International Game Technology PLC (IGT) 2001 Q2 法說會逐字稿

1 INTERNATIONAL GAME TECHNOLOGY CONFERENCE CALL

[_______________] in the market and the strong growth we are realizing in the replacement market. International revenues increased a net 1% during the quarter, IGT Australia increased 46%, it is a success for their LA 4 product line and New York obtained another 60% improvement on a quarter over quarter basis. These gains were offset by a 21% decline at Barcrest, remembering that last year Barcrest had a record quarter with over 3,300 games sold into Spain. Compared to our first quarter, which ended in December product sales were up almost 29 million or 15%. Here to date product sales were at 413.5 million or an 81% improvement over last year, again related to the introduction of our new video products, the opening of the California Market and strong shillings in Australia and Europe. As our press release mentioned IGT shipped 30,400 machines as compared to 22,700 last year, that is an improvement of 34%. Some of the major sales in the quarter included our Texas Station in Las Vegas for 1,500 machines where we saw an 80% share, and in California there were several major shipments, almost 1,300 games to the San Manuel Casino where we had 100% 2 market share. The [_______________] Casino with 700 machines and we had 85% share, and then the [_______________] Casino with 700 was about 60% share. Definitely questions today on average price in the quarter, we did seek consolidated average price of just under 7,300 per game, that's a 39% improvement over last year. That relates to improvements in both international markets and domestic markets. Domestically the increase in average price is primarily due to product mix. We are seeing higher volume of sales of our newer platform products versus the legacy products, and we also realized a higher proportion of IGF system sales in the quarter. Internationally the increase in average price from the second quarter of last year relates to strong sales in Australia. Moving onto product margins scored today, gross product margins were 87 million or at 39% compared to 43.4 million or 37% last year, again at 99% increase. Domestic margins were up 40% this year compared to 39% a year ago and 40% consistent with the December quarter. International margins were 36% in the current period versus 33% last year and 41% in the December quarter. The increase of the prior 3 is due to the leverage we are realizing from Australia's strong performance this year and then the deluded impact of the high Spanish sales through Barcrest last year. Though Net Net, the reduction and margins from the December quarter to the March quarter is really related to international and the fact that we have lower high margin Australia sales. The [_______________] margins were 164 million or 40% compared to 85 million or 37% last year. Domestic margins remained same year over year and international margins improves began related to Australia and Barcrest. Moving on to our gaming operations system segment revenues to a new record at 126 million for the current quarter that compares to 99 million last year, or an increase of 27%. The total installed base increased to 22,600 machines at the end of March compared to 16,800 last year. We introduced several new IGT systems including video jeopardy, "The Addams Family", and we saw continued growth in the video river fortune and "I Dream of Jeannie." Same operations for the year total 235 million representing a 20% growth on a year over year basis. Those profits on the gaming operation segments before the inclusion of our joint 4 venture was 49 million or 54% compared to 41 million or 56% last year. These bargains were impacted by lower interest rates and the fed did cut rates 3 times during that quarter, and we saw total game operations margins of 67.2% that compares to 68.9% at the end of December and the decline is really totally related to the interest rates. Joint venture revenue, which for accounting purposes are reported net of expenses grew to 35 million during the quarter compared to 26 million in the prior year. Operating income also set a new record in the second quarter at 99.6 million or 29%of total revenues, this compares to 54.2 million or 25% in the second quarter of last year. This dramatic improvement margins resulted from markedly higher volumes, significant growth in our game up segments which was then partially offset by higher SG&A expenses, we are seeing higher costs in legal and compliance and then we had some variable costs further up, whether it's commissions or incentives, are directly related to higher sales volume, but that expense increased primarily from the overall higher sales. For the year operating income grew to 188 million or 29% of total revenue, that's 81% year over year improvement. 5 We saw operating expenses as a percent of total revenue at 21 % this year compared to 26% last year, still a pretty significant improvement in the efficiency of our earnings. Not really much to say about other income and expense, the net expense for the quarter at 14.5 million, remains very consistent on a year over year basis. We reported a tax rate of 37% in the quarter and we expect that to be maintained throughout the remainder of the year. Just a few comments on the balance sheet before I turn it back over to Tom. Cash at the end of the quarter was 215 million versus 245 million at the end of the year we did see some [_______________] in the working capital area. Inventories increased 39 million compared to the end of fiscal 2000. Primarily, due to increased finished goods in part related to customer deliveries requested in Q3. We did 3 consolidated churns at 2.6 which is an improvement over December and consistent with our prior year-end. We are also very happy with the improvement in our raw material churns over the last 6 months. Raw material churns reached 5 times by the end of March and that compares to 4 churns at the end of the year. So, we are very pleased by that. Again, consolidate churns of 6 2.6 at the end of March and that compares to 2.5 at the end of December and 2.6 in September. Receivables, total accounts, and note receivables with 435 million and the growth relates primarily to higher volumes in California. Day's sales outstanding did come down 201 days and as compared to 226 days at the end of September. So there is an added efficiency there despite the [_______________] dollar growth. It's up 30 million includes intangible assets that were like the Silicon Gaming an acquisition that we completed at the very end of March of this year. Other assets grew again related to Silicon Gaming, different taxes and royalties and then that was pretty much unchanged at 997 million at the end of the quarter. 0:07:54 that really concludes my financial review of the second quarter. Again it's great to be back at IGT, I think we are very pleased with the second quarter results, not only because we have several records, but we are maintaining operating margins very close to 30%, which I think translates into a very high quality and efficiency of earnings. Thanks, and TOM, I'll turn it back over to you.

Thank you Maureen. I have a 7 few comments before we go to the important part of the conference call, which is really trying to respond to the questions that you may have. The growth drivers for the second quarter, many of them are as they have been for the first quarter and even the strong end that we had on last fiscal year, but I want to comment on some of those and some better that were seen some improvement and in line with the guidance we have given. On the domestic sales, and I am speaking in terms of units now, I am talking about sales, our product sales area, we sold over 16,500 machines in the quarter, that's 117% higher than what we sold in the corresponding quarter a year ago when we sold 7,600. Comparing to just the immediately preceding quarter, Q1 of 2001, the 16,500 compares to a little less than 15,000. So we sold about 10% more in total. Now, we talk about, in terms of our product sales what we are selling to new and expanding properties and replacement sales. In terms of new and expanding properties in recent period in this year, California has been the most significant new market for us and that has had a strong impact. In Q2 we sold almost 7,900 machines versus 3,500 a year ago, that's a 123% increase into new 8 markets and of that 7,800, there were 5,700 in California, and of course there were none a year ago. But maybe more important, just compared to the immediately preceding quarter for new markets, the 7,900 machines that we sold was 43% more than the 5,500 we sold in Q1. Again, related to California where we had 5,700 in the second quarter versus 3,500 in the first quarter; so even in California, which is about 63% increase. Now, the section of product sales that we've talked about and will continue to talk about because I think it's a major growth driver that is going to be with us for a while is in the sale of domestic units replacing units that are already in the market. In the replacement area, we estimate we sold a little less than 8,700 that's second highest that we've ever sold, just slightly behind the first quarter. It represents 52% of all the domestic sales that we've had and if you exclude California, it's over 80% of what we're selling. Replacement sales of 8,700 this quarter versus 4,100 last year and in the first quarter was the strongest replacement sale in absolute units when we had 9,300, so it's down just slightly from the first quarter. But the replacement revenues are up over Q1, because the average price of the 9 machine is slightly higher, and that's related to the new cashless technology where more of the machines that are going out these days are being bought with the capability to go cashless. We'll have a little more about that in a moment. The domestic replacement product sale, I'm just looking at numbers and it's a little hard to follow listening to a phone call, but if you go back to just the absolute numbers in our product sales, going back to Q1 in 2000, and I'm just going to go across there for 6 quarters starting with the first quarter of 2000, 26 to 36, 45, 51 and then starting with our first quarter this year, 824 and 887 for the quarter just ended. The replacement sales are currently very strong and these are being driven by the suite of IGT games and many of these games that we introduced at the 2000 Expo have just recently been approved and emerged from the various regulatory agencies and their queues, it takes a while to get these games approved. They are starting to flow into the market and they're working very well. We think that replacement sales will continue to drive the domestic product sales revenue number for the remainder of 2001 because those new games are just coming out, we 10 have 8 new games that have just been approved for sale, really very late in the quarter just ended, and 5 more titles that are going to come out and the test numbers on these games, the theoretical win per day, that is, are very strong, and we're continuing to see more and more interest in ticket in/ticket out in, cashless technology game, which we'll talk about a little more in a minute. Before we get to that, some specifics on our games, first I'm want to talk about our iGame-Plus Series which is the multi-coin, multi-payline video simulated real games which are really what is the most popular type of game that is sold these days. We sold almost 8900 units in the second quarter versus 7100 in the quarter a year ago and up substantially over Q1 with 5600. This is total, this isn't newer replacement; this is just total game. The Hot Games that are currently moving into the market are "Cleopatra", "Munsters", a game called "Neon Nights", and recently in the market test a game called "Catch A Wave" which features the beach boys, sound clips, it passed "Cleopatra" as the highest testing 29 version game that we've ever released. So we're feeling good about the games that are coming now. Now, the games that have not been 11 tested yet but are just starting to move their way into the market are "Tailgate Party", "Five Card Instant Bingo", a game called "Frog Prince" and "My Rich Uncle"; games that we feel very strong about. There are other games in this category that were originally shown at the Expo last year. They have not been released yet, they'll be released before the end of the year, "Cash King Checkers", "Evel Knievel", a game called "Frequent Flier" and "18 Reeler". In the Game King Video area, we sold over 2,700 games in the quarter that's versus about 1900 a year ago, and about comparable with the first quarter. The Game King Video area continues to be dominated by the multi-hand poker games that were invented by Ernie Moody of Action Gaming. The newest of these is a 100-play Poker where the player can play a 100 hands of poker at one time and on low denomination machines a nickel, and there has even been talk of maybe a penny or two. The release for this game is expected mid next month and orders for this game can be taken as soon as next week. There's been a long delay in getting this game approved because of the regulatory checks on the new EZ Pay and multi-denominational technology with the 100-play Poker, but it's 12 about to work it's way into the field. So, the Game King Video continues to be the dominant machine out there for poker. There is nothing that's even close. In terms of spinning real games, we sold about 4000 this quarter, that's up compared to 1800 a year ago, and down a bit from the first quarter when we sold 5400 but the spinning real games are certainly strong this year, certainly compared to last year and we expect that to continue for the remainder of the year. There is added demand for our EZ Pay Games, which utilize the ticket-in/ticket-out technology, we've talked about this in the past, we continue to get a lot questions and it is not gone unnoticed by this. There are, in Wall Street, a few people that are a bit skeptical of the Whole Cashless area. I'm going to go over it again just to review the voucher system that IGT's has called the EZ Pay. Our machines are fully configured these days to work on a voucher system that includes a ticket printer and we refer to these as EZ Pay machines. Currently 50% of the machines are being ordered at IGT are being ordered with EZ Pay configuration that percentage number includes machines for all of the machines that currently are scheduled for casinos with voucher systems, 13 as well as those that are scheduled to install voucher systems in the future. What we have seen in places where EZ Pay and cashless has been utilized either in total, as it was at the Suncoast which was an outline neighborhood in Reno where really this phenomenon all began, but the game performance has increased in all casinos implementing voucher systems machines. At some properties coin in has grown by over 30% and a large body of data from live casino experience has demonstrated that the hopper fill and hand pays have been reduced across the boards, 90% or more, and this is comparing the voucher system machines to non-voucher system machines which are comparable in all respects, play levels, location in all respects, this information is coming through it's consistent 90% or more reduction of the fill. The other advantages to the casino operators and their customers, more efficient labor utilization, less coin handling, eventually we think there could be less operating cost depending on how the casino deals with us, less machine downtime less time for hand pays and hopper fill. Casinos don't need this much money. The debt money, awaiting hopper fills goes down 14 significantly. Possibly the most important, and we talked about this in our last conference call, I'll mention that again because it just continues to come up more and more as maybe the most significant advantage and this is that the customer aggravation of waiting for a hand pay which in some cases can take as much as 30 minutes and some cases may be more but taking a very pleasant experience maybe the best experience that can happen in a casino, I mean, to wait for a long period of time, much longer than people normally like to wait, which based on our studies is about 10 minutes. If it gets longer than that people don't like it and the cash out is instant with EZ Pay. So, the customer service has improved substantially. A large percentage of the machines, which comprised of present installed base of gaming devices do not readily support the voucher system technology, and so we believe a lot of machines out there replacement targets. There are over 15,000 EZ Pay machines currently operating on voucher systems. That's up from about 8,000 when we had our last conference call, a quarter ago. Installations currently scheduled will raise a total by probably at least 6,000 additional units during Q3. Now, I want to go 15 through the numbers a little bit, in terms of the replacement market, and how we think this is going to impact the future, and these numbers, I believe, some analysts and I have seen even in reports on some competitors that these numbers are somewhat consistent, but I just want to take a moment to go over it. We think the replacement market is growing because of the availability of new games and introduction of voucher system technology on the casino floor is driving all this. We estimate the replacement machine sales could grow to a minimum of 50,000 units a year, and the way we do this, and we assume and I think this is the number everybody agrees on. The domestic installed base machines out there are about 600,000. Everybody agrees that it's much older than 5 years probably in the 7-day year category. Now of the 600,000, we believe 70,000 machines that are in the field are either currently are operating as EZ Pay or cashless machines or are upgradeable to that leaving about 530,000. If we assume the 530,000 machines as a target, and we assume that 20% of those will not be replaced that leaves approximately 424,000 machines as targets for replacement to cashless technology. 16 If IGT maintains a 70% market share on those, that's a little less than 300,000 machines, if it takes 5 years to do that that's a little less than 60,000 machines a year. We estimate at a minimum of 50,000 machines a year for the replacement driven by the cashless technology is very real. Now, going on a moment to our international sales, international revenue for the quarter was little less than 52 million that's 2% higher than last year and down a bit about 9% from the 57 million in the first quarter. Favorable comparisons for the quarter were due to strong performance by Australia and Barcrest our UK subsidiary. Unfavorable comparisons to the immediately preceding quarter are primarily foreign exchange or currency related. Australia had another strong quarter in terms of unit sales, and this is despite aggressive competitor discounting, as IGT Australia has increased its market share they sold over 2,100 machines up from 960 a year ago, and the second quarter which is the first calendar quarter is generally the slowest quarter for IGT Australia. Not much happens in January. In Australia, there is lot of vacation time that occurs at that time, it's really their summer, and it's generally their slowest quarter, but 17 they had a great quarter, and it's phenomenal turnaround and its continuing. Barcrest, during the quarter sold little over 9,500 machines that's the second best quarter in their history. Last year, they had their best quarter at 11.8 and I think, as Maureen commented in her comments that was driven by we believe recurring, but a strong demand for some Barcrest machines in Spain, which we did not have comparable numbers this year. The market share for Barcrest in the AWP market in the UK is at 45%, which is the best in the company's history that's up from 35% in the Q1 and 29% for all of last year as a whole. So, they are continuing to perform well ahead. In the future, they will be introducing a game based on "The Addams Family", a game which we've introduced here in the US, that will be introduced as a AWP game in the Barcrest market, and later in the year, they will be introducing a Austin Powers Game, which we have just introduced here in the US. Next factor that I want to talk about here significant growth in the MegaJackpot installed base. The number of units on line was up 1,700 during the quarter. It's up 5,500 units or 35% for the trail in 12 months, 60% of the net 18 increase in our year to date numbers have come from what we call total IGT systems of "The Addams Family" and the video jeopardy, but we are continuing to see strong increases from the joint venture game primarily in this quarter Jeannie Wheel. The games have been driving growth "The Addams Family" of the installed base grew to a little less than 1,900 up from less than 1,500, a quarter ago. Video Jeopardy Games grew almost 700 units, it grew from 700 to 1,400 units in the second quarter. The Jeannie and Wheel Game grew from which is Anchor joint venture machine grew from less than 500 to over 1,300 during the quarter. The Wheel of Fortune games continue to be strong. We saw the Video Wheel of Fortune improve slightly during the quarter to 4,750 games, and the original spinning reel "Wheel of Fortune" game is little less that 6,900 units and is still the leader in total, in terms of any game installed on line. Older systems Megabucks, Jeopardy, and the Elvis Presley games have continued to be stable. The installed units have not grown, in fact they are actually down about 3% which is better than we thought would occur this year but the play levels are holding, and those games continue to be steady, and we believe 19 that the number of machines will stay out there for quite a while yet. New games will be installed on the MegaJackpot system in the future include Austin Powers, which went live last week with 1,400 games currently on order, play levels exceptionally high. It's a little too early to make judgments. We have another joint venture game with Shuffle Master, Three Stooges, went live in Nevada last week, just about a 100 units, a little early to say yet. Million-dollar pyramid will go out mid May. There is a game called "The Price Is Right" that was acquired in the Silicon Gaming transaction. Harrah's has an exclusive for a period of time on this game that will roll-out in early May with a general roll-out to the rest of the market in June. Our gaming development people feel that this may be the best game that we've ever developed, we'll see. Regis cash club will go live in Q3, and then in Q4 there will be a Marilyn Monroe game that will be introduced. The MegaJackpots have been particularly well received in the Californian Native American Casinos by the customers there. Play levels are exceptionally strong. The win per day units are substantially higher than any other market. They 20 are more than twice in Nevada, although a much smaller number of units, but we are seeing win per day units in the 400 to 600 dollar range. There are about 1150 units at the end of the quarter and that's up to about 1300 currently. We expect to another 300 to 400 for the remainder of the year. So, we think the growth in that area is going to continue to be strong in the 30% plus area. At this time, I'd like to turn it over to you and see if there are any questions that we can respond to. So, Michelle, we are ready to take questions.

Thank-you. At this time if you would like to ask a question, you may press * followed by 1. You'll be announced by name prior to asking your question. Again, if you would like to ask a question, press * followed by 1. Joyce Minor you may ask your question and please state your company name.

It's Joyce Minor with Lehman Brothers. Maureen, your comments on pricing were very helpful. I am just wondering if you could expand on that a little bit and talk about whether or not you think the 7300 dollar average price would be sustainable in the second half of the year or whether we would expect that 21 mix impact to reverse itself to any degree? Also, if you could talk about your production capacity plans for the second half of the year? Should we be looking for, you know, units production in the 30-32,000 for each quarter or are you looking to take up production to any degree?

Okay, per the first question regarding average prices. We do from time-to-time see some change in average price related to system sales, and I would suspect that the total consolidated average prices to turn between 6 and 7000 for the full year. So, it does move around a little bit. We are seeing, as I mentioned, a higher percentage of games being sold from our new product lines, and we're also seeing a greater percentage of our sales EZ Pay related, these are all adding to the average price increases. Related to production, I think that your question of the 30,000 production per quarter, I think that we'll be somewhere around that maybe slightly less.

Great, that's very helpful. Thanks. Then just a followup question for Tom on the scenario that you walked through for a 22 replacement demand. I thought that was very interesting as well, and I guess my question will be is you indicated that you would expect a kind of 297,000 total units replacement for IGT over time, and if you divide by 5, can it help for 60,000 replacement units per year which would be 15,000 a quarter?

It's 50 a year.

Okay.

I'm quite handicapped a little bit as we normally do.

I guess if, kind of, the installed base is 7- 8 years old, and if instead you can have assumed that there wasn't be a change in that average age and that people replace them every 7 or 8 years, I guess that will be more like 40,000 units a year in terms of demands you got which is more or like what it's running at right now. Do you something to indicate that that will accelerate the way your math is kind of working?

Well, I think if you talk to any casino operator, I haven't talked to anybody, that says they, well I'm talking now, anybody 23 that owns more than 800 machines, they generally talk about a 5-year lifecycle, some people talk about a 3-year, but most of the casino people talk about 5-year lifecycle.

Okay.

We think the lifecycle is longer now because there has really been markets that developed 5, 6, 7, 8 years ago that have become mature and there has been no technological or in some cases, no competitive reason to upgrade. The competition hasn't changed that much, but the technology factor has always been a factor in driving the replacement cycle. The last major technology advance that really turned everything over was the bill acceptor and I don't know when the last time was we built a game without a bill acceptor, but you know, it's a long time ago, probably 6 or 7 years ago.

Tom I'd just also like to add that the increases that we're seeing in our replacement sales do support the factor that the replacement market is growing and which would then, you know, translate into a shorter lifespan [_______________] in the last 6 months, we have debated does before that. 24

Now, now the other thing that happens when we quote numbers like this, and in trying to indicated that that we would reach a 50,000 replacements cycle number and it would just stay there every quarter, it has never worked that way, for reasons generally of the buying trends or whatever, it could be a little higher or a little lower from quarter to quarter. But the point we're trying to make, and we think that the results that we have been giving people, are indicating that this market is growing. The replacement market is continuing to be the most significant driver to our product sales. The California market and the replacement market, but the replacement market is increasing and we think that it will continue to increase, and we think it's not only the games that are driving, you know, it's the video games are becoming popular and we've got the Hot Games right now but the technology end is coming as well, and so, you've got to come in from two fronts.

Okay.

We don't believe it's going to end. We think there is, in terms of the replacement numbers that we are quoting now which 25 we're tracking lot more in and about 35 to 36,000 a year, that the upswing in those to hit a 50,000 number is not at all unreasonable.

Right. Thanks. One more followup question about demands coming out of the Native American Tribes in California. I know that there has been a lot of debate about whether the current law that they need to get their allocated slot machines in place by May 15th, just a month away now, you know, there is some controversy about whether that sticks or not, but do you have any concern about the fact that the Native American Tribes may have had concern that that deadline would stick and have ramped up their orders in advance of that, are you continuing to see strong orders as we move into the second half of the year?

Well, first on the deadline and in terms of how we feel about that. It appears to us now that the commissioner there of the California Gaming Commission, that this one year timeframe for a tribe to acquire license machine starts from the date on which the license was issued by the Gaming Control Commission, not the allocation date which was the 15th, and we think also that replacement sales of license 26 machine do not affect it. So, the older machines and some of them are "gray market" machines, but they are licensed now, can act as placeholders until new games are acquired. So, the situation is somewhat murky but it appears to us that this May 15th date; there's a lot less to it than meets the eye. We are not concerned about it. Now in terms of demand in California, I think for this year, we've probably done over half of what we'll do for the total year. I could be off by that, if I am off, I'll be off, but we'll do better then that. But we sold a lot in there. It's not based on the state. It's just when casinos are expected to open or expand. I think that we would expect to do 20,000 in the total Native American Markets and 13,000 and that will be in California this year. And that's our current number. We won't disappoint on that number.

Thank you very much.

Thank-you. Robin Farley, you may ask your question and please state your company name.

Thanks. It's Robin Farley with UBS Warburg. Just following up on Joyce's 27 question about California, can you also talk about what you are seeing in the sales orders in terms of the 43,000 slot limit in California? Do you have the sense that that limit is being disregarded or is that is going to be the build up then?

Well, based on what we see now, Robin, we think that there are different interpretations to that number. We're still sticking with that 43 or 44,000 number and until anything official is released with changes there; that will be our official position, that that will be what the market will be. We have shipped a little over 17,000, well a little less than 18,000 machines into the market at the end of the quarter. That represents a little less than half the machines in total, and we still believe that about 20% of the machines, well, maybe a little less than that, but between 15 and 20% of the machines the currently in the market are still "gray market" machines. So, we believe we have about 18,000. We believe everybody else has about 15,000 and we believe there's about 6,000 gray markets, and that, I think, comes up to about 38,000 machines or so that are in the market now. But 44, there would be another 6,000 28 machines to move into the market plus the replacement of the "gray market" machines. That's our position right now but we have heard that there maybe some relaxation or some different interpretations of that number and it may go higher but we don't know anything official right now.

Are your sales orders kind of indicating that it may be greater than that limit? I understand that you're sort of abiding by the official but would your sales orders indicate that that's not the case maybe?

Well the sales orders, I think, would still fit within that number. You'd hit the wall if it's 44 in terms of what we are selling probably in the next half of next year.

And if I could, two other ones very quick, your market share in Australia in this quarter?

Maureen, do you have a number on the market share in Australia. I don't have one on my fingertips. I know that we're continuing to climb down there, but I don't know what it is. 29

I don't have a number right now, Tom.

We don't have a number. I think we're still pretty strong and we think we're leading some markets. It's really Aristocrat and IGT are battling it out down there.

And if I could just ask the following question. In terms of the cashless, there is a talk that one of your competitors has a converting product that would allow a unit to be made into a play machine and without having to generate a new sale, but it would basically be selling a pair that could be attached. Is that anything that you have sort of an official response to what action you might take if your sales violate a pattern anything along this line?

Well there's certainly a pattern issues and you can speak to them right now, except that we've said for a long time we've invested a lot in intellectual property and we've tried to work with our competitors to see that the best technology finds its way to the market place. I think, CDS is a company that all of 30 other companies that have talked about business. Some have talked about it and then abandoned them, but as far as an upgrade kit for the older games, the S+ and PE+, our official position and it will stay this way until we're proven wrong. We believe there is no safe and secure methodology to upgrade an S+ or PE+ game in the market. There is no jurisdiction that has approved anything in this regard, and we just don't think that it is going to happen.

Thank you very much.

Thank-you. Our next question comes from Harry Curtis. You may ask your question and please state your company name.

Hi, Robertson Stevens. Real quick. Can you talk about the gross margin on product sales and the opportunity to expand that? It seemed to contract just slightly in the last quarter and what you might be doing to increase the efficiency, although it's not a criticism, you're doing a great job?

Maureen, you want to take that? 31

Sure. Harry the domestic margins did remain the same at 40%, you know, this December quarter to the March quarter, and that is a big improvement over the last year and we did see some fluctuations related to the international sales. So, there is some opportunity for improvement with added volume, but I think we'll see the margin of shares somewhere around the 40% range consolidated.

Very good. Thank-you.

Thank-you. Our next question comes from David Anders. You may ask your question and please state your company name.

David Anders, Merrill Lynch. Maureen two quick ones. Number of [_______________] sold in the quarter and also the number of JVG program for the share revenue games?

Sure. The Japan sale...

I was trying to avoid the budget sale number in this quarter. 32

I knew that Tom.

Okay, go ahead Maureen.

It's a little over 500 the good news there is that their current model, Tiger Mask, we do have approximately 4,500 secure order sales for that. That product does look to be performing, but as we've indicated in the past the product that we're putting out in anticipation of golden [_______________], which we can make.

David, I'd just expand on that; I've been to Japan, since our last quarterly conference call, and the second quarter was a dismal quarter for IGT Japan. They didn't sell much at all. If you don't have a good game in Japan you just really don't do much business at all and so it is all based on the current model. Tiger Mask is a model that was introduced. In fact, that was debut to the distribution community in the large hall of customers while I was there. The enthusiasm seemed to be very strong, but those sales were all third quarter sales. So, we expect the third quarter to be much improved in Japan, but the second quarter was, and I think we said in the 33 last conference call that the second quarter was not expected to be much at all, and it wasn't. We expect the third quarter to be improved.

Okay.

And then David, for the joint venture games at the end of March 13,200.

Great. Thank-you.

Thank-you. Our next question comes from Steven Kent. You may ask your question and please state your company name.

Yes, it's Steve Kent with Goldman Sachs. If you look at your installed base on the participation of our WIP games now at roughly 22,600, you know, the pace in the second quarter of adding about roughly 1700 machines was much higher than, I think, most peoples expectations. Is your expectation that that will continue sort of it about that pace, and if so if that installed pace increases at that pace, then it looks like estimates need to go up another probably 5 to 10 cents easily after that?

Well, let me try that. We've 34 said earlier in the year that we expected the incremental growth in the MegaJackpot to grow by about 4000 machines. Now, in the first half of the year we've done 3,500 so it would seem that if the prediction we gave at the beginning of the year were true, we'd only do 500 for the remainder of the year. I think we're going to do better than that. I don't think we're going to do another 3,500, although we could, but I wouldn't at this time estimate that we will grow that much. We've had strong growth. We have new games coming now that are going to be good, and really what we have seen is the games that we've introduced have been a little stronger than we originally projected, and the erosion of the existing games has been much slower than we projected, but even if we don't grow at the same pace, say we grow those games incrementally, even another 1500 for the remainder of the year, the real driver behind the MegaJackpot side of the business is not necessarily how many machines you have, although, that's an important factor, but the time that you have a machine in the market and the play level on that machine. They will only stay in the market if they are at very high performing levels and currently we have high 35 performing levels in all of our machines. The customers accept those games only if they deliver extraordinary revenues far and above what they can get from a normal machine that would be available for purchase from IGT or a competitive product. But the percentage of the total market I think is increasing, and at this point in time, I don't know Maureen if you would disagree, I would say 5000 machines incremental for the year. What do you think?

Sounds good to me Tom.

Okay, I think we could beat that number. Maybe we'll beat that number. Certainly it could happen but we're very happy with the way it's performed, and we're happy that if you have to take a gross in one half of the year, you want it in the first half because you get revenue continually from the games.

Right. I'd just add to it, that the ramp up we are seeing in the year, not only in our domestic markets but also in the Native American Markets will add to any other new games we put in the market in 2002 for the year, based on growth halfway. 36

We are continuing to see the MegaJackpot games installed at about a 2:1 ratio. We install two games and one of the older games comes off the floor, and so that seems to be holding.

Okay. Thank-you. Just sounds like you're being conservative.

Well we think we always have been conservative, and maybe we are being conservative, but we're pretty happy with the way business is running right now and we think it's going to continue to be strong, wait and see.

Great, thanks.

Thank-you. [_______________], you may ask your question and please state your company name.

Our questions have been answered, thanks.

Thank-you. Larry Haverty, you may ask your question and please state your company name.

State Street Research. Hi Tom, a couple of questions, Austin Powers 37 haven't been out in Nevada but I've heard reports that it's causing some strange social behaviors in crowds and it's just an extraordinary game are all of these machines on the joint, basically participation on the Austin Powers?

Yes.

So, basically you're going to be using cash to build those machines and then overtime the cash is going to rolling come back in?

Well, we would appreciate those games over a short life, you're right.

And any members you share with, you know, what is going on and the technology in this machine likely to be replicable in other that machines coming down the pike?

Well, the group that is designing the games right now, every time they do something they stretch the envelop a little more and they would like to do that in terms of using the technology to do something innovative and then building it around something like Austin Powers which has been, you know, something of 38 that phenomenon, transecting like those types seen. They like to do that kind of stuff and some of the people around those games, you know, some of the behavior could be considered a bit strange but the play levels are very, very high.

You don't want to turn around any numbers?

Well we are all telling you, it's a little early to say.

It's still early to say. But the game is very strong, but the numbers are, they have just starting to roll into the field now.

I should clear the fact that we have 1,300 orders for any kind of roll-out that's pretty spectacular, and we don't have too many games, there is no loss that quickly and it's just proving to be a very, very strong thing.

And welcome back, Maureen I can see some your mischief is in the financial statements, but I am just kind of curious product sales are driven by less than a 100% and bad debt reserve is going up by 350%, and I presume that a 39 lot of product sales are going to the Indians and it would seem those folks are going to be able to pay you based on what you said about the play on the MegaJackpot, so what is going on here? It's just a welcome back party.

Larry, well we just put that debt consistent with product revenues, and I would say we have probably been conservative, and we're serving 4 markets mostly internationally, we will see of the increase, we are very confident in the Californians and the Indians ability to pay us back.

No, we don't have any problems there, I think that the two areas that we have said in the past that we especially when we are growing inventory and receivables two areas that we try and launch very carefully, I think, Maureen already commented on the growth in inventory but also the growth in the inventory churns which justify somewhat a higher number, but still that is the number that we watch a lot, and in terms of the receivables, we watch that as well, as the markets expand and new customers come in and in the international markets sometimes issues pop up. We just don't want to 40 ever have any negative surprises on inventory and bad debt and so we think we have always been conservative in the area and we're not changing on that.

And last year if my memory serves me right, you had to pay a lot of money for components and I presume the components are available right now. Is there any margin enhancing activity going on in that area?

In the future there may be, we probably over bought at a time when we were, Larry, of the demand and that has had some negative impact on margins in terms of what they call standard cost evaluation, but we're working our way out of that. It's a good inventory that we're using, it's available now at lower prices and we paid it.

Great. Thanks for that term.

Thank-you and our next question comes from [_______________] you may ask your question and please state your company name.

Yeah. It's 41 [_______________] I was curious about your thought process or your decision whatever your decision making process of putting the participating games in the joint venture or going on your own? And I was wondering if you could comment on the growth rates of those two areas and the new games going in those two areas?

Well, yeah, I will try and comment on that. I think in a perfect world we would like all of the games that we put out to be totally developed by IGT. The world is not perfect and technology and intellectual property, we have a lot it, other people do too, and often times there are joint venture situations that we believe are truly 2 and 2 is 5 or 6 or even 10, if a joint venture can be properly structured and that was really the basis for the Anchor IGT Joint Venture that Anchor had some intellectual property as did IGT, but the real technology was controlled by Anchor and that's worked out very well in terms of the joint venture and IGT had some intellectual property in terms of "Wheel of Fortune" and some other intellectual property that we have acquired together, "I dream of Jeannie", and that worked out to be a very good joint venture and Anchor has provided a lot of 42 expertise in terms of marketing and administration of that area. There are other joint ventures that we have entered into with "Shuffle Master" and some other people and we will enter into others. They will all be evaluated individually on terms of what is being brought for the party so to speak and who is going to do what in terms of placing the games. Excuse me just a moment. But, I think that you will continue to see more joint venture opportunities that IGT will enter into. I don't have a numbers in terms of how many? We certainly are working hard to see the IGT specific games improve and "Austin Powers" and "Addams Family" and "Marilyn Monroe", some others that are just out and other that will be coming out eventually there will be Harley-Davidson games. These will all be pretty much individual IGT games. But we will probably get involved with other companies, if believe that has something in buyers working together, we can do better than we would if do not do it.

I appreciate it.

Thank-you.

Thank-you. 43 Todd Jordan you may ask your question and please state your company name.

[_______________] Wasserstein Perella Securities Inc. Hi, guys, question for you, Maureen on the margins on the MegaJackpot, the IGT owned MegaJackpot, obviously it's a straight impact of the margins, should we expect that margin to go back to that sort of 56% range going forward assuming interest rates stay flat?

Hi, Todd. As far as 56% help with where you got the 56%.

You have 54% this quarter right, and I think not necessarily last quarter but the quarter a few quarters before that you were right around on the first quarter you were right around 56%.

I would say that for the third quarter we will see game up margins and similar to this quarter and slightly higher and depending on the interest rates but I think we could see a slight improvement in Q4.

Okay.

From time to time we give a 44 little more aggressive on depreciation on those machines as we put them out to, we just take, it's right, the machines are faster. Although in every case the games have had longer legs than anybody ever expected, Wheel of Fortune is a case in point.

Okay, then Tom you turned out some numbers on your expectations for California, how many products you are going to shift in there and will you think the overall installed base was. I didn't get those numbers quite right. Can please repeat that please?.

Well, at the end of the quarter, this is our best guess that there are about 38,000 machines, maybe a little more than that. We think that IGT has about 18,000 of those. We think other manufacture have about 15,000 of those maybe a little bit more and we think the balance would be "gray market" machines which would probably be around 6,000. Well, IGT has less than 50% of the installed base in California at the end of quarter, not much, and the all of the what we would call, the competitors have probably in the area 40% or so.

Okay then final question, 45 Maureen, do you have the breakout of MegaJackpot Games in California by legacy games and then the new games?

No, I don't, we are just under 1200 total for MegaJackpot.

I think you can assume that with the exception of the Megabucks most of the games in California are New Games, but we don't have that, the Megabucks games in California are linked to all the Native American Megabucks machines in the Native American market across the country so Megabucks in California would be linked with Megabucks of Fox Woods in Connecticut. That is the only game that goes across state lines.

Yeah. Thank-you.

Thank-you. Again, as reminder if you would like to ask a question you may press * followed by 1. Sir, at this time we are seeing no further questions, I would like to turn the call back over to you for any closing comments.

Okay, I do have a couple, and I wanted to just make a few notes and I did not 46 get any chance to expand on it, but when we were talking about the conversion of existing machines, this question has continued to come up and may be I didn't not answer completely. I just want to expand on little bit of why existing games can't be converted to EZ Pay ready and I commented about of the S+ and PE+, we just didn't think the technology was capable of doing it or that it would ever be approved and that is our position now, but in terms of our this retroposition I do want to say that there is an upgrade kit that IGT provides for the newer platform IGT products, so it is basically products with 8960 game and in the estimate that I gave, I said there were 70,000 machines in the field that are currently up gradable, that would include those newer platform IGT games that could be converted and these products have been designed contemplating additional expansions necessary to make ticket-in/ticket-out technology available. The S+ and the PE+ machines incorporate much older technology. It's fundamentally different, it requires different power and the voucher system technology, we just don't think would work. In terms of an analogy here, of retrofitting and S+, one of our engineer 47 said it would like taking the newest model Corvette taking that engine out and putting it in a 1955 model Corvette which I think was the first year they had Corvette pretty close to it. It could be done, but generally people that do that do it one at a time. It doesn't meet EPA standards, it doesn't work well in the kind of the gas that may be needed for that kind of thing that is essentially one of a kind hotrod that's not the business of our end. And it is the business that the regulators tend to approve. The technology that powers on their machine is just dramatically different from what happened in the legacy platforms. In terms of closing comments here I think for a quarter that I'd just like to say that we think the trends that we talked about have been confirmed and they have been strengthened, and the things that we have recognized three months as the ongoing business drivers continue to make their presence felt and in this case we think may be even stronger then we had said they would be. Again in operation segment, we mentioned earlier that the installed base is now going at 35% annualized rate and that is measured by our experience over the trailing 12-month period. We think that the revenues in 48 this segment will continue to grow and we think that Austin Powers, which we talked about a bit, although stopping short of predicting how well it's going to be, it is getting a warm reception and we think it will help in continuation of this trend. On the product sales side, we think that replacement sales continue to run well ahead of last year, and with the model change over behind us since 2000 Expo Games will largely supplant the 1999 Expo Games in the product mix and this trend should continue going forward. The one thing that we will continue to say the driving factor of this business is games, and the games currently being put out by IGT are better than they have ever been. I can't leave the replacement sales without emphasizing the importance of the spread of the ticket-in/ticket-out technology. It's going to simulate replacement demand going forward, the feedback we continue to receive is as well as from our customer's customers makes us confident that this trend has a long way to go. We believe that it is significant that the 50% of the machines is currently on order are being ordered with EZ Pay configuration including the ticket printers and that percentage has been steadily 49 growing. It just doesn't seem reasonable to us that the casino operators are going to assume that extra expense and we have noted that it's not a big one, but it is something and adding to the cost of the machine we're not going to do that for nothing, but we are optimistic about the future. We have not said about anything about the guidance but I am comfortable saying that we are comfortable with the high-end of current estimates. It wouldn't surprise me that some people who follow IGT will raise their estimates. I haven't had a chance to see what every body has said so far today but I would expect we are going to raise their estimate by 4 to 5 or 6 cents and we are comfortable with those numbers. Obviously, things can change including our outlook but for now our optimism about continued growth of IGT is a trend that we think that is comfortably in place. We thank you for joining us today and we will continue to do our best. Thank you very much. This concludes our conference call.