Multimedia Games, Inc. (NASDAQ:MGAM) Presentation
15th Annual Roth Capital Partners Growth Stock Conference
March 18, 2003

Analyst: Up next, we have Multimedia Games, ticker MGAM. We have a Strong Buy rating on the stock, which closed yesterday at $18.90. We have a price target of $37.00. Multimedia Games is a supplier of Class II gaming systems and Class III Video Lottery systems to Native American markets. And here today, we have Clifton Lind, Chief Executive Officer; and Craig Nouis, Chief Financial Officer.

Clifton Lind: Thank you so much. Would everyone turn off their cell phones, please? First, I would like to introduce Craig Nouis, who is joining me here at the podium, who will take part in the presentation. I am Clifton Lind, Chief Executive Officer and President of Multimedia Games. We want to thank you all at Roth Capital, and Jeff [Martin], and Chad [Cooper] for asking to us to speak here today. Certainly, during the question and answer period, if not during the presentation, I will make some forward-looking statements. I ask all of you as astute investors to please refer to the Risk Factors section of all of our public disclosures. I think they do a good job of discussing all of the risks and uncertainty that our company faces, and Craig and I will be more than happy to discuss them with you later today, or call us at the office, if you have any questions about anything in there. We are going to try to breeze through this presentation to leave most of the time for questions and answers, which might be more interesting to you than what we would say in our prepared notes. I see many old faces and friends out there that have been supporters of our company for a long time. We appreciate you being here, and we appreciate all of the new interest that our new friends are showing by attending this presentation today.

Multimedia Games is a company that has earned its place in the Native American gaming segment of the entertainment business by continually providing innovative new products and services to its customers, and focusing on its customers' needs. We are a market-leading long-term supplier of linked interactive games to the Native American Class II market, which will mean more to you than it does now after we go through this presentation. We have proven scientific and technological capabilities that have a broad number of scientific disciplines underlying all of our proprietary technology. Our management team has broad and deep experience, not only in gaming and system development, but also in defense contracting, lotteries, and other forms of system development. We have a strong balance sheet with high margins and cash flow. The vast majority of our income is derived from recurring revenue sources, and our diluted earnings per share compounded annual growth rate has been nearly 80% since 2000.

We operate in the Native American gaming segment of the entertainment industry; it is governed by the Indian Gaming Regulatory Act, which was passed by Congress in 1988. The Indian Gaming Regulatory Act created three classes of gaming. Class I games are basically ceremonial and social games, which are very important to our sovereign tribal gaming partners that we work with, but are not a factor in for-profit gaming. Class II games are games such as bingo, games similar to bingo, variants of bingo, pull-tab games, tip jar games, certain forms of keno games, and instant bingo games. That is the area of the market where we derive most of our income. Class II games are able to be played by any federally recognized tribe that is in good standing with the Bureau of Indian Affairs without any interference from the state and without any taxation from the state on any revenues that are derived from those [games]. These games are self-regulated, and we are very proud of the job that our tribal partners do in the self-regulation of gaming. We think they are some of the finest gaming regulators that are in America today.

Class III games are games such as those we would think of as Las-Vegas-style games, which include video lottery systems, slot machines, and most table games. All of those games require an agreement with the state in which they are operated. They must be operated as Class II [Class III?] games on tribal land, and in most cases, the state extracts a share of the revenue for allowing the tribes to run those games. Our Class II electronic games that we play are typically played on what we called technological aids. The Indian Gaming Regulatory Act of '88 permitted Native American Tribes to play Class II games with the aid of technological devices such as computers in order to broaden the play of the game and to make it more enjoyable for the players. All of our games are linked nationwide, and all of our games are interactive, for players who are playing against other players. In no case, other than our [Class III] video lottery systems, is there any situation where a player is playing a game against any finite game deck or any other type of gaming. So, if you go to any of our Class II halls, you will be linked in with another group of players coast to coast, from Texas to Canada, and put into a bingo game. Our bingo games start every quarter of a second and play in as short a period of time as 4 seconds. Our New Generation games, which are the games that we introduced in early 2001, account for the majority of our revenue right now, and the most significant short-term opportunity for our company lies in the placement of additional New Generation Class II player stations.

Our business model is really rather simple. We provide the systems, including the hardware, the software, and the content to the tribes, and for that we get paid a share of the revenue. Our systems are highly scalable, and the more player stations we get operating on our systems, of course, the better job we do of leveraging and covering the fixed costs of operating the game. Most of you may be aware and some of you may not be aware of the press release we put out last week about an agreement that we have reached with NIGC, whereby we resolved a lawsuit that we had pending against NIGC that was under appeal in the Tenth Circuit. It revolved solely around the question of whether or not a vendor could bring a suit against the NIGC to challenge any advisory opinion that the NIGC has issued. We decided after months of very cooperative and productive discussions with NIGC that it was in our interest to settle that lawsuit and to move forward working with the NIGC as quickly as we and they could to get an opinion out on an alternate game. That alternate game we call Reel Time Bingo.

Reel Time Bingo is now the game that accounts for the vast majority of our New Generation games that are in the field. Class III games are the games that we provide to Washington Tribes, and as you have all learned or will learn, we also were selected as the winner [in a competitive procurement, to provide] the New York Lottery's Central System. The Video Lottery Central System is a central determinant system whereby player stations throughout the state or within a hall are linked, and again, players are not playing against the machine, but they are being delivered an outcome from a finite game set by a central computer system. All of the video lottery systems that are operated in Native American lands must be operated under a compact. We currently play systems in the state of Washington. We are one of two major providers up there. In a Class III system it is allowed that players can play against the house and players can in fact play against the machines, but in a central determinant system, as I said, we are also dealing out outcomes from a finite deck. The business model for the Class III systems is different from what we do in Class II. We sell the equipment up front and we retain a small percentage of recurring revenue, and so from quarter to quarter, depending on openings of new casinos or placements of additional machines with existing customers, you may see blips in our earnings as we sell machines and realize the gross margin from those machines in a particular quarter.

As I have said right now, the Washington State market is a maturing market, and the majority of the revenue blips will occur when new casinos -- major new casinos -- are opened. We are an innovative content provider. We have over 200 of our own proprietary game faces, including denominational variants. We have 30-plus game faces that we have licensed from Williams [WMS Gaming] to use in Class II and Class III opportunities, and over 60 from Bally's. All of those are running today. We have a larger number of titles that are available to us at our choosing. We have new agreements with Mikohn, agreements with Jeff Foxworthy and National Lampoon, and a number of other agreements under negotiations with other vendors.

This is an example of our Reel Time Bingo product and what the player sees when he is at one of our player stations. As you will note, there is a bingo card up in the upper left-hand corner, and a flashboard that shows the balls that have been drawn in this particular bingo game. This game happens to be displayed on Bally's Black and White game theme that we have licensed. The key differentiator in our marketplace is the fact that we have the largest linked network of Native American gaming establishments across the United States, and as I have said, we are linked from Texas to Canada and from the East Coast to the West Coast. As I said earlier, we have a bingo game starting at least every quarter of a second, so a player can get in the game when he wants to. Most of our games play in 4-6 seconds, depending on the number of players that have been placed into the game, and the speed at which they respond interactively to the prompts. Craig, if you will take over here for a few minutes.

Craig Nouis: Thank you Clifton. I would like to spend a few minutes and just talk about some of the financial aspects of the company. In terms of our player station economics, the average player station costs us about $5,000. That applies to both our Class II and Class III units, as those units are interchangeable from our standpoint. The average player station life is three years, which we depreciate on a straight-line basis. Historic [hold] per day for our Legacy games is approximately $50 a day per machine, and the New Generation games are more than double that amount. Based on our current revenue share that we have in place today, our payback period on our player stations is approximately 6 months. Another important aspect is that the game faces can be converted without significant costs. Typically, all that means to us is placing new glass on the player stations, and a software change after that.

Again, this is a display of what the machines look like if you are a player and you walk up to the machines. One of the attractive features of our company is that a significant portion of our revenues are under participation arrangements with the tribes. So, as you can see, for the last 12 months, approximately 97% of our revenues were recurring revenues, and you can see how that compares to some of the gaming suppliers that are out there in the Class III market. Financial results over the last two years: as you can see, we've had significant growth in our net revenues, our EBITDA, our diluted earnings per share ? they all either doubled or tripled of the amounts for 2001. In addition, our EBITDA margin has increased from 50% in 2001 to 59% for 2002.

As for MGAM's valuation, our enterprise value is approximately $288 million. The FY 2003 EBITDA based on the consensus numbers is about $78 million, which represents an implied EBITDA multiple of 3.7. For gaming company valuations, here is just a chart that shows how some of our valuations compared to IGT, Bally, and Shufflemaster. The EBITDA multiple, the PE ratio, and the EBITDA multiple are all significantly less than the other three. On the flip side, the EBITDA margins, the EBITDA growth projected from 2002 to 2003, and the participation revenues are all significantly higher. MGAM's financial profile for 2002: We had net revenue growth of 113% over the prior year. Diluted earnings per share increased 205% over prior year. As of December 31st, we had approximately $18 million in cash, had minimal debt on our balance sheet, net worth of over $74 million, working capital $15 million, and a current ratio of 1.1 to 1. Our cash capital expenditures for the quarter were approximately $4.2 million. Our guidance as of right now for diluted earnings per share ranges between $2.30 to 2.60. We have a range because the final outcome will be dependent upon the timing of some financing opportunities that will enable us to place a large number of machines in the field, and if those happen on a timely basis, we will achieve the upper end of the range. If we do not achieve those on a timely basis, we will be down towards $2.30. This would represent 32-49% growth in diluted earnings per share over prior year.

Again, this is another example of a [game] screen; this particular screen is [of] our game Meltdown Bingo. The key driver in our earnings is the number of player stations that we have in play, and you can see that in 2002, we were approaching 10,000 units. What's important about this chart is, as you can see at the lower end in the dark blue, the number of Legacy games is decreasing as we start introducing the New Generation games, which is the lighter color at the top of 2001-2002.

Revenue contribution follows a similar pattern, and what's important about this chart is the revenue contribution for the New Generation games. We achieve a lot higher margin than we do for the Legacy games, so this has had a big impact on our earnings per share. Like we mentioned before, a large portion of our revenues are recurring, and the blue bar represents our gross revenues; the bar right next to it, the purple, represents the recurring revenue portion. What we like to key in on is the yellow bar, which represents the net revenue, which really represents the cash that we actually receive in hand for our share of the split. Historically, EBITDA has also followed similar trends, big growth in the year 2002, as well as earnings per share growth: from $1.74 last year up to $2.30 - $2.60 for the current year. And that's my update for the financials, and I'll turn it back over to Clifton.

Clifton Lind: Thanks, Craig. Our Chairman and Founder, Gordon Graves, during the 80's had a distinguished history of innovation in the lottery business, and that history of innovation has been continued at MGAM. We are the market leader, the technology leader, and the relationship leadership leader in the niche that we serve. All of these disciplines up here that we list are critical to the proper execution and development of gaming systems and operations of gaming systems. Particularly important are systems development, software development, hardware development, cashless systems and player tracking systems. Multimedia Games has been the innovator for Class II gaming. Our MegaMania game, which was introduced in 1995, was in fact the first electronic wide-area linked bingo game, which in fact gives rise to the claim that we invented linked interactive bingo. The current technology team that we have under the leadership of our Chief Technology Officer has continued that history of innovation. We won the contract for the New York Lottery central racino system, competing against such industry giants as G-Tech, IGT, Scientific Gaming, and a large number of others.

Our future growth is not only in the New York market, but also in other video lottery markets as other states struggle to cover their deficits and look to gaming being part of that. We introduced Class II games here in California in November and December. We are ideally suited to take our games and gaming system into charity gaming. We are ideally suited to provide lotteries with ancillary systems. And, because of our position as the market leader and the relationship leader with our tribes, we have a significant number of casino development opportunities whereby we assist our tribes in enlarging or building new facilities in order to gain additional floor space and long term-contracts. As I said, our technology team won the Video Lottery Contract for the Racino system in New York last year. Very shortly, we expect to have final approval of the contract, which we have signed and is now under review by the various departments in the state of New York. This was built upon our Central Determinant System that we have been developing since the early 90's. And in awarding us that contract, in the post-award review, the New York reviewers and the outside consultants, who also concluded that we were the company to receive the contract, cited superior system architecture, scalability, security, flexible management options, and floor management support as the reasons that we were selected. As you can see, the New York racino market is projected to be very significant, and we are on a revenue share whereby we get a small percentage of the revenue that's earned from all of the player stations that are placed on that central system.

As you all are aware, the video lottery market is projected to be one of the fastest-growing [gaming industry] segments, along with Native American gaming. We think we serve the two fastest-growing segments in the gaming industry. Many state legislatures have already announced and are considering and discussing video lottery systems right now, and we expect as many as 15 states to have bills drawn up this year on various types of gaming opportunities, some of which will almost certainly be video lottery systems, in which we think we will be a candidate and a player. As I said, we introduced machines to the California market in November and December. Everyone in this room, I am sure, is aware that all of the Class III gaming tribes are currently under contract renegotiations, and we expect the tribes to be very tough and successful negotiators with the state here [California]. The market here for Class II games, which is our opportunity, is significant, regardless of the outcome of those negotiations, because there are large numbers of tribes that do not have a Class III compact and who are either currently federally recognized or seeking federal recognition right now and will initially begin doing Class II games.

Our charitable gaming market is a very large market, a market in which we have extensive sales and marketing expertise. All of the states have some form of charity gaming, and our pull-tab systems and electronic pull-tab systems support the 41 states that also have pull-tab gaming allowed in charities. In lottery opportunities, we have had discussions and see opportunities for being a network communication provider to certain lotteries. We have discussed with several lotteries our player tracking system. We have been contacted by lotteries to investigate remote monitoring of some of their stand-alone video lottery terminals, and we also have an electronic instant ticket dispensing terminal. As to casino development opportunities to our tribes, we provide assistance to the tribes for, in certain situations, facility expansions; we advance, in certain situations, construction funds. In return, we receive long-term contracts that guarantee revenue shares.

Again, our competitive advantages ? I go back to our long-term relationships with the tribes, our proprietary network that we have out there, and what we believe to be our industry-leading technological capabilities. Our investment merits include our strong balance sheet, our high margins in cash flow; multiple revenue streams; being the market leader in the Native-American market; our ability to leverage our technology into other markets; and our management team. We have time for a few questions, I think?

Analyst: We are actually running short on time. I think it's worth everyone's time, so let's ask a couple of questions. Let's allow time for two questions.

Question: Clifton, on the last conference call, you spoke of a 90-day review by the Attorney General's office in New York. Could you give us the status update of what happens to the contract since that window time has elapsed?

Clifton Lind: We are in contact with him almost on a daily basis answering questions about the contract that the [New York] Lottery and MGAM agreed to, and, you know, we expect that contract to be signed very shortly. As you are aware, in New York, a bill has been drawn up to change the revenue share for the [race] tracks, and since that bill is still under consideration, I think that there is not a great deal of pressure on the Comptroller to move ahead smartly with this contract, but we would be shocked if it was not signed in the next 30 or 45 days. However, you know, predicting when a government entity is going to do something is always dangerous.

Question: So, when do you expect the New York tracks actually have the gaming system in place?

Clifton Lind: Originally, we had thought that the system would be in place in July, now it is looking more like the September/October timeframe is more practical.

Analyst: Okay, one final question. Did you have a question here in front?

Question: [inaudible ? no microphone]

Clifton Lind: No, we have asked NIGC to expedite a classification ruling on Reel Time [Bingo], since the vast majority of the MGAM machines have been converted to Reel Time. It is no longer relevant?

Question follow-up: [inaudible ? no microphone]

Clifton Lind: Reel Time, yes.

Clifton Lind: Thank you very much.