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“We are pleased with our operational and financial positioning for the future.  While current industry conditions remain challenging, we have a number of opportunities, both domestic and international, that are attractive and exciting for the Company. Additionally, the early acceptance of our new Pro Series cabinets has been excellent, and we continue to be pleased with the strength of our gaming operations business.”

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

HIGHLIGHTS FROM THE RELEASE

  • New game sales: 3,417 ; ASP: $15,556
    • ASP increased primarily as a result of mix, including sales of the Pro Series Cabinet
    • International unit sales were 29% of total
    • Nearly all of their units were replacement, 210 for sale (MD is on a participation basis for them vs. for sale for other suppliers)
    • Gross margin decreased to 43% due to "higher costs for the initial production runs of the Pro Series cabinets as well as write-downs related to older technology platforms.
  • Repurchased over 2MM shares since the beginning of FY2011 for $76MM
  • Gaming operations had a nice increase in install base
    • Placed over 550 units of New Vegas Hits game during the quarter
    • "Gross margin increased to 74 percent from 72 percent in the same period last year primarily due to lower jackpot expenses."
  • Systems revenues declined due to "fewer large new implementations during the quarter."
    • Gross margin increased to 77% "primarily as a result of the change in mix of products sold and an increase in maintenance revenues. Specifically, hardware sales were 34 percent of Systems revenues, and software and service sales were 31 percent, as compared to 36 percent for hardware and 35 percent for software and services in the same period last year."
    • Maintenance revenues hit $16MM
  • 2011 Business update:
    • Reiterated reduced guidance of $1.82-1.95 ($1.31 from continuing operating in the first 9 months of FY11).  The guidance doesn't include the impact of the tender refinance.

CONF CALL NOTES

  • Reason for their buyback include faith in their specific opportunities and belief in the recovery of the replacement market
  • Believe that their ship share was 18% for replacement units
    • Based on our math, it was 13% for total NA shipments
  • Operating margins have been continued to be impacted by investments in international market that will not produce revenues until 2012 and beyond
  • Higher bad debt expense due to a few international receivables
  • Effective tax rate was 36.5% - impacted by change in mix of international and domestic business. Expect their tax rate to be 35-36%.
  • Inventory increased as a result of building inventory for cabinets to be deployed to Italy once approvals are obtained
  • Premium game color:
    • Cash Wizard orders are over 700
    • Heart Spin had just started
    • Money Vault w/ USpin launched
    • Betty Boop Love Meter launched
  • 80% of domestic sales this quarter were video slots
  • Pro Curve - is the first curved LCD display - look and feel of a reel spinner in a video format is also being rolled out
  • 2/3 of the new systems installs involved the replacement of a competitor system - including the system at Grand Lisboa
  • Expect pressure on their game machines margins as they ramp up their Pro Series cabinet
  • International/ new opportunities include:
    • Italy
    • Canada
    • Australia
    • New Zealand
    • Pro-Series improvement and rollout

Q&A

  • Will have 50 titles on Pro-Series by end of the calendar year
  • Had 300bps of margin impact due to obsolescence charge. Expect game sale margins to be in mid 40's range. Longer term, expect margins to be in low to mid-50's once they are mid cycle on their Pro Series life cycle
  • Process in Italy is product approval and then installation - they don't need to do a field trial. They expect to start shipping later this calendar year. Have over 4,000 commitments mostly on participation.
  • Have 11 customers signed up for iVIEW DM now and 6 customers have iVIEW DM on banks of games
  • Feel like their opportunity on game sales is more on the margin side not ASPs as much.
  • Decrease on linked progressives has to do with more of a focus on premium fee games. They did just release two new games for the progressive product so they do expect it to trend up going forward.
  • Bad debt expense was roughly 3 cents and the obsolescence charge was 2 cents in the quarter. They do expect a sequential increase in systems revenue and replacements should increase seasonally as well next quarter.
  • Regarding systems - they are reviewing their guidance methodology and that's why the guidance range for 4Q is so wide
  • They will announce the results of the tender offer on May 6th
  • Bad debt expense was about $2MM higher than what they would expect - so that impacted SG&A a bit
  • Quarter end diluted share count was 55.527MM - buyback in the quarter was $35MM
  • On the Alpha 2 platform, their new games are exceeding performance expectations
  • What's in their other equipment sales?
    • Higher conversion kits and used games, expect to see some increases in used games going forward
  • Sales environment internationally?
    • There are economic challenges in Western Europe but the good news is that Italy will be a very solid market
    • Have been making investments in Africa which haven't panned out yet
    • Just starting to ship to Australia and New Zealand
    • Compared to last year they had a large sale to Mexico and LVS opening in Singapore
  • Expect to start generating revenue from the Canada system some time at the end of the year
  • Just received approval to ship to New South Wales - and will begin to recognize revenue in the June quarter
  • During their system user conference they were able to demonstrate some exciting applications that can run across DM - believe that will allow them to drive sales
  • Alpha 2 was 50% of their shipments. Used introductory pricing to get them moving.