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Sloppy quarter and lower guidance. Our low confidence in this Q was confirmed but long-term positive outlook remains intact.

"I am pleased with the acceptance of our recent innovation, including the new ALPHA T platform, the strength of our new gaming operations products, and the interest in our iVIEW DM player-centric networked gaming system. We continue to see excellent growth opportunities for Bally in Canada, Italy, Australia, Mexico, New York, and selected other U.S. and international jurisdictions."

- Richard M. Haddrill, the Company's Chief Executive Officer

HIGHLIGHTS FROM THE RELEASE 

  • "During the second quarter, we purchased approximately 475,000 of our shares for $18 million"
  • "Calendar 2010 represented one of the toughest environments for replacement and new game sales. As we look towards calendar 2011 and beyond, we expect to see both an improvement in replacement demand and jurisdictional expansions."
  • "Our lower than normal revenue levels in the first half of fiscal 2011 have not been fair indications of our backlog, pipeline, and win-loss ratio levels, all of which continue to remain strong. Our competitive strength and positioning in Systems have never been better. The commercial rollouts of iVIEW DM and ELITE Bonusing Suite products are now beginning to take shape."
  • ASP's for new unit sales of $15,244 (+7% YoY) "primarily as a result of product mix and sales of Pro Series cabinets with ALPHA 2 technology."
  • Lower GM's on gaming equipment "due to higher costs for the initial production runs of the Pro Series cabinets."
  • Lower new unit sales due to "continued sluggish North America replacement market and fewer new openings and expansions during the quarter."
  • "New unit sales to international customers were 34% of total new-unit shipments"
  • Systems "maintenance revenues increased to a record $16 million"
  • "The effective tax rate for the three months ended December 31, 2010 was 20 percent, which benefited from certain discrete items including the retroactive reinstatement of the U.S. research and development tax credit to January 1, 2010 and conclusion of the IRS audit for 2003 to 2005."
  • 2011 Guidance:
    • "Diluted EPS from continuing operations to $2.00 to $2.15 (down from $2.30), which includes $0.89 per diluted share earned during the first half of fiscal 2011. This Diluted EPS guidance range continues to assume a challenging North American replacement market, as well as limited new casino openings and expansions during the period."
    • "Total systems revenues of $205 million to $215 million, including systems maintenance revenues of $63 million to $65 million."

CONF CALL NOTES

  • First quarter ASP's included some custom sales. Over 1/2 of quarterly shipments were Pro Series cabinets.
  • Systems revenues were at the lower end of their expectations.  Systems have been impacted by longer decision making by their customers. Have signed commitments for 2/3rds of their 2H2011 systems revenues.
  • 35-36% tax rate for the balance of FY2011
  • Inventory increased as a result of an increase in new materials, the new Pro Series capital, and the Italian units due to be shipped later this year
  • Have a backlog of 500 units for Vegas Hits game
  • 2,305 of their units sold were to clients in NA - 78% were replacement sales
  • Estimate their NA shipshare at 17%. Their MD units are on a leasing model and therefore impact their shipshare.
  • Continue to focus on international expansion opportunities. Expect approval to sell their games in Australia within 30 days. 
  • In Italy, most of their units will be recurring revenues
  • 75% of their domestic sales were video product
  • Their first Alpha 2 games will ship this quarter
  • Getting great feedback from customers on their new Pro Series cabinet
  • Sense some optimism from their customers but remain cautious on replacement sales for FY2011
  • Excited about FY2012.  Think that the IL situation is a delay, not a cancellation
  • Acqueduct should open in the summer of 2011
  • iVIEW DM and Bonusing suite products are at a stage where the major challenges are behind them. Thinks that they have reached the tipping point for server based gaming.  Expect a good portion of their systems revenue growth to come from international sources (which have more than doubled over the last 3 years)
  • Continue to gain traction with small casinos to their windows based system
  • Reasons for the 15 cent guide-down:
    • Canada revenues won't begin until late Calender 2011
    • Lower systems revenues
    • Deferral of Italy due to some regulatory delays as well as more recurring units. They expected that 1,800 units would be for sale in FY2011 (40% of their total games). However, given the stronger yields, most of their games will be recurring revenue with very little profit in fiscal 2011

Q&A

  • Thought that Canada systems business would begin to be recorded in F4Q11
  • Their EPS range does assume a buyback of $20MM/Q
  • They are finding that the larger deals are taking longer than expected to execute. No deals have been lost; they are just taking longer to execute. The delays aren't price related but boards are taking longer to approve projects.
  • The Canada system deal hasn't been signed yet - and they don't expect signing for a few more months
  • They are confident in signing some more iVIEW DM deals over the next 90 days and should see revenues from that in the March Q
  • Interest in DM is much stronger than the interest they had in regular iVIEW
  • Reduction in their guidance range is due to far fewer uncertainties. Reduced the systems guidance mostly due to Canada and because of a slightly weaker 1H11.
  • A signed commitment on systems means that its a done deal but it could slip, timing-wise
  • They included the 5 cent gain from the R&D tax credit
  • No caps on their new WAP games
  • No change in their R&D budget
  • Not many Cash Spins have been placed internationally.  They have sold it in a few markets because you can't do participation in many markets.
  • The Vegas Hits backlog is domestic only
  • When will they have critical mass in their Alpha 2 titles? - 1/3 of shipments were the new cabinet and would expect that % of quarterly shipments to increase going forward. By the June quarter they should have a critical mass of games.
  • Had a sizable order for new units just recently. Feel pretty good about their guidance.
  • Washington and Mexico drove some of the additions to their gaming operations install base
  • Gun Lake was in the quarter and shipped the balance of their Cosmo units this quarter- most of Cosmo were shipped last quarter.
  • 505 new units - 78% were replacements
  • Acqueduct - will be July- October opening ... could be in 2 installments. Will not be in this fiscal year.
  • Total capex this year will be up year over year.  Games ops capex was $44MM almost 2x what it was in 2010 due to Cash Spin deployment and Italy games.