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IGT INVESTOR DAY - PART THREE

Q/A

What did they learn from their entry and exit into and out of UK & Japan?

  • In Japan and UK, there was very little that could be leveraged outside that markets so that's why they decided to exit those markets.  It's really about trying to leverage what they do well and bring that into those markets.
  • What are they spending on R&D efforts internationally? It's minor and included in $200MM budget.  It's more about skinning their existing content and localizing it rather then developing content from scratch. 

Timeline from market studies to localize content to put out new content

  • They are already re-skinning existing math to local tastes

How to get to $2.5BN revenue?

  • Outsized participation from the international side, which comes at a lower margin.  Interactive contribution also has a lower margin. They will need to be more aggressive internationally to gain share.  The efficiencies will come from all the back-office support functions by consolidating all the international operating systems.  Doing more market research will get them a higher success rate on the hit games, so they put out less flops by having better inputs into the product development process.  Used to have each studio have different product development tools and they are going to globalize that process.
  • ETG expertise/ lack thereof
    • Their ETGs are performing well at Acqueduct.  Their strategy is to identify good platforms and take them globally.  They had historically built games for markets - like the Australian games - and they are looking to change that and bring those low cost boxes into other markets. 
  • Investment required to grow their market share in various markets (LATAM/Asia) will not degrade their margins
  • Operating profit in Australia has significantly improved over the last 5 years.  It used to be a B/E division and is now one of the largest international contributors.
  • SAP implementation/ disruption?
    • There will be no disruption.  Berg did it at all his other companies (did it 3 times before).  Will get the implementation done in 18 months.  SAP will allow them to see how they are doing real time - and course correct - plan discounts / etc; they don't have that expertise currently.  Rolling out these systems is complex and that's why they hired Berg.

Energizing Interactive (Gideon Bierer - EVP New Media)

  • On track with plan. Few key pillars over the next 3-5 years.
    • A fews years ago, 95% of revenue in this division came from UK
    • Produced 2x as many games this year vs. last year (online casino)
    • Mobile gaming: acquired a Million to One (small tuck in) -  more then tripled their business.  Transitioned their business from feature to smartphone business.
    • Entered sports, bingo, and poker business through the Entraction acquisition.  Have a turnkey business for clients that want to get online (white label service) quickly.
  • Markets
    • Growing in UK
    • Entered into Canada in June 2011 when online was legalized; IGT should have the highest market share in online casino in Canada
    • Denmark: Legalizes Jan 1. On track to be the #1 share for online GGR casino revenue.  All the Entraction offerings have been taken up by that market.
    • Italy is in the process of legalizing online gaming.  Expect to go live March 2012
  • Customers
    • Serve 13 of the top 20 operators; landed customers in 6 markets (signed contracts), have 37 new customers.
  • Go to market strategy
    • Most of the markets that they are targeting are either in final legalization stages or just going live.  Each market is different in terms of strategy / offerings/ etc. 
    • Most of their games are made for all 3 platforms: Mobile. online, and tablets/PCs
  • Channels
    • Working on linking their land and online offerings
    • Poker and Casino are their leading offerings and that's where most of their money is going
    • Looking to strengthen the offering in sports and bingo offering
  • IGT's unique value proposition
    • Content for online games
    • Compliance position
    • Many online only guys don't have the same compliance standpoint and have no presence in casinos so they don't offer convergence products (WMS already offers this)
  • Strategic goals
    • Drive top and bottom line growth
    • Market expansion, partnerships, product investment, gain customers
    • Achieve a strong position in regulated markets
    • Leading supplier to land based casinos (very small market now)
    • Tier 1 in all verticals (this is revenue share model)

Next Generation Platforms/IGT Cloud Transformation (Chris Satchell - CTO)

  • Why does cloud matter?
    • Operators need more yield for their floor (better analytics/ROIC from floors)
    • Makes it easier for clients to access IGT content
  • What is a cloud
    • Data center (infrastructure as a service)
    • Development in the cloud (platform as a service)
    • Software as a service (ala salesforce)
  • So their strategy is developing private clouds for their clients which allows the clients to outsource their infrastructure, centralize management, and capital expense would become operating expense.  This is particularly nice for the really small European casinos (casinos that run in the cloud vs. locally at casinos) by putting the casino content in the cloud and player experiences in the cloud.
  • Reduces the acquisition cost of systems and game content for small operators (outsources a lot of the casino operation to IGT)
  • Value proposition of Cloud?
    • Reduces TCO and Capex (technology expense of operating casino systems)
    • "Deeper connection to patrons" by linking online activity of patrons and land based activity
    • Profitable access to new technology (pay as you go model/pay as you consume  - i.e. easier and more seamless upgrades)
    • For Patrons (reward experience, targeted marketing and content push)
    • Increases their global addressable market share for IGT solutions; decreases friction for IGT content and services delivery; generate new recurring revenue streams.
  • Timeline: Showed this to 35 operators in Oct11' at G2E. Launched first infrastructure test in Nevada in Dec 11. Signed 4 casino customers to trial the product; at G2E 2012, they plan to have the first commercial service available

Q&A for cloud/interactive parts

  • How are they going to make money on this?
    • Too early to talk about pricing money.  But the plan is to pay for services on a scaled basis (depending on who is hosting the data center, how many services they are delivering).  The traditional ways to pay for this is on a transactional basis - traditionally, not a revenue but an as you use it model.  Customers like it since it doesn't require upfront investment.
  • How much does IGT need to spend on this on an R&D basis?
    • It's part of their R&D budget.  They already have cloud servers that they use.
  • Regulatory reactions?
    • Nevada has deliberately changed regulations to allow for off-site hosting.  They are very forward looking.  In theory, it gives regulators more control in auditing data.  Nevada will be a good test bed for them. 
    • A lot of the places that they are looking at though are international where the regulator and the customer is the same client
  • There is a huge market for clients that can't do sbX because their capital investment is just too large (they will announce a customer that has lots of locations with 100-200 machines) so this is much more feasible

Financials (Pat Cavanaugh - CFO)

  • Eliminated about $200MM in SG&A. Only increase will be tied to uplifts in revenues.
  • Continuing to reduce their leverage by using their excess cash towards the bank leverage calculation (part of their covenant agreement in terms of calculating leverage)
  • Continue to be ROIC focused and be good stewards of capital
  • Got out of non-profitable business and restructured other business relationships that weren't favorable in past forms
  • Will invest in growth opportunities that support core and accelerated growth
  • Have been able to improve margins in a flat revenue environment.  Believe that some growth in revenues will deliver compelling bottom line growth.
  • Almost have $2/share of cash on the balance sheet.  Expect to generate significant cash over the next 3 years ($2BN in operating cash flow) : uses: ($700MM of capex; $350MM of strategic investments, $500MM of returns to shareholders; $700MM of debt reduction)

Q&A

  • $500MM of growth in revenues will come from uptick in the US economy; jurisdictional expansion (50%) and 50% will come from emerging businesses and market share expansion internationally
  • Domestic market- status quo in the domestic market - tick up in the replacement market.  If things go their way, they think that hardware will be longer lived but driven by recurring revenues.
  • Continue to take share in the domestic market (and replacement cycle).  Systems growth will be in the cloud. 
  • Redirecting their efficiencies in the new technologies.
  • December is seasonally softest for them. Q4 is the strongest for them.
  • Quebec and Alberta has made their awards; others are still in the RFP process
    • Canada VLT replacement gets replaced in a wholesale fashion - so they should fair really well
  • How much of the convert is already in the share count? None of it until their share price is just under $20/share... they also have a call spread... so there is no dilution until price gets to around $30/share