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MGAM > SEC Filings for MGAM > Form 10-Q on 30-Jan-2014All 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-Jan-2014

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 for the fiscal year ended September 30, 2013 filed with the Securities and Exchange Commission on November 14, 2013. 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" 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 lottery operators, and commercial bingo gaming facility operators. The Company's revenues are generated from the operation of gaming units in revenue-sharing or flat fee leasing arrangements and from the sale of gaming units and systems that feature proprietary and licensed game themes. We lease and sell our gaming units and systems in a variety of regulated markets, including slot machines, video lottery terminals and electronic bingo machines, collectively referred to as electronic gaming machines (EGMs). The Company serves gaming facilities operated by commercial and Native American casinos and derives the majority of its gaming revenue from participation arrangements or development and placement fee agreements. Under participation arrangements, the Company places EGMs and systems as well as its proprietary and other licensed game content at a customer's facility, with no specific contract period, in return for either a share of the revenues that these EGMs and systems generate or for a fixed daily lease fee. The Company enters into development and placement fee agreements to provide financing for new gaming facilities or for the expansion of existing facilities in exchange for a certain amount of floor space for a contracted period of time. 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. For more information on our development, placement and participation arrangements, please see "Results of Operations" below.

The Company also generates revenue from the sale of EGMs and systems that feature proprietary and licensed game content. We continue to seek to increase participation and for-sale revenues by expanding into additional gaming jurisdictions and seek to expand 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: 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. 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 our efforts, during the three months ended December 31, 2013 and 2012, we saw growth in both our domestic installed base and our unit sale business. We expect fiscal 2014 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 2013.

BUSINESS STRATEGY

We are currently 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 our newest higher-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 expand the scope of our market opportunity.

Our growing content library 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, higher-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. The development of high-performing content also enables us to continue to effectively serve our existing customers, as well as secure new customers by providing enhanced entertainment experiences for the game players.


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 newer and higher performing games. We are also investing in new markets as they become available through the licensing process.

We seek to continue 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.

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 higher-performing games and expanding our installed base, and further expanding the number of markets where we are licensed.


RESULTS OF OPERATIONS

Three Months Ended December 31, 2013 Compared to Three Months Ended December 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
                                    December 31, 2013      December 31, 2012    % change
                                                (in thousands)
REVENUES:
Gaming operations                 $            33,608    $            29,974       12.1 %
Gaming equipment and system sales              24,891                 14,004       77.7 %
Other                                             660                    324      103.7 %
Total revenues                    $            59,159    $            44,302       33.5 %




                                                             Three Months Ended
                                           December 31, 2013       December 31, 2012      % change
                                                        (in thousands)
Revenues
Gaming Operations
Participation revenue                    $            29,531     $            26,163        12.9  %
Lottery                                                4,077                   3,811         7.0  %
Gaming Equipment and Systems Sales
Player terminal and equipment sales                   23,979                  12,685        89.0  %
Systems sales                                            912                   1,319       (30.9 )%
Other Revenue                                            660                     324       103.7  %
Total Revenues                                        59,159                  44,302        33.5  %
Operating Costs and Expenses
Cost of gaming operations revenue                      3,850                   3,274        17.6  %
Cost of equipment and systems sales                   11,825                   6,185        91.2  %
Selling, general and administrative                   13,718                  11,343        20.9  %
Research and development                               4,308                   4,093         5.3  %
Amortization and depreciation                         10,436                   7,964        31.0  %
Other income (expense), net                             (152 )                  (116 )      31.0  %

End-of-period domestic installed player terminal base

                                                             Three Months Ended
                                            December 31, 2013     December 31, 2012     % Change
Domestic participation units, by regions
East                                                    1,647                 1,537         7.2 %
Central (a)                                             9,107                 8,511         7.0 %
West                                                    1,903                 1,140        66.9 %
Total domestic participation units                     12,657                11,188        13.1 %

(a) Player terminals located in Oklahoma is included in this data, which included 8,226 units as of December 31, 2013, and 8,044 units as of December 31, 2012.


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

                          December 31, 2013                            December 31, 2012
              Number of   Participation     % of Total      Number    Participation     % of Total                Expiration
                units        revenue          Revenue      of units      revenue          Revenue      Fee ranges   range
                          (in thousands)                              (in thousands)

Development     2,941   $          5,754       10 %         3,839   $          8,342       19 %        20% - 30%  March 2015
Agreement                                                                                                         - Oct 2018
Placement       3,352              4,542        8 %         2,201              3,428        8 %           20%     April 2014
Agreement                                                                                                         - Dec 2017
Participation   6,364             19,235       33 %         5,168             14,393       32 %         7% - 30%          NA
Agreement
Total          12,657   $         29,531       50 %        11,208   $         26,163       59 %

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. See also, Note 4 of the Condensed Consolidated Financial Statements, "Development and Placement Fee Agreements".

Three Months Ended December 31, 2013 compared to Three Months Ended December 31, 2012
Total revenues for the three months ended December 31, 2013 were $59.2 million, compared to $44.3 million for the three months ended December 31, 2012, a $14.9 million, or 33.5% increase, primarily due to an increase in proprietary unit sales and participation revenue in both new and existing markets.

Gaming Operations - Participation Revenue

         East: Gaming revenues from eastern regions were $4.5 million in the
          three months ended December 31, 2013, compared to $3.4 million in the
          three months ended December 31, 2012, an increase of $1.1 million, or
          33%, due to new additions of 110 placement units. Participation units
          as of the December 31, 2013 were 1,647 compared to 1,537 as of
          December 31, 2012. The majority of the increase was related to new
          placement units in Michigan and Florida offset by 221 unit sold out of
          the installed base in Alabama which were previously on a revenue share
          arrangement.



         Central: Gaming revenues from the central region were $16.3 million in
          the three months ended December 31, 2013, compared to $16.6 million in
          the three months ended December 31, 2012, a decrease of $0.3 million,
          or 1.9%, primarily due to bad weather conditions in the Central region
          during the three months ended December 31, 2013. Participation units,
          excluding Oklahoma, as of the three months ended December 31, 2013 were
          881 compared to 467 as of December 31, 2012. The majority of the
          increase was related to a unit count increase in Texas.



               Oklahoma: Participation revenue generated from Oklahoma was $13.1
                million in the three months ended December 31, 2013, compared to
                $15.0 million in the three months ended December 31, 2012, a
                decrease of $1.8 million, or 12.3%, primarily attributable to
                severe weather conditions in Oklahoma and north Texas, including
                the Dallas-Fort Worth area, during the three months ended
                December 31, 2013. Participation units as of December 31, 2013
                were 8,226 compared to 8,044 as of December 31, 2012 due to an
                increase in unit placements at both new and existing casinos.



         West: Gaming revenues from the western region were $8.8 million in the
          three months ended December 31, 2013, compared to $6.0 million in the
          three months ended December 31, 2012, an increase of $2.7 million, or
          45.2%, mainly due to an increase in 763 participation units,
          predominantly in Nevada, California


and Washington. Participation units as of the three months ended December 31, 2013 were 1,903 compared to 1,140 as of December 31, 2012.


Gaming Operations - Lottery

Revenues from the New York Lottery system increased by $266,000, or 7.0%, to $4.1 million in the three months ended December 31, 2013 from $3.8 million in the three months ended December 31, 2012. The increase in New York Lottery system revenue is attributable to an increase in the total number of customer units, which were approximately 18,100 as of December 31, 2013 and 17,200 as of December 31, 2012.

Gaming Equipment and System Sales

Total player terminal and equipment sales were $24.0 million for the three months ended December 31, 2013, compared to $12.7 million during the three months ended December 31, 2012, an increase of $11.3 million, or 89.0%. Player terminal and equipment license sales in the three months ended December 31, 2013 included the sale of 1,375 proprietary units, compared to sales of 644 proprietary units in the three months ended December 31, 2012. The player terminal and equipment sales increase is attributable to continued growth in new markets and continued penetration into existing markets as well as a large sale to an existing customer in Alabama. Player terminal and equipment license sales also include $101,000 and $637,000 related to deferred revenue recognized during the three months ended December 31, 2013 and the three months ended December 31, 2012, respectively, due to final execution of deliverables or mutual agreement to changes in contract terms.

Systems sales revenue for the three months ended December 31, 2013 was $912,000 compared to $1.3 million for the three months ended December 31, 2012. The decrease is the result of decline in stand alone license and parts sales.

Other Revenue

Other sales revenue was $660,000 in the three months ended December 31, 2013, compared to $324,000 in the three months ended December 31, 2012, a 103.7% increase. This increase relates to a increase of maintenance and service contract revenue in the three months ended December 31, 2013.

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 $576,000, or 17.6%, to $3.9 million in the three months ended December 31, 2013, from $3.3 million in the three months ended December 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 $5.6 million, or 91.2%, to $11.8 million in the three months ended December 31, 2013, from $6.2 million in the three months ended December 31, 2012, primarily due to the increase in player terminal equipment sales. Costs of revenues related to player terminal sales were $11.3 million and $5.6 million in the three months ended December 31, 2013 and the three months ended December 31, 2012, respectively. Cost of equipment and system sales in the three months ended December 31, 2013 includes $513,000 related to the sale of gaming equipment during the period and $32,000 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 December 31, 2012 includes $285,000 related to the sale of gaming equipment during the period and $287,000 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, increased approximately $2.4 million, or 20.9%, to $13.7 million in the three months ended December 31, 2013, from $11.3 million in the three months ended December 31, 2012. This increase was primarily a result of an increase in salaries and wages and employee benefits of approximately 2.8 million offset by a reduction in legal and professional expense of approximately $0.6 million. Employee benefits include insurance claims under the Company's self-insured plan, which increased approximately $0.8 million compared the prior two year quarterly average claim amount during the quarter.

Research & Development


We conduct research and development activities primarily to develop new gaming systems, gaming engines, casino data management systems, casino central monitoring systems, video lottery outcome determination systems, gaming platforms, and gaming content and to add enhancements to our existing product lines. We believe our ability to deliver differentiated, appealing products and services to the marketplace is based on our research and development investments, and expect to continue to make such investments in the future. These research and development costs consist primarily of salaries and benefits, consulting fees, game lab testing fees, and an allocation of corporate facilities costs related to these activities. Once the technological feasibility of a project has been established, it is transferred from research to development, and capitalization of development costs begins until the product is available for general release.

Research and development expenses increased approximately $215,000, or 5.3%, to $4.3 million in the three months ended December 31, 2013, from $4.1 million in the three months ended December 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.

Amortization and Depreciation

Depreciation expense increased $2.1 million, or 32.0%, to $8.7 million in the three months ended December 31, 2013, from $6.6 million in the three months ended December 31, 2012, primarily as a result of continued increases in installed base.

Amortization expense increased $368,000, or 26.7%, to $1.7 million in the three months ended December 31, 2013, compared to $1.4 million in the three months ended December 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 $79,000, or 46.5%, to $91,000 in the three months ended December 31, 2013, from $170,000 in the three months ended December 31, 2012 due to reduced outstanding note receivable balances. During the three months ended December 31, 2013, we recorded imputed interest of $54,000 relating to development agreements with an imputed interest rate range of 2.96% to 5.25%, compared to $146,000 in the three months ended December 31, 2012 with an imputed interest rate range of 2.90 to 9.00%.

Interest expense decreased $38,000, or 12.8%, to $258,000 in the three months ended December 31, 2013, from $296,000 in the three months ended December 31, 2012 due to a reduction in interest rates charged under our Credit Agreement and a reduction in the outstanding debt balance.

Income Taxes

Income tax expense increased to $5.3 million in the three months ended December 31, 2013, compared to an expense of $4.2 million in the three months ended December 31, 2012. These figures represent an effective income tax rate of 35.8% and 37.2% in the three months ended December 31, 2013 and 2012, respectively.

We expect our effective tax rate in fiscal 2014 to be in the range of 36% to 37%. 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.

RECENT ACCOUNTING PRONOUNCEMENTS

We monitor new generally accepted accounting principles and disclosure reporting requirements issued by the SEC and other standard setting agencies. Recently issued accounting standards affecting our financial results are described in

Part I, Item 1. Financial Information - Note 2 of the Notes to Condensed
Consolidated Financial Statements "Significant Accounting Policies and Use of Estimates".

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

A description of our critical accounting policies can be found in "Part II, Item
7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended September 30, 2013. There were no material changes to those policies during the three months ended December 31, 2013.


LIQUIDITY AND CAPITAL RESOURCES

Selected Financial Information
                           December 31, 2013      September 30, 2013
                                         (In thousands)
Cash and Cash equivalents $           112,464    $            102,632
Debt                                   28,675                  29,600

Working capital
Current assets                        169,670                 156,816
Current liabilities                    34,052                  33,349
Working capital           $           135,618    $            123,467

Working Capital

As of December 31, 2013, we had $112.5 million in unrestricted cash and cash equivalents, compared to $102.6 million as of September 30, 2013. As of December 31, 2013 and September 30, 2013, we had approximately $32.9 million and $26.6 million, respectively, in accounts receivable. Our working capital as of December 31, 2013 was $135.6 million, compared to a working capital of $123.5 million at September 30, 2013. The increase in working capital was primarily the result of an increase in cash collections from notes and accounts receivable and the exercise of stock options, as well as an increase in accounts receivable due to increased sales volumes.

Our principal sources of liquidity have been cash generated by operations, available cash and cash equivalents, and amounts available under our Credit Agreement. Absent any significant change in market condition, we expect anticipated working capital and capital expenditure requirements for the next twelve months will be funded by these sources. There can be no assurance, however, that we will continue to generate cash flows at or above current levels or that our Credit Agreement and other sources of capital will be available to us in the future.

As of December 31, 2013, our total contractual cash obligations were as follows (in thousands):

                                                    Payments due by period
. . .
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