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MGAM > SEC Filings for MGAM > Form 10-Q on 30-Apr-2013All Recent SEC Filings

Show all filings for MULTIMEDIA GAMES HOLDING COMPANY, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for MULTIMEDIA GAMES HOLDING COMPANY, INC.


30-Apr-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD LOOKING STATEMENTS

The following discussion and analysis should be read in conjunction with our Consolidated Financial Statements and Notes thereto included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on November 15, 2012. This discussion and analysis also contains forward-looking statements and should also be read in conjunction with the disclosures and information contained in the cautionary note on Forward Looking Statements above and in Part II - Item 1A. "Risk Factors" below. The following discussion and analysis is intended to enhance the reader's understanding of our business environment, financial condition and results of operations.

OVERVIEW

Multimedia Games designs, manufactures and supplies gaming machines and systems to casino operators in North America, domestic and selected international lottery operators, and commercial bingo gaming facility operators. Our standalone gaming machines are primarily sold and placed in Class III settings, while our central determinant and server-based centrally-linked products and systems are primarily sold and placed in Class II, video lottery terminal and electronic bingo settings. The Company's markets served include gaming facilities operated by Native American and commercial casinos and we derive the majority of our gaming revenue from participation, or recurring revenue agreements, and development and placement fee agreements, all of which operate on a participation, or revenue share, basis. We enter into development and placement fee agreements to provide financing for new gaming facilities or for the expansion of existing facilities. All or a portion of the funds provided under development agreements are reimbursed to the Company, while funding under placement fee agreements is not reimbursed. Under these agreements, the Company places player terminals and systems as well as its proprietary and other licensed game content at a customer's facility in return for either a share of the revenues that these terminals and systems generate or for a fixed daily lease fee. For more information on our development, placement and participation arrangements, please see "Results of Operations" below.

We also generate revenue from the sale of gaming units and systems that feature proprietary game content and licensed game content. We continue to seek to increase participation and for-sale revenues by expanding into additional gaming jurisdictions and into other segments of the gaming market. We also generate revenues by providing the central determinant system operated by the New York State Division of the Lottery for the video lottery terminals installed at racetracks in the State of New York.

We are focused on growing by executing a business plan focused on the following key initiatives: Class II and Class III product expansion in existing and new jurisdictions throughout the country, profit increases through prudent expense management and capital investments, and the creation of products and technologies that can contribute to our growth into new markets, pending regulatory approvals.

As part of our revenue growth initiative, we remain focused on expanding market share through new product introductions and more effective utilization of sales and marketing efforts across the organization. The creation of our proprietary products and market expansion is a key area of focus for our company. As a result of these efforts, during the three months ended March 31, 2013, we saw growth in both our domestic installed base and our unit sale business. We expect fiscal 2013 revenue growth will continue to be driven by further increases in the domestic installed base as well as growth in new unit sales, although such growth and increases may be at a lower rate than in fiscal 2012. Based on current fiscal 2013 projections, we expect that our fiscal 2013 tax rate will be in the range of 35%-39%, compared to the fiscal 2012 full year effective tax rate of 11%.

BUSINESS STRATEGY

We are currently focused on executing a business strategy focused on developing high performing gaming products, investing in our gaming operations, expanding our total addressable market to include new gaming jurisdictions, and driving continued profitability and cash flow.

Product Development

One of our top priorities is investing in research and development activities to expand our product portfolio and build on the recent success of our newest high-earning games. The creation of a consistent number of high-earning games is critical to our ability to enter new markets, expand our existing footprint and keep our installed base of games fresh by allowing the Company to better serve a growing number of our customer needs, more effectively maintain the performance of our installed base, and better support a growing footprint of games, particularly within a single customer facility.


By expanding our portfolio, we are able to work closely with our customers to more fully serve their needs, allowing us to forge deeper relationships with our customers and expanding the scope of our market opportunity.

Our growing library of Class II and Class III content also allows us more flexibility in managing our existing installed base. A growing library permits us to more quickly replace titles within our installed base whose performance is in decline with fresh, high-performing content. Additionally, by offering our customers a greater choice when purchasing our gaming machines for use in their facilities, we can better support a larger footprint of games, effectively increasing our addressable market for game sales.

Class II: The development of high-performing Class II content enables us to continue to serve our largest customer and, given the renewed focus on Class II content by our tribal customers, provides us with the opportunity to better serve our existing customers and secure new relationships with new tribal customers.

Class III: Our investment in Class III game development is yielding new games and play features that provide enhanced entertainment experiences.

Gaming Operations Investment

We are also focused on investing in the maintenance and growth of our existing domestic installed base through the extension of placement or development agreements and continuous revamping of existing games with new high performing games. We are also investing in new markets as they become available through the licensing process.

We seek to replace third party units with our own proprietary games and content in order to better position the Company to generate a higher return on our investments in gaming technology and on our investments in securing floor space at our key customers' facilities. This proprietary product includes our Class II and Class III titles.

Furthermore, we are focused on expanding our addressable markets to include new commercial and tribal jurisdictions. We are committed to offering to new customers in the jurisdictions where we are newly licensed our products on a participation basis and believe our expanded product portfolio positions us to leverage our product development and licensing investments by further expanding our participation installed base.

Addressable Market Expansion

We continue a concerted effort to expand our total addressable market by targeting new gaming jurisdictions across the United States and seeking new gaming licenses. We have leveraged our expanding game portfolio gaming operations investments to target customers in the jurisdictions where the Company is newly licensed and to expand our national reach.

Profitability Growth

The final key piece of our long-term growth strategy is leveraging our focus on fiscal discipline to generate strong profitability and solid free cash flow, setting the stage for continued success. By generating strong financial returns in our business, we are further able to invest in the balance of our long-term growth strategy by developing additional new proprietary games, refreshing our existing installed base with high-performing games and expanding our installed base, and further expanding the number of markets where we are licensed.


RESULTS OF OPERATIONS

Three and Six Months Ended March 31, 2013 Compared to Three and Six Months Ended
March 31, 2012

Below are our revenues and costs and expenses for the periods noted above. This
information should be read in conjunction with our Condensed Consolidated
Financial Statements and notes thereto.

                                       Three Months Ended                  Six Months Ended
                                           March 31,                          March 31,
                                   2013       2012     % change       2013       2012     % change
                                   (in thousands)                     (in thousands)
Revenue
Gaming Operations
Participation revenue           $ 29,162   $ 25,021      16.6  %   $ 55,325   $ 46,687      18.5  %
Lottery                            4,244      4,022       5.5  %      8,055      7,257      11.0  %
Gaming Equipment and Systems
Sales
Player terminal and equipment
sales                              9,774      7,877      24.1  %     20,339     15,725      29.3  %
Systems and Licensing              3,013      2,237      34.7  %      6,452      3,982      62.0  %
Other Revenue                        378        375       0.8  %        702        676       3.8  %
Total Revenue                     46,571     39,532      17.8  %     90,873     74,327      22.3  %
Costs and Expenses
Cost of gaming operations
revenue                            3,263      3,005       8.6  %      6,450      5,931       8.8  %
Cost of revenues equipment and
systems sales                      5,381      4,175      28.9  %     11,566      8,333      38.8  %
Selling, general and
administrative                    11,575     12,276      (5.7 )%     22,918     23,024      (0.5 )%
Research and development           4,288      3,896      10.1  %      8,469      7,374      14.8  %
Amortization and depreciation      8,143      9,512     (14.4 )%     16,107     19,202     (16.1 )%
Other income (expense), net         (126 )      331    (138.1 )%       (242 )    1,331    (118.2 )%

At March 31 End-of-period installed player terminal base: 2013 2012 % change

Oklahoma                                       8,173   7,679     6.4  %
Washington                                       531     282    88.3  %
California                                       654     382    71.2  %
Mexico                                             -   1,281  (100.0 )%
Alabama                                          251     199    26.1  %
Other                                          2,103   1,349    55.9  %
Total participation units                     11,712  11,172     4.8  %


The participation units can be further delineated between units under development agreements, placement fee agreements and participation arrangements as follows:

                               Three Months Ended              Six Months Ended
                              Participation    % of       Participation       % of      Participation Expiration
                                               Total
                    Units        Revenue      Revenue        Revenue      Total Revenue  Fees Ranges    Ranges
March 31, 2013               (In thousands)              (In thousands)
                                                                                                      Mar. 2015
     Development                                                                                      to Oct.
     Agreements     4,854   $        11,065    24.0%    $        21,015       23.0%      20% to 30%   2018
                                                                                                      Apr. 2014
     Placement                                                                                        to Dec.
     Agreements     1,074             1,457    3.0%               2,789       3.0%           20%      2017
     Participation
     Arrangements   5,784            16,641    36.0%             31,521       35.0%      10% to 30%   N/A
        Total      11,712   $        29,163             $        55,325

March 31, 2012
                                                                                                      Mar. 2015
     Development                                                                                      to Oct.
     Agreements     4,848   $        11,659    29.0%    $        21,999       30.0%      20% to 30%   2018
                                                                                                      Apr. 2014
     Placement                                                                                        to Dec.
     Agreements       928             1,493    4.0%               2,848       4.0%           20%      2017
     Participation
     Arrangements   5,396            11,870    30.0%             21,841       29.0%      10% to 30%   N/A
        Total      11,172   $        25,021             $        46,687

All of these agreements or arrangements provide us with the ability to place player terminals on a customer's casino floor, generally for some contracted period of time, for either a share of the revenues that these terminals and systems generate or for a fixed daily lease fee. We define development agreements as those arrangements in which funds are provided to a casino operator to be used for the construction of a new facility or the renovation of an existing facility that are contracted to be refunded to us, generally in monthly installments. Placement fee agreements, however, provide similar funding to the customer but are generally not designated for a particular purpose and are not refunded to us. Participation arrangements are less formal arrangements that allow for product to be placed on a customer's floor, but do not have a designated term which provides both the customer and us the flexibility to make changes to the number of player terminals placed in the casino.

Three Months Ended March 31, 2013, Compared to Three Months Ended March 31, 2012

Total revenues for the three months ended March 31, 2013 were $46.6 million, compared to $39.5 million for the three months ended March 31, 2012, a $7.0 million, or 17.8% increase, primarily due to an increase in proprietary unit sales and participation revenue in both new and existing markets.

Gaming Operations - Participation Revenue

Oklahoma gaming revenues were $16.2 million in the three months ended March 31, 2013, compared to $16.8 million in the three months ended March 31, 2012, a decrease of $592,000, or 3.5%. The majority of the decrease is a result of increased activity at our largest customer's facilities in 2012 compared to 2013. End of period unit counts in Oklahoma as of March 31, 2013 were 8,173 compared to 7,679 as of March 31, 2012, a 494 unit, or 6.4% increase.

Washington gaming revenues were $4.1 million in the three months ended March 31, 2013, compared to $2.6 million in the three months ended March 31, 2012, an increase of $1.4 million, or 53.5%. The increase in Washington gaming operations revenue was primarily the result of an increase in back office fees received on player terminals as well as an increase in the number of player terminals. End of period unit counts in Washington as of March 31, 2013 were 531 compared to 282 as of March 31, 2012, a 249 unit, or 88.3% increase.


Revenues from California were $2.6 million in the three months ended March 31, 2013, compared to $1.2 million in the three months ended March 31, 2012, an increase of $1.4 million, or 115.7%. The increase in gaming operations revenue primarily relates to the increase in the number of participation units. End of period unit counts in California as of March 31, 2013 were 654 compared to 382 as of March 31, 2012, a 272 unit, or 71.2% increase.

Revenues from the Mexico market were $0 in the three months ended March 31, 2013 and $636,000 in the three months ended March 31, 2012, a decrease of $636,000 or 100.0%. During the first fiscal quarter of 2013, we sold all remaining units in Mexico to our primary customer and have effectively terminated operations in Mexico.

Alabama gaming revenues increased $23,000, or 3.2%, to $741,000 in the three months ended March 31, 2013, compared to $718,000 in the three months ended March 31, 2012. The increase in revenue primarily relates to the increase in player terminals. End of period unit counts in Alabama as of March 31, 2013 were 251, compared to 199 as of March 31, 2012, a 52 unit, or 26.1% increase.

Other gaming operations revenue relates to participation revenue from other states, including Wisconsin, Texas, New York, Minnesota, Kansas, Idaho, Michigan, Mississippi, Nebraska, Louisiana, Florida, Connecticut, New Mexico, Arizona, Arkansas, Indiana, Iowa, Ohio, and Rhode Island. Combined gaming revenue from these states were $5.5 million in the three months ended March 31, 2013 compared to $3.0 million in the three months ended March 31, 2012, a $2.5 million or 83.7%, increase. The increase in gaming operations revenue was primarily the result of an increase in our installed base of participation games, which increased 55.9% to 2,103 as of March 31, 2013 from 1,349 as of March 31, 2012.

Gaming Operations - Lottery

Revenues from the New York Lottery system increased $222,000, or 5.5%, to $4.2 million in the three months ended March 31, 2013, from $4.0 million in the three months ended March 31, 2012. The total number of units within the New York Lottery system was approximately 17,500 as of March 31, 2013 and 17,200 as of March 31, 2012. The increase in New York Lottery system revenue is attributable to an increase in the total number of units and the full effect of the opening of Resorts World Casino in New York, New York on October 28, 2011.

Gaming Equipment and System Sales -Player Terminal and Equipment Sales

Player terminal and equipment sales were $9.8 million in the three months ended March 31, 2013, and $7.8 million in the three months ended March 31, 2012, an increase of $1.9 million or 24.6%. Player terminal sales in the three months ended March 31, 2013 were $8.5 million on the sale of 580 proprietary units, compared to sales of $7.0 million on the sale of 472 proprietary units in the three months ended March 31, 2012. The player terminal and equipment sales increase is attributable to continued growth in new markets and continued penetration into existing markets. Generally, player terminal sales include ancillary equipment, such as networking gear, bases, chairs, and occasionally signage, some of which may be necessary for the full functionality of the player terminals in a casino. This ancillary equipment comprises an install kit which is shipped simultaneously with the player terminals. Gaming equipment sales were $899,000 in the three months ended March 31, 2013, compared to $245,000 in the three months ended March 31, 2012. Player terminal and equipment sales also include $361,000 and $597,000 related to deferred revenue recognized during the three months ended March 31, 2013 and the three months ended March 31, 2012, respectively, due to final execution of deliverables or mutual agreement to changes in contract terms.

Gaming Equipment and System Sales - Systems and Licensing

Systems and licensing sales revenue was $3.0 million in the three months ended March 31, 2013, compared to $2.3 million in the three months ended March 31, 2012, a $0.7 million or 32.9% increase. Systems and licensing revenue for the three months ended March 31, 2013 relates to (i) $2.5 million of licenses associated with the player terminal sales during the period; (ii) $426,000 license revenue from game conversions; and (iii) $132,000 of systems and game themes sold in prior periods being amortized to revenue from deferred revenue over the contract period. Systems and licensing revenue in the three months ended March 31, 2012 relates to (i) $1.5 million of licenses associated with the player terminal sales during the period; (ii) $259,000 of systems and game themes sold in prior periods being recognized from deferred revenue during the period;; and (iii) $488,000 of license revenue from game conversions. The increase in the year for systems and licensing is primarily attributable to the increase in the sale of licenses related to player terminal sales.


Other Revenue

Other revenue was $378,000 in the three months ended March 31, 2013 and $375,000 in the three months ended March 31, 2012, a $3,000, or 0.8%, increase.

Cost of Gaming Operations Revenue

Total cost of gaming operations revenue, which includes field service and network operations personnel, as well as royalty and participation fees, increased $258,000, or 8.6%, to $3.3 million in the three months ended March 31, 2013, from $3.0 million in the three months ended March 31, 2012. Costs of gaming operations revenue increased primarily due to the increase in the player terminal installed base.

Cost of Equipment & System Sales

Cost of equipment and system sales, which includes the cost of goods sold for player terminals and other equipment and system sales, increased $1.2 million, or 28.9%, to $5.4 million in the three months ended March 31, 2013, from $4.2 million in the three months ended March 31, 2012, primarily due to the increase in player terminal equipment sales. Costs of revenues related to player terminal sales were $4.7 million and $3.6 million in the three months ended March 31, 2013 and the three months ended March 31, 2012, respectively. Cost of equipment and system sales in the three months ended March 31, 2013 includes $432,000 related to the sale of gaming equipment during the period and $233,000 of costs of prior period shipments being amortized from deferred revenue over the contract period. Cost of equipment and system sales in the three months ended March 31, 2012 includes $265,000 related to the sale of gaming equipment during the period and $326,000 of costs of prior period shipments being amortized from deferred revenue over the contract period.

Selling, General and Administrative Expenses

Selling, general and administrative expenses, or SG&A, decreased approximately $0.7 million, or 5.7%, to $11.6 million in the three months ended March 31, 2013, from $12.3 million in the three months ended March 31, 2012. This decrease was primarily a result of a decrease in miscellaneous expense related to a $500,000 one-time charitable donation in 2012.

Research & Development
Research and development expenses increased approximately $392,000, or 10.1%, to $4.3 million in the three months ended March 31, 2013, from $3.9 million in the three months ended March 31, 2012. Our research and development costs increased primarily due to salaries and wages, as a result of increased headcount and continued efforts to attract and retain employees, independent testing lab fees, and contract labor.

Amortization and Depreciation

Depreciation expense decreased $1.6 million, or 18.7%, to $6.8 million in the three months ended March 31, 2013, from $8.3 million in the three months ended March 31, 2012, primarily as a result of a change in the depreciable lives of leased gaming equipment reflected in our rental pool effective as of October 1, 2012. It was determined that a four year depreciable life on leased gaming equipment more accurately reflected the current age of leased gaming equipment on customers' floors, the current and historical replacement rate and the useful lives used for comparable assets by our competitors. Amortization expense increased $190,000, or 16.1%, to $1.4 million in the three months ended March 31, 2013, compared to $1.2 million in the three months ended March 31, 2012, primarily because of an increase in capitalized software costs, which led to an increase in the associated amortization expense.

Other Income and Expense

Interest income decreased $415,000, or 74.2%, to $144,000 in the three months ended March 31, 2013, from $559,000 in the three months ended March 31, 2012 due to reduced outstanding note receivable balances. During the three months ended March 31, 2013, we recorded imputed interest of $118,000 relating to development agreements with an imputed interest rate range of 2.95% to 9.0%, compared to $379,000 in the three months ended March 31, 2012.

Interest expense decreased $64,000, or 17.9%, to $293,000 in the three months ended March 31, 2013, from $357,000 in the three months ended March 31, 2012 due to a reduction in interest rates charged under our Credit Agreement and a reduction in the outstanding debt balance.


Other income decreased $106,000, or 82.2%to $23,000 in the three months ended March 31, 2013, from $129,000 in the three months ended March 31, 2012. The decrease primarily relates to a gain on the exchange of used equipment with a third party equipment supplier in the three month period ended March 31, 2012.

Income Taxes

Income tax expense increased to $4.5 million in the three months ended March 31, 2013, compared to an expense of $181,000 in the three months ended March 31, 2012. These figures represent an effective of 32.3% and 2.6% in the three months ended March 31, 2013 and 2012, respectively. During the three month period ended March 31, 2013, we recognized the impact of the American Taxpayer Relief Act of 2012, which was signed into law on January 2, 2013. This legislation retroactively reinstated the credit for increasing research and development activities, commonly referred to as the R&D Credit. We have recognized a one-time benefit in the current period for the R&D Credit we are now entitled to for the fiscal year ending September 30, 2012. Additionally, we have adjusted our effective tax rate for the remainder of the current fiscal year to reflect the estimated benefit of the R&D Credit for fiscal 2013.

We expect our effective tax rate in fiscal 2013 to be in the range of 35% to 39%, compared to a net benefit of approximately 11% in fiscal 2012. Although we believe that our tax estimates are reasonable, the ultimate tax determination involves significant judgment that is subject to audit by tax authorities in the ordinary course of business.

Six Months Ended March 31, 2013, Compared to Six Months Ended March 31, 2012

Total revenues for the six months ended March 31, 2013 were $90.9 million, compared to $74.3 million for the six months ended March 31, 2012, a $16.5 million, or 22.3% increase, primarily due to an increase in proprietary unit sales in both new and existing markets.

Gaming Operations - Participation Revenue

Oklahoma gaming revenues were $31.2 million in the six months ended March 31, 2013, compared to $31.6 million in the six months ended March 31, 2012, a decrease of $0.5 million, or 1.4%. The majority of the decrease is a result of increased activity at our largest customer's facilities in 2012 compared to 2013. End of period unit counts in Oklahoma as of March 31, 2013 were 8,173 compared to 7,679 as of March 31, 2012, a 494 unit, or 6.4% increase.

Washington gaming revenues were $7.5 million in the six months ended March 31, 2013, compared to $4.7 million in the six months ended March 31, . . .

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