryan Worst, Brean Murray - Analyst
Okay. Thanks. And then, Clifton, could you
potentially talk about WinStar and the impact of a competitor facility on your
games at WinStar? And where you are in the process of upgrading to the new
platform, your units, at the WinStar facility?
Clifton Lind, Multimedia Games - President & CEO
Sure. Well certainly, as I
think most of the market is aware, there was a new bricks and mortar facility
that was opened about 40 miles from WinStar, as the crow flies, about the same
distance from the Metroplex as WinStar is, just up a different highway, and
there is absolutely no question based upon the attendance that that has had an
impact on the attendance at a number of facilities surrounding that new facility
that was opened, and we believe that is the case for the facility that you
mentioned.
Insofar as game conversion, during the month of July, we have changed out nearly
450 games there, and we'll be changing out additional games during the month of
August, and so they both--with Reel Time Bingo and stand-alone units we
aggressively went in there over a 10-day period and swapped out some games, and
we have been very pleased with the improved performance of the new Reel Time
Bingo games, as well as the stand-alone games, since we made those changes.
Ryan Worst, Brean Murray - Analyst
Okay. What about traffic to the facility?
Has that kind of bounced back after people went in and looked at the new
facility?
Clifton Lind, Multimedia Games - President & CEO
Well, we would believe it is
based upon our observations and the revenue from our games, but that is really a
better question for the management of the facilities.
Ryan Worst, Brean Murray - Analyst
Right. Okay. What about your games
surrounding the new facility in Oklahoma City, Riverwind? Are you seeing some
cannibalization of your other--of the other games in that market?
Clifton Lind, Multimedia Games - President & CEO
There, as you know, there is a
facility within a rock's throw from that particular facility and although during
the first week, we didn't see any cannibalization of that particular facility,
the tribe that owns the new facility owns that facility and has had a plan for a
long time to de-emphasize that older facility, so we expect that over time the
number of units in that facility will go down as the tribe focuses its marketing
on this new facility. As far as facilities further away, there is no doubt that
[during] the first few days of operation that there seemed to be an impact at
surrounding facilities, but now players appear to have gone back to playing
their home facility after the initial week of operations.
Ryan Worst, Brean Murray - Analyst
Okay. Thanks. And then could you guys just
talk about, this is the last question. Randy, you said you were looking into
reclassifying some lines on the income statement?
Randy Cieslewicz, Multimedia Games - Interim CFO
Yes, we are currently
considering going to a more standard gaming industry presentation on the income
statement, which is income from gaming operations and then product sales. That
is currently under evaluation right now.
Ryan Worst, Brean Murray - Analyst
Well that sounds like it would provide less
detail and it seems like you said in your opening statement that the company's
effort is to provide more detail?
Randy Cieslewicz, Multimedia Games - Interim CFO
Well, I said better
disclosure, and that would make it more comparable to what the other gaming--I
mean again, it's still open--we are still evaluating this, but we are looking at
other comparable gaming companies as far as their disclosure on their income
statement.
Ryan Worst, Brean Murray - Analyst
Right. All right. Thanks.
Operator
We will go next to Michael Friedman with Noble Financial.
Michael Friedman, Noble Financial - Analyst
Hi, guys. Couple of just
housekeeping items. Did I miss it? Is there the diluted share count at the end
of the third quarter on the sheet?
Randy Cieslewicz, Multimedia Games - Interim CFO
There is not a diluted share
count on the reconciliation, but primarily because well, in the loss
calculation, the dilution does not...
Michael Friedman, Noble Financial - Analyst
Is the common there? I just didn't
see it. I missed it, unless it's...
Randy Cieslewicz, Multimedia Games - Interim CFO
We didn't...
Michael Friedman, Noble Financial - Analyst
Can I get that number real fast?
Randy Cieslewicz, Multimedia Games - Interim CFO
I can tell you--I can tell you
what the number is, just give me one second here. Roughly $27 million to $29
million, but let me give you the exact number.
Michael Friedman, Noble Financial - Analyst
While you are looking it up, I just
had a couple of quick questions also on how much you spent in cap ex? And if you
can give us a sense of the loss per share from New York? We get a better idea of
how much--I mean I think it's--I don't think it's very significant, but just to
verify that?
Randy Cieslewicz, Multimedia Games - Interim CFO
Yes, the cap ex for the
current quarter, we have spent about $4.4 million on the Class III units that we
bought, the stand-alone games, and then about $5.2 million in maintenance cap
ex. We spent about $1.9 million in licenses, which gets you up to a total $11.5
million for the quarter, for Q3. With respect to New York, we still saw an
impact of about 2 cents a share in New York for this past quarter.
Michael Friedman, Noble Financial - Analyst
Okay. Great. And then the share
count?
Randy Cieslewicz, Multimedia Games - Interim CFO
I'm sorry. Share count, back
to the share count. Diluted share count is 29,388,376 and basic is 27,210,798.
Michael Friedman, Noble Financial - Analyst
Great. Thank you.
Randy Cieslewicz, Multimedia Games - Interim CFO
You are welcome.
Operator
And we will go next to David Vas with Banc of America.
David Vas, Banc of America - Analyst
Hey, guys.
Randy Cieslewicz, Multimedia Games - Interim CFO
Hi.
David Vas, Banc of America - Analyst
Wondering if you could answer how much
latitude you have in Oklahoma to offer Class III versus Class II at facilities
where you have contracts?
Clifton Lind, Multimedia Games - President & CEO
David, another change that has
happened over the recent few months is that our major customers have agreed to
give us complete latitude in the mix of games that we are offering, so long as
we continue to be willing to offer at least some Class II games. The change is
that our customers now readily recognize that it's unfair to compare the
performance of standard-sequence bingo games with the performance of stand-alone
games, and so we will probably be ratcheting down the mix of Class II games that
we are offering in most of the facilities.
David Vas, Banc of America - Analyst
Do you have a product that has been
submitted that's new? Whether it's home-grown or licensed for Class III? Other
than stuff that you are buying?
Clifton Lind, Multimedia Games - President & CEO
Absolutely. We have a large
number of themes and two other platforms in the gaming laboratory, and expect
all of those to be rolling out one of the platforms within the next 90 days, and
another platform shortly thereafter, and we have a large group of themes already
implemented for both of those platforms.
David Vas, Banc of America - Analyst
Okay. Clifton do you mind separating out
for us a little bit better revenue and/or EBITDA geographically?
Clifton Lind, Multimedia Games - President & CEO
Yes, let me get Randy to do that for us.
Randy Cieslewicz, Multimedia Games - Interim CFO
I don't know if I have that
detail here in front of me, but what are you specifically talking about revenue?
I can tell you the revenue numbers if you're looking for percentages or actually
dollar figures.
David Vas, Banc of America - Analyst
Okay, sure maybe Oklahoma compact revenue,
New York lottery revenue. Sweepstakes revenue.
Clifton Lind, Multimedia Games - President & CEO
Probably ought to get back
with you and anyone else who's interested with that offline, I don't think we
have that breakdown right here, Randy do we?
Randy Cieslewicz, Multimedia Games - Interim CFO
I can flip to it, just give me
a minute here. The sweepstakes revenue was just north of $1 million.
David Vas, Banc of America - Analyst
Okay.
Randy Cieslewicz, Multimedia Games - Interim CFO
New York revenue was
approximately $700,000, and compact [games] revenue was about $2.5 million.
David Vas, Banc of America - Analyst
Okay, in terms of the investment bank that
you've hired, would you consider them to be doing an active or a passive
exploration of shareholder value? In other words, are they out there possibly
soliciting interest or are they waiting for things to come in to evaluate?
Clifton Lind, Multimedia Games - President & CEO
We have asked them to provide
us the very broad level of services in that regard. I do not think that I'd
classify it as inactive in any way, but there has not been a decision as to the
course that maximizes or optimizes or releases shareholder value right now, and
so they are not pursuing any single-minded approach but all potential analysis
of any opportunities, which may include a large number of opportunities or none,
David, so there is no single mission in mind right now, so I will say that they
are actively engaged, but they are not in my opinion focused at this point in
time on any particular course.
David Vas, Banc of America - Analyst
At what point would you think that you
would have a little bit more clarity as to what their exact mission is, then?
Clifton Lind, Multimedia Games - President & CEO
Well they will be meeting with
the Board of Directors each and every month at least, and we will be talking
more frequently than that, so as I've said before, if and when there is
something that should be more broadly disseminated, well, we will have broad
public disclosure of any activities that merit that.
David Vas, Banc of America - Analyst
Okay, last thing before I--well, actually,
last two things. Are there any change-of-control provisions in any of your
contracts that would possibly cause for different things?
Clifton Lind, Multimedia Games - President & CEO
Yes, virtually all of them had
change-of-control provisions in them.
David Vas, Banc of America - Analyst
Can you elaborate any more on that?
Clifton Lind, Multimedia Games - President & CEO
You mean give you a firm
count--certainly all of the contracts that we have with public entities have
change-of-control provisions in them and many of the contracts that we have in
Native American relationships have change-of-control provisions in them. That's
about as much detail as I can go into.
David Vas, Banc of America - Analyst
Okay, meaning that they can be
renegotiated or terminated. How should we think about that?
Clifton Lind, Multimedia Games - President & CEO
Well they're all different,
but that is, in general, anybody that has a change-of-control provision gets
another look. So the options that they have vary. Because we are licensed by
each and every entity that is, we do business with, all of the licensing
applications and permits and actual licenses also have change-of-control
provisions in them.
David Vas, Banc of America - Analyst
Got you, okay. Last thing. How many games
do you have right now in the pool that are being depreciated versus ones that
are actually out in the field and/or can you split out your depreciation by
what's in the field and what's not in the field?
Randy Cieslewicz, Multimedia Games - Interim CFO
Okay, we've got 3,200 that are
either depreciated or fully depreciated. Actually, of the 3,200, 2,200 are fully
depreciated. We have another 574 that are ready to deploy in our original pool.
We have a total of about 3,800; that doesn't include the new Class III cabinets
that we just bought, and we've got some unfinished terminals, player terminals
from our OEM provider, about 1,200.
David Vas, Banc of America - Analyst
Okay, great, thanks.
Operator
And we'll take a follow-up from Manny Pearlman with Liberation
Investments.
Emmanuel Pearlman, Liberation Investments
Yes, Randy, could you give us a
little more color again. I was wanting to follow up on a response that you had
to one of the other shareholders in regard to possibly reformatting the income
statement, because we would be extremely concerned if the amount of disclosure
would be going down and not up and even though it may put you more in line with
other gaming companies, there are few other gaming companies that operate in the
kind of segments that you do and we would certainly expect, even if you were to
adopt that, that you would have supplemental disclosure for us as shareholders
and owners of your business that would allow us to properly evaluate the
company. So maybe you could explain a little bit further about what's being
considered?
Randy Cieslewicz, Multimedia Games - Interim CFO
Well, we would obviously, even
now, in our 10-Q, we explained all the revenue lines. Nothing would change from
a disclosure standpoint. You'd still get the major components of all the
revenues. It would just strictly be a presentation on the face of the income
statement. So I don't think if you're worried about not getting information,
this is the same level of detail you're getting in the Q now, you would continue
to get. It's just a matter of presentation on income statement and how it would
roll up into gaming operations or product sales. And of course that, again
that's why I brought it up and I will, obviously I will take all the investors'
concerns and we haven't made a commitment to do it one way or the other. We will
evaluate this and I think I'm willing to hear any investor concerns about that
and we'll consider it.
Emmanuel Pearlman, Liberation Investments
I would just state that we, at
Liberation, the more disclosure the company gives its owners to able to allow
them to evaluate the company's business, especially in one that operates in many
different markets, the better it is for all shareholders and I believe the
better it is for the capital markets to better understand your business. So what
may have to be adopted under accounting rules, I can't tell you, I'm not that
expert, but if there is a change on the income statement presentation, we would
be extremely distressed if the level of disclosure that the company currently
gives does not stay at least the same, and we would [be] hopeful, now that
Clifton has brought up many issues in regard to Oklahoma, and if the Class II
gains versus the Class III, that perhaps the company can now start to give more
disclosure to us as owners of the business in regard to a breakdown more in the
Oklahoma market about where our revenues are coming from.
Randy Cieslewicz, Multimedia Games - Interim CFO
All right. When you read the Q
tomorrow then we can have a discussion about it. I mean, the details that are in
the Q will not change. So if you think the disclosure in the Q needs to improve,
then I'd be willing to change...
Emmanuel Pearlman, Liberation Investments
Great. Well we look forward to
reading the 10-Q tomorrow.
Randy Cieslewicz, Multimedia Games - Interim CFO
Okay.
Emmanuel Pearlman, Liberation Investments
I love reading 10-Qs.
Randy Cieslewicz, Multimedia Games - Interim CFO
Okay. We will see you tomorrow.
Emmanuel Pearlman, Liberation Investments
Thank you.
Operator
And we'll go next to David Katz, CIBC World Markets.
David Katz, CIBC World Markets - Analyst
Just one last quick one on the CFO
search that's going on. And I know--I heard your comments earlier, Clifton. Is
there--can we--can you help us set our expectations in terms of timing? Is the
end of the year reasonable? Sooner than that?
Clifton Lind, Multimedia Games - President & CEO
Well I think Randy will be
brokenhearted if it's not sooner than that, and we're moving with all due
diligence and it is something that we're actively working on and are reviewing
candidates as we speak. And so I'd certainly--anything is possible, David, I
will not say that I can't imagine that it will go on that long, but the Board,
Randy and I will all be greatly disappointed if it has not been productive long
before that. So...
David Katz, CIBC World Markets - Analyst
Is reviewing your sort of capital
structure part of what--within the confines of what Bear, Stearns will be
considering for you?
Clifton Lind, Multimedia Games - President & CEO
Yes. They have been given a
broad palette of options to look at and they have given us a broad palette of
options to look at. So there's not anything that's off the table, including
that.
David Katz, CIBC World Markets - Analyst
Thanks very much.
Clifton Lind, Multimedia Games - President & CEO
Thank you.
Operator
We'll go next to Scott Kimball, GLG.
Scott Kimball, GLG Partners - Analyst
Hey guys.
Clifton Lind, Multimedia Games - President & CEO
Hi.
Scott Kimball, GLG Partners - Analyst
Given what you said earlier in terms of
you believe this quarter is the inflection point, why not buy back stock? And
why hasn't management been buying back stock down at these levels?
Randy Cieslewicz, Multimedia Games - Interim CFO
Well, primarily because we
just funded the Oklahoma City project; we put a substantial amount of cash into
that, which has just been completed. So that's the primary reason why we haven't
been buying back...
Scott Kimball, GLG Partners - Analyst
So can we expect to see a share buyback
with cash going forward?
Clifton Lind, Multimedia Games - President & CEO
Well I think, Scott, the way
to look at that is we certainly, now have the option of getting back into the
market, and we have a large number of shares, that Randy and I have the
discretion to go in and buy. We review that with the Board at every Board
meeting. Our cash position and our intended uses of the cash and we certainly
have the buy-back program on the table, and so that is certainly an option that
our Board will be considering and we certainly feel that we should continue to
look at that as an important option as far as the use of our cash. As you know,
we recently redid our bank lines, and we're well within all of our covenants
under those new arrangements, and so we will be looking at that very carefully.
Insofar as management is concerned, you and I have had a discussion of this
before. Basically, our folks are dedicated to this company and have a belief in
this company. But most of our management team is not independently wealthy, and
they do not have a large pool of available cash to be buying stock, so I would
not be expecting to see management, meaning--let's separate me from the rest of
the group when I speak, I wouldn't expect my other executives to be jumping into
the market, because they just don't necessarily have resources available to do
that, but don't rule out the purchase of stock by me or others in the company.
Randy Cieslewicz, Multimedia Games - Interim CFO
And also, I would say of
course, evaluating our balance sheet, that is what Bear, Stearns is going to be
doing for us, so I think we will listen to their advice.
Scott Kimball, GLG Partners - Analyst
What other alternatives could be more
compelling than buying back your stock at $8.40? I mean investing in Oklahoma
and other markets in the U.S., the Wall Street is never going to give you guys a
multiple.
Clifton Lind, Multimedia Games - President & CEO
I didn't say...
Scott Kimball, GLG Partners - Analyst [overlapping speakers] your stock.
Clifton Lind, Multimedia Games - President & CEO Yes, and I think the answer to
the question is there may not be any other investments that are more compelling.
Scott Kimball, GLG Partners - Analyst Well, I agree with that.
Clifton Lind, Multimedia Games - President & CEO So...
Scott Kimball, GLG Partners - Analyst And then the second comment, I mean I
don't think you guys need to hire Bear, Stearns to figure out your stock is
cheap and you need to buy it back, so if you hired them for that reason, you
could have asked any shareholder.
Clifton Lind, Multimedia Games - President & CEO
No, no, no, I don't think
Randy meant that, I think--obviously, one of the options for them is to
recommend that they put together some financing to facilitate doing that, but
Randy is absolutely correct, our Board and management will listen to Bear,
Stearns' advice. That is why we have formalized our agreement with them, so we
are not going to disregard their advice. We are going to listen to it and that
certainly is one of the avenues that they are exploring.
Scott Kimball, GLG Partners - Analyst And then lastly, can you guys talk about
Mexico? Reading from your press release it looks like--are there ten facilities
that are going to be opened by May of 2007?
Clifton Lind, Multimedia Games - President & CEO Actually, thought it was going
to be 11, but I will--
Randy Cieslewicz, Multimedia Games - Interim CFO 10.
Clifton Lind, Multimedia Games - President & CEO It's 10? Randy says 10. He has
got the list.
Scott Kimball, GLG Partners - Analyst Is that a change from previous
expectations?
Clifton Lind, Multimedia Games - President & CEO
Let me say that by mutual
agreement with our customer, we have agreed to adopt their public expectations
in this regard and that is their schedule that they have published publicly, and
so that will be our expectation. We stand prepared if they accelerate that to
meet that, but for our internal purposes, we are now using their public
statements as a guide to what our expectations are.
Scott Kimball, GLG Partners - Analyst Okay. Thanks.
Operator And we will go next to Justin Orlando with Dolphin Management.
Justin Orlando, Dolphin Management - Analyst Thank you, Clifton. I just wanted
to ask you quickly, back on Bear, Stearns for a second, what is your expected
timeline for the Bear, Stearns process? Do you have a termination date in mind
where something has to happen?
Clifton Lind, Multimedia Games - President & CEO It is a long-term agreement,
and so there are certainly no short-term expectations, but there are no limits
on short-term activity whatsoever. But normally, one of these agreements covers
a longer duration, as this one does, so I think this one--I would consider this
a standard-term engagement for an investment bank.
Justin Orlando, Dolphin Management - Analyst Yes, and I guess I was less
worried about the contract and more worried about--more concerned about your
perception of the timing for some results to come out of this process that you
have hired them [for].
Clifton Lind, Multimedia Games - President & CEO Well, the results for the
advisory services, the activities are already underway and we have, neither the
Board, nor Bear, Stearns have any particular expectation about results other
than their ongoing advisory services, so it is hard for me to put a time frame
on any expectations.
Justin Orlando, Dolphin Management - Analyst Do you have people in your office
already tasked with putting together a set of materials to help Bear, Stearns in
talking with potential partners or acquirers et cetera?
Clifton Lind, Multimedia Games - President & CEO As you may or may not know,
our relationship with Bear, Stearns goes back to 1997, and they have had the
materials on our company since 1997, including some rather thorough sets of
documentation that have been put together on numerous occasions. We have been
continuously refreshing the data that Bear, Stearns has, and they have current
up-to-date data that they have from our normal relationship.
Justin Orlando, Dolphin Management - Analyst So, what that implies to me is
that if you were going to put a book together to solicit offers to buy the
company, that would not be a month-long process. That is something that could
happen very quickly?
Clifton Lind, Multimedia Games - President & CEO Well, I would not draw that
conclusion. First, there is not necessarily, have we even gotten to the point
that we would have concluded that entertaining offers about the company is what
Bear, Stearns' recommendation is going to be. Let me say that they have a world
of data that has been available to them, and they will continue to collect
additional data as they work with management and the Board to understand what
the opportunities are and what options lie ahead.
Justin Orlando, Dolphin Management - Analyst Okay, and then on Mexico. I just
want to maybe try to tie you down to answer that last question. Have you changed
your projections positively or negatively on Mexico in the past quarter? Maybe
you can just help us with that a little bit and give us some color around the
changes? And, you know, how excited you are [overlapping speakers]
Clifton Lind, Multimedia Games - President & CEO To repeat what I said, our
installation goals are now consistent, and our internal forecasts are now
consistent with our customer's published public disclosure of what their plans
are, and so we had been asked to be prepared to meet their needs on a more
aggressive schedule than is currently published, but that is now our internal
forecast of what the installations will be and that is the pace at which we will
be manufacturing units to meet their needs. We stand ready and have the
capability of supporting a more aggressive installation, but their public
disclosure is what we are now using as both our internal and external guide to
be prepared to meet and support.
Justin Orlando, Dolphin Management - Analyst I think I understand what you are
saying and I appreciate that. And, lastly, you know, at 3.5 times forward
EBITDA, I would echo what some of the other shareholders have said to you on the
phone, which is you certainly don't need Bear, Stearns to figure out this stock
is incredibly cheap, and I know you believe that the stock price is not in the
right place based on what the company is doing, or at least when I spoke to you
in the past, you've given me that impression. I don't want to put words in your
mouth. I think it's quite time to buy back stock here and let the market know
that the management team believes that this company's stock price is mispriced.
Clifton Lind, Multimedia Games - President & CEO I don't think you have
misrepresented my position in the past or my position today, and certainly our
Board of Directors is keenly aware of the low multiple and are keenly aware of
the option of getting back into the market, and the management is keenly aware
of that as well. So, I think we're all on the same page here. As others have
pointed out, that while I am always very vocal about my opinion and my position
on the Board, I have a great deal of respect for our independent Board of
Directors, and they are very active in the policy-setting process of the
business. We review that and other strategic opportunities at every meeting.
Certainly, they are aware of all the issues that are being addressed on this
conference call, both before and as a result of this conference call, and
management will make sure that they understand that you keenly feel that that is
an option, as others have expressed as well.
Justin Orlando, Dolphin Management - Analyst Thank you, Clifton. I look forward
to hearing your updates on the Bear, Stearns process on the company. Thanks.
Clifton Lind, Multimedia Games - President & CEO Thank you so much.
Operator We'll go next to Adam France with Keane Capital.
Adam France, Keane Capital - Analyst Hey, Clifton, could you--and perhaps this
is a basic question--but when you look at these stand-alone machines that you're
competing against, what are they doing better than you guys? I guess that's the
simplest way I can ask the question.
Clifton Lind, Multimedia Games - President & CEO Well look, we believe that our
forte has been in the past in linked interactive player-against-player gaming,
and what stand-alone gaming do better than that is they don't rely on a network
and building quorums in order to conduct games. The stand-alone games conduct
the game internal to the machine, and therefore, the communication needs are far
less sensitive than for player-against-player linked interactive games.
They also appear to be remarkably similar to slot machines that the player might
see in other markets, and many of the players are frustrated slot machine
players who would prefer to be playing slot machines, and some of these
instant-bingo games appear to be almost identical to slot machines. As you know,
[in] our bingo games, the flash board and the bingo card have a very prominent
position on the display surface, with generally about one third of the display
surface being devoted to the bingo card and the flash board, so it is painfully
obvious to a player that they're playing a bingo game and not a pseudo-slot
machine. There are just lots of folks who wish they were in Las Vegas instead of
in a local gaming establishment, and would prefer to be playing a slot machine
rather than a bingo game. So that is the largest distinction, so our new product
offerings, since it has now become possible to play these instant bingo games
without having a bingo card or a flash board on the screen, our Class III
offerings removed those from the screen, and fully comply with the regulations
in the cases, where necessary, to have them available. In other interpretations,
the bingo card and the bingo pattern is not even required to be available, and
so we are making adjustments so that our player stations will appear to be more
slot-like, while still consistent with the gaming regulations in the
jurisdictions where we play.
Adam France, Keane Capital - Analyst Okay. And, Clifton, just a follow-up
question there. Are there any signs of life of actual enforcement in Oklahoma?
Or is it more of the same, versus what you saw three months ago?
Clifton Lind, Multimedia Games - President & CEO Well, with all due respect for
my tribal gaming commissioners, I think that they do the normal, thorough job
that they do in evaluating game offerings from vendors, and so they are the
primary level of evaluation of which games are legal. And, it has always been
our position that we support, you know, our customers and their interpretation
of what is best for their tribes, and what games fall under the compact. Some of
those games we can offer, some of the games we cannot, and so I would first like
to say that I respect the operations of all of the tribal gaming commissions
that we have the honor of dealing with.
Beyond that, the state is relying, as they have committed to do, on the tribal
gaming commissions to be the primary interpreters of what is available. And,
they are allowing broad latitude to the tribes, with the support of the gaming
labs, and so I think as long as the tribes do their job of doing their own
internal evaluation, and as they get opinions from gaming laboratories, I think
that the state is going to be satisfied with those activities, and it is not
going to undertake any independent interpretation of whether games are compliant
with the compact or not. And so, my view is that the level of tribal regulation
and gaming laboratory interpretation will be the extent of what we are going to
see here in the future, and that the current level of state oversight is the
level of state activity that we will see for the foreseeable future.
Adam France, Keane Capital - Analyst Okay. So, at the end of the day, Clifton,
it sounds like you are now able to perhaps take the proverbial gloves off, and
compete on a more apples-to-apples basis with the folks in the gray market, per
se?
Clifton Lind, Multimedia Games - President & CEO Well, let me say that there
are now stand-alone options that we are offering, and our tribes have now given
us wide latitude to remove bingo games and replace them with instant bingo
games, or bonanza bingo games, or other offerings that are more slot-like. And I
am pleased and excited about the fact that I think this last quarter, we saw
more conversions to those games that are Class III games than we have in any
other previous quarter. That has continued in the quarter that we are in, and so
we have said for a number of years that we wanted to wait for the day that we
could be offering one-touch stand-alone gaming, and I think that that time has
come as is evidenced by the large number of machines that we converted last
quarter and are in the process of converting this quarter. So it is certainly
true that many of the tribes will continue to offer Class II games, even Class
II standard-sequence games like we offer, but it is my opinion that by the end
of the first calendar quarter of next year, that the majority of the games that
we will be offering in Oklahoma will be stand-alone games or other games that
are qualified as Class III games under the compact.
Adam France, Keane Capital - Analyst Okay, very good thank you for your time.
Clifton Lind, Multimedia Games - President & CEO Thank you.
Operator We'll go next to Marc Andersen, Axial Capital.
Marc Andersen, Axial Capital - Analyst Yes, you've given some color on the game
situation, the installment situation in Oklahoma, I was wondering if you could
also talk a little bit about the situation in California on a unit basis?
Clifton Lind, Multimedia Games - President & CEO I think in California on a
per--go ahead, Randy, why don't you give the numbers and then I'll...
Randy Cieslewicz, Multimedia Games - Interim CFO Well we had a net install of
20 units in California in the quarter.
Clifton Lind, Multimedia Games - President & CEO So we actually picked up, our
published numbers show that we actually picked up numbers in California and
we're excited about the future of Class II gaming in California, once again we
think it's entered into a realm where we will be adding machines. We have
offered our first new game themes in a long time in California in the last
quarter, at the very end of the last quarter, and they were very well received
and as in other markets we are in the process of changing out the game themes
and certain gaming platforms in California as rapidly as we can run them back
through the factory. And so we're very excited about the potential of both
placing other units and driving hold per day up in that market.
Marc Andersen, Axial Capital - Analyst Thanks.
Operator We'll go next to Ryan Worst, Brean Murray.
Ryan Worst, Brean Murray - Analyst Thanks. Just a quick question, can you
provide some detail on the player station sales in the quarter? $1.8 million?
Clifton Lind, Multimedia Games - President & CEO Oh it was just--periodically
in Washington State, we have a customer who is interested in purchasing
additional player stations, and that was a sale of additional player stations to
one of our customers in Washington.
Ryan Worst, Brean Murray - Analyst All right, thanks.
Clifton Lind, Multimedia Games - President & CEO Thank you.
Operator We'll go next to David Vas, Banc of America.
David Vas, Banc of America - Analyst Hi, just a couple numbers stuff, guys, on
Riverwind, can you give us the split of your games in terms of Class III versus
Class II?
Randy Cieslewicz, Multimedia Games - Interim CFO Yes, right now it's about 700+
Class II and about 160, I believe, Class III.
David Vas, Banc of America - Analyst Okay, and Randy, last thing, R&D break out
from SG&A?
Randy Cieslewicz, Multimedia Games - Interim CFO $4.2 million I believe? Hold
on a second. I'm sorry, Q3, $4.6 million.
David Vas, Banc of America - Analyst Okay, thanks.
Operator And at this time, that concludes the question-and-answer session, I'd
like to turn it back to Mr. Lind for any additional or closing remarks.
Clifton Lind, Multimedia Games - President & CEO
Thank you, operator, and thanks to everyone on the call for their continued
interest in Multimedia Games. We've obviously given you a lot of new information
to digest this morning, some that points out the obvious challenges that we are
experiencing in one of our major markets, some that I hope clearly illustrate
the continued growth opportunities that Multimedia has, and the commitment the
management has to execute against these opportunities. We appreciate all of our
shareholders' interest and have a unified goal in trying to build shareholder
value, and will be devoting considerable energies to that. So at this time, let
me thank you for being on the call, and if you have any follow-up questions give
Randy or me a call and we look forward to visiting with you. Thanks, operator.
Operator Once again, ladies and gentlemen, this does conclude today's call. We
thank you for your participation and you may disconnect at this time.
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