EGMI: Merriman Curhan Ford Update

Revenue Acceleration and Strong Pipeline Provide Increased Confidence into 2010 Projections

· We reiterate our Buy rating and $3-4 valuation range on EGMI. Revenue growth accelerated in 3Q09 (up 39% Q/Q) and our visibility into 2010 improved significantly. The core promotions segment remains a steady grower, and starting in 4Q09, new products (iQuiz and ePlay cards) in new verticals (edutainment and gaming) should contribute to revenue as well. Poken , China , lottery and other lottery opportunities in U.S. and Europe are not included in our 2010 expectations and we view these as valuable options imbedded in the stock. Regardless of the success of these, we believe that our current projections for 40% EPS growth in 2009 and 2010 justify higher valuation multiples and a $3-4 price per share valuation range.

· Record 3Q09 results included revenue of $4.2M (up 39% Q/Q) which was ahead of our and the consensus estimate of $4.1M. EPS of $0.04 beat our and the consensus estimate of $0.03 and increased $0.01 from 2Q09. The company’s cash balance increased $1.4M sequentially and $4.5M YTD to $12.7M. EGC also has $8.1M in investments on the balance sheet.

· Management reiterated FY09 guidance. FY09 guidance of $16M in revenue implies significant sequential growth in 4Q09 of $1.5M, or 35%, for a total of $5.8M. EGC will be able to hit $16M in revenues from its current backlog alone, which gives us great confidence in 4Q09 projections. As we look into FY10, there is the potential for significant growth as new products and distribution deals begin to ramp. The company did not give FY10 guidance; however, with a 4Q09 revenue run rate at $5.8M, or over $23M per year, we have increased visibility and confidence in our FY10 projections for over $27M in revenue.

· Growth in gross profit dollars remains a key metric. During 3Q09, gross profit increased 44% Y/Y and 35% Q/Q to $3.3 million with margin of 78% (up 262bps Y/Y). This strength in margins was driven primarily by growth in license fees, which inhibit low costs. With the launch of the iQuiz and ePlay cards, gross margins will decline but gross profit dollars should continue to grow.

· Strong acceleration in revenue growth should continue in FY10. As we anticipated, EGC experienced substantial growth of 39% on a sequential basis, primarily driven by repeat business in the promotions segment, which still represents 80% of revenue. Starting in 4Q09, however, we should start seeing contributions from new products and distribution deals in verticals such as education/entertainment and gaming. Another 35% Q/Q increase in revenue is expected in 4Q09, driven by the launch of the first iQuiz cards in the UK .

· Significant expansion of product mix in 2010. EGC has several products in its pipeline that will begin to rollout in the early part of 2010. Management suggested that compared to 2009, there will be 3x the product base and 2x the distribution base in 2010. Some of the key drivers in 2010 are 1) the first shipments of iQuiz cards for the UK in 4Q09 and the U.S. in 1H10, 2) iQuiz and ePlay cards based on a popular TV show in the U.S. in 1Q10, 3) Thomas ’n Friends iQuiz cards in late 1Q10, 4) Poken distribution deal announcements in 1Q10, 5) a joint venture with China LotSynergy in China welfare lottery in 2H10, 6) new cards for betting shops in Eastern Europe (owned by Stanley Leisure) and 7) other U.S. and European lottery opportunities.

– Source: Richard Fetyko (646) 292-1446 rfetyko@mcfco.com

Disclosure:  LONG EGMI