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IGT hosted a series of presentations at G2E.  The new products looked very good.  CityCenter roll out of SBG not going well.  “Wheel of Fortune” will face a lot of competition from BYI.  Here are our notes.

GENERAL PRESENTATION

The company has a tendency to be silo focused but they are working very hard to break those silos down.  They are setting “leaner, meaner" organizational goals.

The primary goal is to manage their asset base rigorously. Having more interoperability is a very important component of customer service. They are focused on protecting their market share and growing revenues.

  • Focused on improving performance of their games
  • They are preparing for a rebound
  • Higher conversion of R+D to revenue

Management is very happy with their share this quarter and hoping they will maintain that going forward.

In the long term:

  • Focusing on diversifying their revenue base (beyond Wheel of Fortune too)
  • Outsized revenue growth
  • Stimulating replacement demand (using balance sheet and producing better content)

2010 goals:

  • Clients today are focused on enhancing performance today - not 5 years out (think they are referring to failure of SB)
  • Focusing on new markets - Italy, Brazil and China.
  • Focus on their scale and the operating leverage that should come with that.

Changes that they have made so far to ensure that they maximize their ROI on R+D:

  • Created smaller studios focused on specific products.
  • No more new platforms for every theme on the game ops side.  Everything will be on the same platform which is reusable.

New titles they are excited about:

  • “Sex and the City”
  • “American Idol”
  • “Amazing Race”
  • Center stage series - entirely reconfigurable, basically a huge display over five seats.  "Movie theatre style concept". 103" and 70" displays.  Have 4-5 titles in the works.  First one is Wheel of Fortune, American Idol is another.

MLD product "dynamix brand" only manufacturer that can have an all in one box that can be a 3,4, reel game or a video poker game. These games are consistently earning above floor average.  IGT is focusing on renewing the content on those devices and introducing new feature. This is the new server based platform - most exciting thing.

Future product:

  • Improving their time to market - which lets them know if the game will be a hit earlier in the process - rationalizing their platforms - allows them to put their content across more platforms helping them save money

Marketing:

  • A lull like this allows you to rethink your strategy
  • On the sales side they have restructured around the customer, now they have one person per client that can talk about all of their products.  Still organized to sell and take orders at the property level but also have corporate level relationship managers.
  • Branding project around "IGT".  

Government Relations - US market opportunities:

  • 940,000 legal installed games in new America in ‘09
  • Have not exercised all the legal potential to install games "150k" games in jurisdictions like Kansas, California and Illinois
  • Think that 75k machines can be installed in the near term.
  • 26 states with new budget shortfalls now and 2010 is an election year - so he thinks that it’s easier to vote for gaming than higher taxes.
  • Approved markets with expansion opportunities: MD,  CA, KS, IL, FL
  • Potential markets: OH, TC, AL, NH

International opportunities:

  • Casinos: two openings in Singapore, Rosario in South America
  • Longer term: Philippines in 2012/2013 (Manila Bay); Taiwan was close but voted no; Japan may potentially legalize, project starting in Hungary and Spain - early stage

2010 opportunities for VLT:

  • Italy - 56,697 units (14% of existing AWP) converting to VLT as part of earthquake relief effort. Pays (upfront) 800mm euros in new tax revenues in order to get license.  IGT is in discussions with licensed operators to see how they can participate
  • Longer term: Brazil has a bill currently under consideration.  Vote in may 2010 which could legalize gaming

Internet gaming (primarily a UK opportunity):

  • Wager works: a content provider in UK and emerging European markets (Spain, France, Italy)
  • Offers internet, digital TV and mobile gaming
  • Longer term Africa/Australia and even the US is possible

For 2010 they are focused on controlling costs until the market recovers to get to 30% operating margins.  IGT is focused on reducing production costs, standardization, and content.  Took $50mm out of material and labor costs this year on game production.  Hard to see with depressed volumes.  When volume comes back there will be big margin upside.

Next few years they will focus on reducing leverage from 3.5x to under 2x (2.5x by next year). They will continue to do equipment finances for customers.

Manically focused on what they can control until times get better.

Q+A:

  • How is the executive team compensated? 50/50: revenue growth and operating income growth.  Lower down its more ROI focused on things like reduction of working capital, win per unit, margin expansion on for sale
  • R+D: pull money more towards mega jackpot product.  Turn the investment in server based gaming to for sale and jackpot products
  • How do they benchmark conversion of R+D to revenues?  In the past they didn't - only looked at R+D/revenues.  They are focused on how much they spend that never results in a revenue generating product.  Killing bad projects earlier.  Basically what percentage of projects is generating money?  They are doing more market research and analysis now too
  • They are using the balance sheet more to drive sales?  Their balance sheet allows them to do it on a larger scale than competitors.  Have $175mm out to casinos (for development).  Want to be more creative on just lending directly to game ops.  More creative pricing, more leasing, more partnership lending
  • There is not much M+A in the near term/any divestitures.  Expect some cautious investments in tuck in technologies for core business but also video lottery and remote gaming.  Have no sacred cows at IGT - if they have bad business they will either get rid of them or fix them. (A la walker digital)
  • Replacements for next 12 months: bottom end of guidance assumes replacements like ‘09. High end/"best case" think that it’s like last Q.  No indication yet that 2010 will better than 2009
  • Server-based gaming's ability to stimulate demand?  High degrees of interest, clear view on how they would use it.  BUT given the economy, they are now focusing on bridge products (sounds just like BYI)

R+D center in Beijing.  Interaction between on and offsite R+D.  In China there are 500k graduating engineers yearly vs 69k in the USA.  The cost of an engineer in China is 45% of the cost of a US engineer.

  • There are big opportunities to hire amazing people there.  The China center is embedded across all their platforms.  So they are fully integrated
  • So will they also be manufacturing in China?  IP protection issues?  Portion the code/responsibility so they eliminate a lot of the IP risk.  Purchase a lot of material from Asia (50-55% from low cost suppliers)
  • Subcontracting Australian product to get manufactured in China.  So, they are testing the waters.  They reduced their own manufacturing work force by 38% this year.  Generally trying to move to a more variable cost structure throughout the organization.

In Illinois IGT decided to go through a distributor given the nature of that market.  They have an exclusive agreement with the largest distributor in that market.  Now they are getting to know the route operators.  In other markets like Illinois they are usually one of 2-3 suppliers that survive.  Illinois is more of a 2011 relationship.  In addition, they are financing there - which they believe you need to finance to get the business.  That can be a $100mm market for them.

In Italy there are already existing shops betting parlors and more casinos-like facilities.  Have a lower priced solution (coming out of UK) and for casino option they have the Reno games.  The games must be centrally determined too.

PART TWO - Network systems presentation

Advantage: 200 installations and 200,000 EGMs

SbX:  8 installations - mostly trials

Maripose BI: 32 installations, 48k EGMs

Casinolink: international, multi-site accounts.  40 customers.  They acquired this in Jan ‘09, new markets for networked systems. Late ‘09 they will integrate SBG and in mid 2010 they will integrate the mariposa technologies.

SbX floor manager (downloading to avp) + SbX media manager - drives the service window.  All ready now

SbX is all about managing their existing real estate.  In order for it to work they need Ethernet, G2S compatible EGMs, game library and floor manager, service window and player services.  IGT's tier 1 solution is meant to be a solution (6-10/day) to conversion kits - allows you to swap out the game as soon as performance becomes poor.

Server window: allows them to customize content to each client.  Having the media manager eliminates 2k of product hardware cost - some of which they can pass down to clients.  Mid-2010 deployment.

Trial data?  It’s unclear because they didn't have a lot of content that was deployable on the box.  They won't really comment on the results/ROI - even though it’s been at Monte Carlo for almost 5 months.  The SB window is very cool and we really like their ability to also use the top LCD to real estate as well.  Can work side-by-side with next generation.

The 103 game is more about the puzzle and a community gaming. Expect to see on floors in March.  Not for sale till January 2010.  Top dollar - new high and mid denomination game.  “Alice in Wonderland” - new progressive game.  Doesn't reset each time.  “Quest for Lost City” - another fantasy progressive  - remembers where you left off.  Lots of very cool MLD games.  Introduced a transmissive element to it.  Also have 3D video slots (“Little House of Horrors” looks cool).  Multi-play - basically multi-video slots at the same time.  4 sets of 3 reels.  Average wager is 2/spin vs 50 cent average.

Reel edge: first skill-based spinning reel game.  The player can stop reels when he/she wants.  For Generation X/Y.  Seek to capture 21-35 years of age emerging customer base.  These are evolving traditionalists that have moved on to newer types of devices.

New Illinois product:  game king/poker Illinois didn't limit payouts in the state.  Can have different types of games.  Game kings, super star poker, hall of fame video games all on one box.