International Game Technology PLC (IGT) 2002 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the IGT 3rd quarter fiscal 2002 conference call. At this time, all phone participants are in a listen-only mode mode. Later we will conduct a question-and-answer session with instructions given at that time. If you should require assistance during the conference, press 0 and then star. As a reminder, this call is being recorded. I'd like to turn the conference over to our host Chief Executive Officer Tom Baker. Please go ahead, sir.

Thank you. Welcome to the conference call for the 3rd quarter. We had a good quarter. And we want to talk about the results. I'm going to turn it over to Maureen Mullarkey our CFO to start things off.

Thanks, Tom. Before I begin, I would like to read a brief prepared statement. During the course of this conference call, we may make forward-looking remarks, regarding future events or the future financial performance of IGT. We wish to caution that such statements represent our expectations or beliefs and actual events or results may differ materially. We refer you to the documents we file from time to time with the SEC. These documents contain important factors that could cause actual results to differ materially from those contained in any forward-looking statement we may make today. Please also be advised that we do not undertake to update any of these statements made in the call today. I have some previous financial comments and turn the call back over to Tom. During the 3rd quarter in nine months ended June, IGT reported exceptionally strong results in several categories. Including, [INAUDIBLE], operating profit, net income, and EPS. For the 3rd quarter revenues at $522 million were up over 63 percent from last year, inclusive of the joint venture income in the prior year revenues, were up 46 percent. Operating profit during the quarter reached $147 million, up over 42 percent, net income at 83 percent increased 46 percent. And earnings per share at 91 percent, I'm sorry, 91 cents, was 25 percent higher than levels last year. For the nine months revenues totaled 1.3 billion an increase of 47 percent. Inclusive of the joint venturing come last year revenues increased 35 percent. Operating profit for the nine months reached $381 million improving 31 percent over last year. The nine month net income at $208 million was up 31 percent and earnings per fully diluted share, at $2.44 increased 18 percent.

Recognizing that our results changed significantly due to the strategic acquisition of Anchor Gaming, completed at the end of the calendar year 2001, a same store comparison of operating income is meaningful. On a comparable basis, one that includes the effect of Anchor and IGT for the full year period last year and this year, meeting a nine-month comparison both periods, quarterly net income increased 16 percent, and year-to-date operating income grew by 17 percent. The current period included a couple of one-off items. One, was the extraordinary loss related to the early redemption of a portion of long-term notes of $909,000, net of tax, or one cent per fully diluted share. We completed the tender offer for Anchor (indiscernible) due 2008, and anticipating extraordinary loss net of tax of $12 million, or 14 cents per fully diluted share in the 4th quarter of fiscal 2000. The current period also included income from discontinued operations related to our casino operations division. During the quarter, senior management committed to a plan to sell the casino operations, acquired in connection with the Anchor acquisition. These are assets included the Colorado Central Station in Blackhawk, Colorado, the Colorado Grand in Cripple Creek, Colorado and the gaming machine route in Nevada. Our financial statements have been presented to reflect the casino operations as discontinued operations for all periods presented. The balance sheet also reflects the assets held for sale, and the liabilities of the discontinued operations.

Income from discontinued casino operations net of tax was $2 million for the quarter, or 2 cents per fully diluted share, and 3.6 million for the nine months end of June. Inclusive of the discontinued operations, IGT earned 92 cents a share in the quarter, which compares to the mean street estimate of 89 cents. EBITDA from continuing operations in the quarter was $187 million and $488 million for the nine months, compared to $124 million and $347 million in the respective year periods. Cash flow at the company remains very strong due to the above mentioned improvement in operating results, and our continued balance sheet focus. Net cash flow from operations totaled $122 million in the quarter, and $357 million in the nine months. Deducting for cap-ex spending, IGT therefore generated free cash flow of $108 million in the quarter, or $1.19 per share, free cash flow generation for the nine months was $334 million, or $3.92 per fully diluted share. We deployed these cash flows meaningful during the quarter returning $209 million in value to shareholders by reducing our equity base by 3.5 million shares. Through mid-July we also we retired over $370 million in debt, or essentially all the debt acquired related to the Anchor acquisition. Moving on to the comments specific on the income statement product sales, 3rd quarter product revenue of $222 million was flat compared to the last year, yet gross margin contribution of $94 million was up 8 percent over the prior year period. Year-to-date product revenues totaled $628 million, down 1 percent from last year, but margin contribution at $266 million was up 6 percent. The increase in gross margin dollars is primarily the result of our ongoing efforts to manage our product costs, and improve efficiencies within our factory.

Shipments during the quarter approached 31,300 units, unchanged from last year, but represent a 6 percent improvement over the 2nd quarter, or a sequential improvement. As our press release stated today, our year-over-year units were down primarily in Nevada and California, related to the maturation of that market. And they were up substantially in the public gaming jurisdictions. Sequentially, the 6 percent improvement in product shipments was primarily related to the growth in domestic markets. Fueling the growth were increases in the traditional casino markets including Nevada, Atlantic City, in addition sales were strong into Canada and Virginia. Canada casino sales were strong in the quarter with sales primary into British Columbia, Alberta and Ontario. Additionally, the Atlantic Lottery Corporation has been in an active replacement mode over the last 12 months, and we shipped about 1100 games into this jurisdiction during the quarter. We shipped no games into Quebec this quarter, as that market commences in fiscal year '03. Last year, West Virginia announced about a 10,000-machine expansion within their limited market, or a video lottery market. They also in the last three or four months, announced expansion within the three race tracks that exist in West Virginia. During the quarter we shipped about 2100 games into West Virginia. Our market share during the quarter remains in a leadership position. Overall, we estimate our market share in excess of 75 percent.

Some of the larger orders, New Brunswick in Atlantic Canada, 70 percent. West Virginia's Charlestown race track 83 percent. Ameristar, Saint Charles 80 percent. Oregon lottery, 100 percent. To name a few. We track average prices closely. Average prices were strong both on a year-over-year basis, and sequentially. Total average prices at $7100 were up 2 percent from the March quarter, and up 4 percent from the prior year. Domestic average prices for the quarter were about just over $9600 and in line with targets. They are also inclusive of our video lottery consultants results, which have average prices trending lower than the other domestic segments. International average prices at just under $3900, also up 4 percent for March, and 6 percent from the same quarter last year. Average prices most notably increased in Australia and Europe. Moving on to game operations, I'm going to slice game operations a couple of different ways. To make it most clear and most comparable. Starting off as our press release stated today, gross profit contribution from game operations was $142 million in the quarter, versus $89 million last year. That is inclusive of the joint venture. Our 50 percent or 59 percent improvement. Sequentially, gross profit dollars improved by $2.9 million, or 2 percent. This is an apples-to-apples comparison as both quarters had Anchor fully consolidated, and the joint venture fully consolidated.

Year to date again on a fully comparison basis, the contribution of games OPS would have grown by 11 percent. Careful management of our assets keeps the various units deployed in areas and jurisdictions where the company achieves the best results from both a revenue and margin perspective. We did see a decline in installed base of games in the Nevada and Atlantic City markets, but these were fully offset by over 1,000 additional placements in Native American markets, and 400 additional games in the regional markets over the nine months. Yield per game also improved on a year-over-year and sequential basis. Coin in per game as measured on our wide area progressives, was up almost 7 percent, year-over-year and 2 percent sequentially. Moving on to lottery and parimutuel systems, this segment produced revenue and gross profits of $39 million and $12 million, or 32 percent of related revenues. Higher revenues from Minnesota and Maryland, positively impacted these results. The cost basis was also lower as a result of telecommunications charges lower, reduction in the use of consultants, and liquidated charges we suffered in Florida in the prior year. Operating expenses for the quarter, operating expenses totals in aggregate, the four line items, SG&A, R&D, bad debt, depreciation, $101 million or 19 percent of total revenue, compared to $73 million last year, or 23 percent of total revenue. The inclusion of the Anchor Gaming subsidiaries grew the expense levels, and the additional amortization of intangibles for the Anchor acquisition consistent with the guide under FAS 141 and 142, and our continued investment in research and development were the primary factors related to the increase in expenses.

If you want to comment a little bit about the trend in expenses sequentially, because we have received a couple of questions about that. Sequentially, when adjusting for the discontinued operations, operating expenses were essentially flat. Again, that's the aggregate amount of SG&A, R&D, depreciation and bad debt. These four line items in the March quarter also totaled $101 million when you adjust for discontinued operations. There were some variations quarter to quarter, R&D was down slightly related to Anchor head count, slightly lower international spending, and then just general timing. R&D should run around $20 million per quarter as we continue to invest heavily in R& D. Bad debt is down slightly sequentially due to the lower reserves in international markets, most notably Argentina, where we had to add to our reserves in the first two quarters. Currently, and as of March, we were adequately reserved in this market. SG&A was up sequentially, due to higher legal fees and insurance costs. Moving on to other income and expense, net for the quarter was a net expense of $15.7 million compared to $13.3 million in the same quarter of last year. The primary reason in the increase, is the net expense for the quarter was due to the additional $276 million in Anchor senior sub notes that added approximately $6 million in quarterly interest expense. As mentioned earlier, we have now retired all of the Anchor debt outstanding. In conclusion, our reported results today show growth in all of IGT's business segments, and the financial results during this quarter were rock solid. Measurements and metrics we watch closely like average prices, gross profits, yield, all showed impressive improvements. We also widely deployed the capital during the quarter, not only to return value to our shareholders, but to pay down debt in order to strengthen our balance sheet. The metric we watched the most carefully and the most closely is cash flow. As previously mentioned, we were able to bring our operating improvements right to the balance sheet, and saw impressive improvements in cash flows both during the quarter and year to date period. That concludes my prepared financial remarks. Tom, I'll turn it over to you.

Thank you, Maureen. I have a few prepared comments, but before I begin, Chuck Mathewson, the Chairman of the Board, has asked to address you for a moment. So Chuck?

Hi, everybody. I guess a few of you know me. Yeah. A cheer for Maureen. That's quite a mouthful, Maureen. Very impressive to me. But you're all looking at the stock market, so you know they don't have the same feelings that I might have. But I haven't been on one of these calls for many years. But I wanted to let you know that I'm still here, and these are unusual times so I'd like to say a few words. I'll try to, you know, keep it short and sweet. I'm in my 17th year at IGT, and so I probably represent the philosophy of the company, the way it's been managed and the way it will be managed going forward. And very simply, and it is very simple, we've always and will continue to focus on enhancing shareholder value. And we do this by generating real cash flow, in excess of our cost of capital. No surprises, and certainly no surprise to those of how know us. You know, we feel we're very fortunate, I mean really fortunate, we're in an industry that can deliver positive results, both in good times and bad times. And we've been proving this for a long time. Sometimes we're like Tiger Woods. He shot an 81 on Saturday, but came back with a 65 the next day, so when we stumble once in a while, we seem to be able to recover. You know, I can't say enough about Tom Baker and his dynamic management team. I mean, they are really as good as it gets. To sum it up, you know, in my 17 years at IGT, I have never felt more confident about the future, even in these uncertain times. Thanks, Tom. It's all yours.

Thank you, Chuck. [ laughter ] I have a few comments for a moment. I wanted to say that, uhm, in watching the markets, we have observed an economic contraction that became visible now almost a year ago. In the conference calls that we have had, we have communicated our belief that there's two types of companies that we're evolving: Those companies that were uncertain, and those companies that were very confident. Those that are uncertain were nervous about their ability to grow, and in some cases survive in a changed environment. And those companies that were confident would prosper given, their ability to adapt to change. We've maintained that IGT is in the latter category, given our broad range of markets in which we conduct business, the strength of our brands, our experienced management team, and the diversification of our earnings and cash flows. In business, change is a constant. The business climate in which we operate in at IGT evolves constantly. We continually experience changes in consumer preferences, technological advancements, or obsolescence of technology, customer attitudes, regulatory attitudes and consideration, gaming expansion, or lack of gaming expansion -- and, of course, the capital markets. The results that Maureen just discussed demonstrate quite vividly that we have the flexibility to cope with change. We have done it successfully, and are prospering in the current business environment, even as we position ourselves for continued growth in the future. I'd like to take an opportunity to point out at least one example of a constant, and that is the consistency of our earnings. I have a few comments on our business segments, and then we'll turn it over to field some of your questions. Some of this may be a bit redundant. But from Maureen's comments. But I'll try and be brief.

In terms of the unit shipments for the quarter, we did 17.6 versus 18.1. That's 17,600,000 versus 18,1 in the quarter a year ago. Sequentially, our units were up to 17.6 was up over 16,3 in the immediately preceding quarter. These are domestic shipments that I'm talking about. And for the year, year to date, we have done 46,400 machines domestically versus 49,7 a year ago. This is a solid performance, in light of a drop-off of capital expenditures for many of the large casino operators, and this is reflected in lower volumes in Nevada where this year, year to date, we have sold 8500 machines versus 15,000 a year ago. And in Native American, uhm, 10,000 versus 18,000 a year ago, where we had the expanding California market. Replacement sales in the quarter were about 10,3 versus 10,5 a year ago. Year to date, there are about 29,500 versus 28,4 a year ago. The quarterly replacement sales slowed somewhat from the Q2 level. Our prior Q2 included the change out of an entire slot floor at the cypress bayou a casino that may not be a household name to many of you but they changed their entire floor-out to ticket in, ticket out cashless. And they are very happy with the results that occurred in the immediately preceding quarter. There will be more deals like this that will add aberrations possibly to these replacement numbers that we share to you. There were no big casinos that changed out entirely in Q3. But there will be more in the future. They will continue to come up.

In terms of our backlog, in terms of sales, it's currently over 10,000 units. That's up from 8,000 at the end of the immediately preceding quarter, and our order flow has been steadily improving since the first of the year. Ticket in, ticket out, continues to be a prime driver for replacement sales. There is no longer a debate over this concept. It is widely accepted by operators and players alike. The total machines sold to date include -- including a few that are not connected to any system that have been sold is 58,200. That's about 10 percent of all the domestic gaming machines in operation. That's up from 47,5 at the end of the immediately preceding quarter. The ticket in/ticket out systems that are operating today number 82. [ bell ] A recently conducted survey indicated that -- [ bell ]

Excuse me just a moment. We have a technical flaw here.

Just a moment, please. [ pause ]

Sorry about. We think we have that technical flaw taken care of, at least for the moment.

We were talking about ticket in/ticket out technology. We believe that our surveys indicate that -- [ bell ] 80 percent of slot players prefer this technology. [ bell ] [ pause ] Excuse me just a moment. [ bell ] [ pause ]

Again, I apologize for that interruption. Concluding here, during the immediately -- during the Q3, installations of ticket in/ticket out tests at Ceasar's's, New Jersey, they began with 228 machines, the Stardust in Las Vegas about 250, New York-New York in Las Vegas, 130. The Mirage Las Vegas 300 and the Luxor 84. There are tests under way in Atlantic City that have been expanded several times, and is being viewed as very successful by IGT and our customer Park Place Entertainment. Subject to New Jersey regulators giving final approval, which we expect will certainly be received before the end of the calendar year, there will be an expansion allowing widespread implementation in the Park Place properties in Atlantic City. New inquiries and proposals continue to be processed, and we have another busy installation schedule for Q4. We are confident that this technology will continue to be a major driver of the domestic replacement market for several years. We mentioned last quarter that the VLT segment was an emerging driver of replacement sales, due to a particularly advanced average age of the installed base of many of the video lottery jurisdictions. This continues to be true. But additionally, because of the expansion in West Virginia, sales of new and expansion units are also strong in this segment. Notable sales in the video lottery during Q3, were the Canadian lotteries which I think Maureen mentioned, was 1600 versus 1400 in the Q2. West Virginia was 2300 versus 1100 in Q2. Oregon, about 700 versus 1,000 in Q2. Down a little bit. But strong. And the outlook for video lottery sales in Canada is good.

Manitoba, Alberta, Saskatchewan, all are expected to issue RFB's for the replacement of their existing machines in the '03 fiscal year. In Delaware, we recently assigned an agreement with the Delaware State Lottery which increased the number of IGT and VLC games being operated at the three racetracks from 2850 to 3300. It increases our market share in that market from 50 percent to 65 percent. This award to IGT resulted from the fact that heretofore our games which were 50 percent of the total, were presenting 60 percent of the revenue. Internationally it remains a steady and reliable contributor to our revenue and cash flow. Net income from the international division was 7.6 for Q3 up from 1.7 a year ago. Higher volumes were experienced in Europe and Australia. We had a stronger showing in Japan, although still not as strong as we would eventually like to have. Unit sales for the quarter, were 13,7, down from 14,4 in Q3 at fiscal '01. But -- up sequentially, over the 13,2 sold in the 2nd quarter. Europe had the most profitable quarter of any of the international operations. Their gross profit was the highest of any international division and they had strong parts sales. A good portion of this was due to the conversion to the Euro currency. Australia, struggling in a difficult market had another profitable quarter. 2500 units over 2100, in the immediately -- in the preceding year. And up over the 1900, in the immediately preceding quarter. In our game operations, I want to say a few things because we continue to receive a number of questions about this business segment.

Most of these questions equate growth in this segment, or lack of growth, with the installed base, as being the most important metric. We don't believe this is true. This is not the sole metric of which track the health of the game operations business. As historically defined, however, the installed base in games was essentially unchanged, 26,2, which was up almost a thousand over the prior year, but essentially unchanged in the quarter. Our total installed base including our daily fee games, which are the multipoker games, the top box conversions, which were part of the Anchor business model, and still are, uhm, but if you add those games together, the total installed base of fee-related games, is 51,300, versus 45,5 one year earlier. We saw the removal of games out pacing the installation of games, for several weeks, but this peaked in early April and the last 8 out of the 10 weeks in the quarter had net positive in terms of the installation of daily fee games, and in our game operations segment. The revenue has improved sequentially, and year-over-year despite any flatness interpretation in the installed base. In the 1st quarter, a year ago, it was $241 million. And this is on an apples-to-apples comparison, if the Anchor joint venture were accounted as it is today, in the immediately preceding quarter $255 million, and in the quarter just ended $261 million. All of this in spite of a relatively smaller growing of the installed base. We are seeing an improved unit yield per game, due to lower mix of games in the most competitive markets, Nevada and Atlantic City, and a higher mix of games in the Native American and regional riverboat markets where play levels are simply much higher.

Adjusting to the change in this area, we have addressed those games that appear to have a shorter replacement cycle, and I can say that the type of game that is turning over quicker is much the same as in the products for sale. It's multi-line video, multi-denominational, nickel games. Generally played at nickel or even penny levels. We have a number of games out there that are doing very well. They tend to run strong for a while, and then they need some strengthening to stay in place. We are replacing some of the versions that exist out there, which brings the play levels back to higher earnings. And we'll continue to do this. We are also giving our customers multiple price points to choose from, in addition to the wide area progressive which is a cornerstone of the game operations area. There are participation games, with a fixed percentage of the win split between IGT and the customer. There are premium games, with a base game and a high-end top box, where the customer can buy the entire package, or buy the base game and take the top box on a daily fee basis. Beetle Bailey is a good example of a premium game that is currently being introduced into the field. Jurisdictional expansion will also add to the recurring revenue units. This happened last year with the California Native American venues, and when the New York racetracks open sometime next year, we believe there will be an additional increase in the recurring revenue games.

The most important way, though, to grow the installed base is to continue to put out better and better games. We have a strong line-up of coming attractions in this segment. Beverly Hillbillies will be rolled out in Louisiana in August, Quarter Mania II which has been a stalwart of the game operations side, and has slowed down in this last year, will be introduced in Nevada in August. I Love Lucy will be introduced in the Native American markets in September. And Nevada around that same time. Lifestyles of the Rich and Famous in the Native American and Nevada markets in August/September. Family Feud in Nevada in November. Uno, again in Nevada in December, along with Magic 8 Ball. So there is a strong line-up of continue games to be introduced into the game operations area. A few comments on AWI, our lottery division. A year ago, we started a restructuring effort there. It was started by Anchor, and has continued, has resulted in a rationalization of cost structure and improved margins. Since that time on the revenue side, we have seen our domestic contracts, Florida, Pennsylvania, Maryland, Delaware, Indiana, South Dakota and West Virginia, have all -- have stable contracts which go through 2004, and then with staggered end dates, most containing extension periods. Pennsylvania has joined the Powerball multi-state game, which has helped the growth in that particular lottery. We believe this division is poised for growth internationally, as well as domestically, because of our technological know-how, and we are going to try and introduce some new ideas in terms of game content.

A recent settlement between G tech, AWI , and the Florida Lottery, ended six years of litigation. This agreement allows AWI to continue operating through December '04 as before. There will be a new RFP that will come out from the state, early next year for operation of the lottery beginning in January of '05. The outcome is favorable to AWI, and we will be a player in responding to the RFP to operate the lottery after the 2004 period. A note on casino operations. During the current quarter management made a commitment to sell the casino and route assets that were acquired in the Anchor Gaming acquisition. These consist of the Colorado Central Station, Colorado Grand, and the Nevada slot route operation, that was operated by Anchor coin, principally in Nevada. Based on preliminary discussions, with prospective and qualified buyers, we believe there is a market for these assets, and a sale will be consummated no later than the 1st quarter of '03. On a full-year basis, these assets contribute about $135 to $140 million in revenues. $9 to $11 million in net income. 10 to 12 cents in EPS. And about $27 to $29 million in EBITDA. I think at this point I'd like to turn it over to question and answers.

And if you wish to ask a question, please press the 1 on your touch-tone phone. You'll hear a tone then indicating that you have been placed in queue, and you can remove yourself from queue at any time by press the pound key. If you are using a speaker phone, pick up your handset before pressing the number. We have a question from the line of Robin Farley with UBS Warburg. Please go ahead.

Great. Yeah, you talked about eight of the last ten weeks having net positive installs. Is that being driven by a specific game? And also, can you talk about if things continue -- if installs continued at that rate, where you think net installs could go for the September quarter?

TJ Matthews our Chief Operating Officer would like to answer this question.

Yeah, Robin, this is TJ. Good talking to you. When you ask about specific game introduction, you know, in the last quarter, we have introduced American Bandstand and that certainly has had driven some incremental units. Bewitched Lotto and Diamond Cinema which were introduced the quarter before, both are growing very nicely, Harley-Davidson which was r introduced right at the end of last quarter has now reached about 300 units and, of course, is performing very well and so it is the result of some new introductions, Survivor, also, has put out a decent number of units, and that of course is the business that we are in. I want to remind everybody that, you know, our job is to introduce brand-new games on an ongoing basis. You heard Tom talk about the fact that there are seven new titles that will be introduced between now and the end of the calendar year. Not only that, but we have games that were not mentioned, games like Austin Powers and games like Elvira, that are really extensions of our existing links, extensions of our existing game matter out there already. And so we very much are concentrating right now on how to drive yield per unit, and how to justify incremental units to the operators. One of the things that you'll see, I think, in our gaming show, is you will see the most diverse product line ever introduced by IGT, and this is a company that has been unbelievably diverse over the last few years. And so we are going to have a great show. And that's what drives -- that's what drives our business is games.

Okay. Would you venture an estimate on the net installs for the quarter?

For the 4th quarter?

Yeah.

Uhm, no.

Okay. [ laughter ] And then, uhm --

Well, I, think the one thing though in a we did tell you is the backlog is over 4500 units. And that our installs -- we have been very consistent. Our install rate has been at 200 to 250 games a week like clockwork, and so I don't -- forecasting the installs is, you know, obviously, uhm, is easier for to us do than forecasting the removals. Removals, the good story is what Tom has talked about is that you have really seen a good shift in the machine placement by jurisdiction, by customer, that is, enhancing our yield story.

Ok. Great. And then if I could just clarify a number -- in Maureen's comments, when you said that the contribution from gaming operations would have been up 11 percent proforma.

Yeah.

That -- is that on a revenue basis or is that operating income?

Gross profit dollars, Robin.

Gross profit dollars. And is that also proforma like if the accounting had been the same in both periods?

That's correct.

Okay. Great. Thank you.

You're welcome.

Our next question comes from David Bain with Seidler. Please go ahead.

Yes. Can you guys give a little recent color on how things are progressing in the United Kingdom, and also your penetration strategy?

Yeah. There's -- there really hasn't been a lot that has happened in the last quarter. I mean, the Bud Report, there's been no new news about that. There have been -- the gaming company over there that has gone public in -- and another that I think is in the process of being sold, ones's a casino company -- primarily a casino company Wave Hill and the other is Corral which consists primarily of betting shops.

Right.

And the values seem to be a bit stronger than they were at this time a year ago, in terms of what investors are willing to pay for these. Our feelings is that there won't be too much that's going to happen in this next year, and '04 is really questionable how much will happen at that time. This looks like it's primarily a '05 event for all of this to unfold, in terms of the expansion of the casino business, and opportunity to sell machines, and have game operations over there.

Right.

Having said that, we have established a group, IGT Casino Division in the UK, that hasn't really done too much at this time, but we started to put that organization together. There will be a managing director of that organization, and they will continue to work with the customers, in addition to the people that we have over there, IGT Europe and BarCrest, who is very connected with operators in that market.

Okay. Also, on the international front, how do you feel the overall economy is affecting sales?

In the international market?

International market.

Well, in Europe, it's been quite strong. And it's been pretty good in the UK, in terms of the AWP market. The economy, especially the gaming economy, driven primarily by legislative actions and harmonization actions in Australia, it's a no growth market. In spite of that, we have been doing a pretty good job down there, in an essentially replacement market. We have seen our market share hold in worst case, hold, and in best case improve in almost all the markets down there.

Okay.

It's also important to remember that the shipments that we make in the international markets are over 90 percent replacement.

Oh, okay, gotcha. Also, I think I got the backlog number wrong. I thought, what was it 10,000 or 4500?

10.

10,000. Okay.

And 4500 for the proprietary game --

Okay, okay okay.

Two different business segments.

All right. Thanks, guys.

Sure.

Our next question is from David Anders of Merrill Lynch.

Chuck, maybe you can comment a little more on cap allocation process, balance sheet still looks under levered. I'm assuming he is very aggressive on the share buy back below 50?

Well, you know, we have always been opportunistic in our share buy-back program because the way the tax laws are structured we feel this is the best way to return value to the shareholders. I think we'll continue to do that.

Okay. Thanks.

We bought over 3.5 million shares in this quarter. Reducing our outstanding shares about 4 percent.

Operator: And our next question comes from Joyce Minor with Lehman Brothers. Please go ahead.

Guys, maybe to follow up on Robin's question a little bit, TJ, I think you said gross installations are running 200 to 250 a week which I guess sounds like 2400 to 3,000 a quarter if I'm doing that math right. Can you just give us a sense in recent week what net installations have been running?

I I think that's what we commented on, net installations for the quarter were essentially flat, but that 8 of the 10 last weeks in that quarter, we saw increases in our installed base and so --

I know. You but you didn't tell my by what magnitude. Is it 100, 50, 25?

Well, obviously, Tom declined to give guidance for what we think the end count will be at the end of the fiscal year because, you know, we don't know. I mean, but we do believe that we're growing that install base now, at the beginning of this calendar year was really the after effects of September 11th, some very public comments made by a couple of our customers, and then following through with action, obviously shook our install base a little bit from the standpoint of what was already out there, there are new games that filled that gap, new market places a little bit, although not so much this year, but new markets like in some of the Native American territories have been helpful to us. So we really, if you take away a couple of the things that have occurred in terms of the economy, in terms of a couple of very specific customer activities, our business is growing. And my -- we believe that we are at a point where '03 gaming expansion is going to be realized, where '02 was essentially a flat year in terms of the number of games out standing, that will allow to us increase our unit count, that the folks that have been somewhat non-believes in terms of the earning power of our machines and as a result have cut the name of games on the floor, have really have less room to cut now that we'll see that activity greatly reduced. That's the economy, especially in the gaming world continues to be very strong. Year-over-year performance in most major markets has been very good. We are beneficiaries of that both directly and indirectly. Directly as the fact that we participate in that increased growth. Indirectly, by virtue of the fact that our customers being more successful have more money to spend. So I think that we are very optimistic that we are going to grow the install base, through the 4th quarter, into '03 but as you know, it counts and is based on games. And we feel very comfortable that our game line-up is as strong as it's ever been, and it will be more diverse than it's ever been, and I think that will propel more units.

I would like to comment, too on that that we're seeing competitors out there introduce their version of game operations, and so it's become continually more competitive. There are more choices for the customer. And that's good. We don't have a problem with an open marketplace. Right now, our market share majoring on revenue which is the only way to get a true measure of this, we still hold in the 83, 84, 85 percent of all the game operations, machines that are available to our customers, and it's been this way for a long time. Probably 3 years. And we'll continue to put out good games, and it's going to be very difficult for the customer to make some of these choices. But they are going to have these choices, which is what they want, to have better games, to put on their floor.

Sure, guys I guess I understand. I think it's just that most of us are looking for some level of guidance about what you're expecting maybe in terms of net placements for '03, and even if you could be comfortable picking a number that you would be thinking was very conservative, is it, you know, 2000 games? Meaning 500 a quarter? Or -- is there some number that you can get comfortable talking with us about?

Well, I think the thing that we are comfortable talking with you about is that that business segment is going to grow. We have done that now for a long time. This is the most successful quarter we have ever had in that area with flat numbers. TJ has talked about the number of games that we have been installing on a weekly basis, and you have interpreted that up to a quarterly basis. The thing that's difficult for us, is predicting the removal rate. If we bring a game in, sometimes it replaces one of our own games. That's just something that is very difficult for us to predict with certainty right now. We are going to focus on trying to give strong games out there and hopefully to see the unit count grow. The revenue will grow.

Okay. Let me try one more question for TJ. TJ, what percent of the lottery business is the Florida contract?

The Florida contract represents about 25 percent of our business.

Okay. Thanks, guys.

That's on a top-line basis.

On a revenue basis.

Thank you.

Our next question is from Ray Cheeseman with Jeffries & Company. Please go ahead.

Couple of questions. I was wondering if you could comment, or give us the latest on the inside scoop on those new York tracks that you mentioned, Tom? It seems like they have taken longer to gather some momentum. While I'm aware that they have chosen a system, I was wondering how the RFP for the machine is going, and where the economic negotiations to try to induce the tracks to pursue the business model might be, if you could share that with us.

TJ is going to take that question.

Where we stand is that the system provider has been chosen. And the machine RFP is now outstanding in the midst of which we are participating through the question and answer period, and it's expected that we will put together a formal bid in mid-August. It will include a price component, and the price component we anticipate to be reasonably influential over the number of games allocated from player to player. But not the sole determiner ,in fact, I think technical capabilities including past earnings power, diversity of game libraries, are just as important in terms of the final selection of the games that go out on the floors. We feel of course IGT by virtue of it having a market share well in excess of 70 percent in virtually every other marketplace, is going to fare very well in New York with the sole exception of the fact that they have -- have expressed some desire to have multiple vendors participate, not on an equal basis, but at least get reasonably fair shares. And so that will probably not allow us to realize our normal market penetrations. That said, the entire marketplace is recurring revenue in its orientation. That's a good model for us. And we anticipate that you'll see 10,000 machines up and running by the end of the March quarter of next year, and so it will have an impact on the 2nd half of fiscal '03.

I understand that California may open up the compact as early as February. I was wondering if there is any color you might give us with what could happen there. I know there's an awful lot of, you know, numbers thrown around that were very, very large early in the process there. I guess they built up to about 51,000 that nobody's fighting over. I'm wondering what you think might occur when they re-open that compact.

California by lou of the contact, requires a renegotiation of the numbers installed in March of '03, and so there is definitely going to be conversations that are going to take place. I think that the state of California may be -- maybe wishes they had a little more regulatory control, and wishes that maybe they generated some tax dollars for the state, which they presently do not. If those are their goals, really, their primary negotiating power is with giving more machines to the tribes. And the tribes are definitely expressed a desire to operate more slot machines and judging on the numbers that we have seen, have the wherewithal to operate more slot machines. And so I think along with New York, certainly California, the marketplace that we think that you could see big expansion in, in '03. There have been very favorable comments made in Pennsylvania. You know, Kentucky and Ohio, and a whole host of other states are constantly talking about gaming, and given the fact that state deficits still remain, that you'll be in a post-election cycle, we think that '03 should be very robust for gaming expansion.

Last question was for Tom. Tom mentioned over the last couple of quarters on replacement trends. He said again that the gaming companies are doing pretty well. I agree. Is there any variation in replacement trends you're seeing recently, very recently, as the markets have been very strange, and traded off, maybe people getting more conservative about the remainder of the calendar year. Do you see any slowing in orders or anything like that?

Well, as I said, the backlog is at the highest level it's been in some time. It's not a record level, but it's a record for certainly the last year and a half. And I think this has been driven by the technology, a lot of it, by the ticket in/ticket out. I predicted I think several quarters ago, I think it was a question asked me how big is this going to get, and I said I thought about 50,000 a year or 12,5 a quarter. We're not at that number yet. We will get there. I mean, we're essentially did in this quarter about what we did in the prior quarter, although the prior quarter had a full casino change out. There is still a regulatory concerns in -- it has not been full lay approved in Atlantic City. And we have a number of tests under way. I have had a chance to see the results of some of these tests with the casinos which are very, very strong in terms of the additional benefits, and earnings, from machines that go to a ticket in/ticket out format over the prior method. So I think you are going to continue to see that. We have seen some of the casinos evaluating this, and it does mean in some cases a pretty big capital commitment. There's been some pretty heavy negotiations under way with some of the casino customers but it's going to move ahead.

Okay. Thank you very much.

Mm-hm.

Our next question is from Brian Kerwin with Prudential. Please go ahead [ pause ] Mr. Kerwin, your line is open.

Hello, Brian. [ pause ]

Okay. I betcha he stepped away from his phone or his phone is on mute perhaps. Okay, maybe not. Then we are going to go to Michael Chives with Wells Fargo. Please go ahead.

Congratulations guys, on a great quarter. TJ, if the stock goes down any more I'm going to ask you for that job. [ laughter ] Question. What's the rationale with selling the Colorado unit and the route?

There was a lot of debate about that. You know, among the managers, and at the Board of Director level. It's clearly strategic in the domestic -- well, our company overall, we have just, uhm, made -- [ overlapping speakers ] -- sometime ago to not be an operator. And it puts us in direct competition with some of our best customers. In order to grow those assets -- an these are great assets. I mean, they are leaders in their market in all cases. But we would have to continue to put capital into those assets, and right in the face of people that we are trying to sell our core products to. We chose to exit the business.

What kind of money do you think they'll bring?

TJ?

Well, I think that those businesses generate EBITDA of $30 million, and that certainly we're anticipating that the market multiples of 5 to 6 times kind of depending on whether you're a route or a casino, and the fact that they're in the Colorado marketplace, uhm, affects their value somewhat. But you know, those kinds of EBITDA multiples are what we are talking about.

And the money's going to do what, pay down more debt?

Well, I think we've -- our cash flow has been particularly strong. You know, in this immediately preceding -- well, at the end of the quarter, we had $545 million in cash. That's been reduced with the costs of repurchasing the Anchor bonds. But it would be strengthened, of course, when the casino and route sales. And we'll continue to follow the same principles that we have in the past.

With such a good quarter, can you tell me why you think the market on the stock is down four points today?

Yeah. I think it's because of progressive units didn't grow.

Is that what it is?

Yeah. The revenue grew. We sold more machines. Ticket in/ticket out's doing great. Expenses as a percentage of revenue are down. We're generating a lot of cash. We're shrinking the capitalization. We are paying down debt. But the damn units of sequential progressive games didn't grow. Very much. And that's why the stock is down.

More people on fewer airplanes.

I'm sorry, what?

More people on fewer airplanes.

The units are producing more income.

Mm-hm. So I don't get it. It doesn't make sense.

The market doesn't, either.

Okay, guys. Thank you very much.

Thanks.

Let's have another good quarter, huh?

And our next question is from Jeff Martin with Ross Capital Partners. Please go ahead.

Thank you for taking my call. Maureen, can you give me an apples to apples comparison on total revenues, from this quarter to last June's quarter?

Sure. Total revenues obviously in this quarter were $522 million. With the full companies together three months last year would have been $510 million.

Okay. And can one infer an apples to apples comparison just by pulling up Anchor's former SEC filings? Is it a straight plug in there, or is there a reclassification of revenues?

Just (indiscernible).

Okay.

Also, uhm, you would take the -- this is easy to do. You would take the joint venture income of Anchor and gross it up. It's, you know, the joint venture income for IGT and Anchor were split 50/50. So you would want to gross that up. And we did file several different, uhm, SEC filings last year related to the acquisition, so I would recommend that you look at those, too.

Great. I will do that. And Tom, could you give us an update on the lawsuit between Anchor and Acres Gaming, regarding the top box of the Wheel of Gold and Wheel of Fortune? Thanks.

It's chugging along. I don't really know -- it's, uhm, I don't really know what much more to say about it, in terms of specifics. It hasn't been resolved yet. It's chugging along.

Okay. I guess you don't want to comment beyond that, then.

Well, I don't really know too much beyond that. I mean, there's, you know, continual meetings, and discovery, and summary judgments, and all these things that happen when you have a lawsuit. Uhm, and to date, there's no conclusion.

Okay. Great. Thank you.

We feel strongly about our position, but that's about as much as I can really say.

Next is Leonard Willing with First Associated Securities. Please go ahead.

I haven't heard anything about your participation games. Did I missing something, or would you like to comment on it?

I think you did missing something. We talked quite a bit about it.

Oh, okay. Tell me briefly just what you did say.

We said that the units were see seemingly flat and the revenue was record level.

Oh.

And that we are putting out more and better games. The Nevada market has been lackluster. The Native American market's been strong. And that's pretty much it. I think the games that are showing the churn, to the extent there is churn in the market, are the multi-line video, low denomination games. And that's the same as in the product sales area. Those games are very, very popular, but they are falling off.

I know, I have been reading about some customers pulling out the participation games. Is that continuing? Or....

Uhm... We have seen in the last 8 out of 10 weeks, we have seen an increase in the number of games installed. Net increase.

And we would be happy to take any further questions you have on that as some of these topics have been covered in today's call.

Our next question is from Steve Kent with Goldman Sachs. Please go ahead.

Hi. Good afternoon. Just a couple of quick questions. One, TJ, uhm, or Tom, maybe you could just talk about why these nickel and penny machines need to be changed out so often. Does that create an opportunity for you? And then on the lottery, you know, in the past you haven't really discussed -- you haven't really decided what you want to do long term with that business. Maybe you could give us an update on that, and the need for capital, and then finally, you know, comfort level with earnings estimates out there last quarter time you gave us some views and, you know, you came right in line. Do you still feel comfortable with that I guess it's 84-94 cents now for the 4th quarter?

Sure, Steve. I'll answer the first two questions for you. On the life cycles for the video games, that's just the unique phenomena that is specific to video. I mean, we have certainly had kind of the luxurious environment on the real slots where we can introduce one game, it was the best game, and it would be the best game 10 years after the fact. We have done that with "Wheel of Fortune" where in this last quarter it continues to set new records in and of itself. And so that game continues to do exceedingly well. Multi-coin, multi-line video is a tremendous opportunity for this company because it's an expanded niche. It's allowing us to sell an awful lot of new games on our product sales basis. Lower denominations are driving the ticket in/ticket out, technological need. And so we are obviously seeing new sales, because of ticket in/ticket out. But the life cycle of these games are just shorter, and on the sales side, I guess it's not so bad, because it gives us tremendous opportunity to slowly migrate to a software oriented business, where we are putting adequate value on our content and reselling content to existing boxes. But on our proprietary game business, obviously that affects our cost structure because it means that we have to refresh existing boxes out there. In some cases we have to replace existing boxes. And so it's really changed our cost structure. But every time that we put out a new game, you know, theoretically, at least, and I think in practice, we have realized that we have increased revenues, and that we are constantly making more dynamic, more complicated, more enjoyable games, and that IGT's big advantage is that so far, we make the very best games in that category. We make the most games. We are accelerating our effort, and tomorrow we'll probably have something that's important to this company, happened, that is you know, we have new platforms, up to date platforms from the standpoint of kind of the investment community, because that uses PC technology, probably doesn't affect our immediate efforts too much, but tomorrow our -- what we call our AVP platform was introduced on field trial in California, and what that really ultimately means is that you will see an even more robust, more dynamic environment for video. But shelf life being as short is just kind of a fact that we have just come to accept, and the way that we think that we fight that a little bit, is things that have unique experiences, have longer lives, and so the wheel game Harley-Davidson, we think the quarter mania game, are all in that category. And for the lottery business, we have made a very specific determination about the gaming operations, and that we are selling them because we are not committed to those businesses. Likewise we made a very specific commitment to keep the lottery business, and be committed to that. And if you are going to be in a business, of course, we believe that you should be the best. The goal is not to be number 2. The goal is to be number 1 in that marketplace, and so we are continuing to work on nationalizing our expenses, improving our technology, figuring out ways to make cost structure just from an operation in the lottery states themselves make better sense, and figure out probably most importantly, how do you make games different? How do you really be a revenue driver in what is very much a stagnant industry, in terms of overall revenues? We believe that the focus on games and intellectual property is unique to IGT, and AWI, is what has differentiated us in the gaming business, and is what should be able to differentiate us in the lottery business, and so we feel very comfortable with our standing as a future competitor in that industry and our ability to grow. Tom, on the estimates?

Yeah. On the estimates, I think that the 4th quarter will look much like the 3rd quarter. It might be a little less. It could be a little more. But I would expect it to be close to what we have in the quarter just reported, which was a little better than the street estimates. Whether we're a little bit above, a little bit below, we are going to be in the ballpark, and I'm comfortable with the estimates that are out there for the year. And I think Steve Kent commented some estimates and we are certainly comfortable with those. As far as next year, I think we've said in the past, we want to grow the business double digits, and I think that equates to 15 percent. And I think you can look for those kind of numbers most of the estimates I think are in that category. This is not different than what we have said in the past. And those are our comments now.

Thanks very much.

Our next question is from Harry Curtis with J.P. Morgan.

Hi, guys. Most of my questions have been answered. I did want to find out the weighted average, or the absolute common shares on a fully diluted basis today, would be that about 87 1/2 to 88 million shares, Maureen?

Yes, Harry.

Okay, thanks.

Our next question is from Bill Learner with Prudential. Please go ahead.

Thanks, guys. In the recent past, one of the riverboat operators had indicated that in order to get relief from some of these onerous tax increases, they would move out some of their participation games. Number one, can you just quantify for perspective how small that is, but number two, what are you hearing from some of the other operators with respect to that, thanks?

Taxes are an issue for the industry, and they obviously adversely affect us. They adversely affect us directly because we pay our share of taxes in a number of jurisdictions either directly or indirectly. And so, you know, we obviously prefer that the tax climates be stable at least. We also think that's obviously good for our customers. To the extent that the tax increase for instance, in the state of Illinois, though, has increased, it's not this dramatic in terms of the decision-making as you might think. The top tax rate went from 35 percent to 50 percent, but when you figure out what is the incremental performance required to justify the maintaining of one of our participation games on the floor, it really only requires 10 percent more play levels. And because that increase in play levels is really so slight, given the fact that our operating -- the operator community really requires that we out earn the average machine by factors of 100 percent generally speaking or more, we really just don't think that that's going to have an immediate profound impact in that jurisdiction amongst all the operators. It is, however, another reason for a concern from the industry point of view, something we need to be cautious of, because it's being discussed in a lot of other places. And our revenues could be adversely impacted by increased taxes.

Thanks a lot.

And our final question in queue is also a follow-up from Robin Farley with UBS Warburg. Please go ahead.

Just kind of housekeeping where you usually give a schedule of shipments by jurisdiction and product sales, if you could run through that real quickly?

Sure. Let me just get there. For the 3rd quarter, total Nevada was just under 2700. Atlantic City, 1900. Canadian casinos, 900. The Eastern region, 3300. Native American markets, 3600. Public gaming in aggregate, 5200. Total domestic, 17,6. Australia, 2500. Barcrest, 7600. Europe, 1200. Japan, 2100. Other is about 400. International just under -- about 13,7, and total shipments of 31,3.

Okay, great. Thanks.

Sure.

And we have no further questions in queue. Please continue.

Okay. Well, this is Tom and, uhm, before we sign off, I just want to leave a few parting thoughts here for just a moment. This has gone on a little bit longer I think because we had a little technical flaw there, but for the second consecutive quarter we set financial records in just about every category. We feel confident that this is a trend that's going to continue for a while. There are challenges as well as opportunities that will arise in the future, as they have in the past. But as we mentioned earlier, our broad range of markets that are served by IGT, the strength of our brands, which is stronger than anybody, there is nobody close to the strength of our brands, and the diversification of our revenue sources, and our proven management team. We're pretty confident that we can be ready for these challenges. These things really mean little, if they are not supported by our unshakeable corporate ethic, if you will, that's dedicated to increasing shareholder value. I think that was amplified with Chuck's comments at the beginning of this call. Of our most positive attributes, I believe this is one which we're most proud. And then, I know a lot of people are talking about this these days, but and we would like to say it just a few things on the topic of financial disclosure. We have a long history of more than ample disclosure, and we try and give the cleanest picture of our financials to our share and bond holders. We published a cash flow in today's press release. A cash flow has always been published with the 10q's. It requires some additional effort to get it done by the time we put out our press release, but we have done that. There is a big emphasis on cash flow these days and we want to you have that information. We're conservative on what we capitalize.. We'll continue to be. We're prudent in what we reserve for. We have no joint ventures or special purpose entities that aren't fully consolidated. The maintenance of a strong balance sheet is always been and will continue to be a top priority for us. The team at IGT is keenly focused on working capital efficiencies, cap-ex spending with returns in excess of weighted average cost of capital. Excuse me. We have been consistently well disciplined in our deployment of our capital. We've made four strategic acquisitions in the last four years, all of which have been quite successful. We have been consistent in our philosophy behind our share repurchase program. And we're committed to returning value to shareholders in this form. We also believe strengthening of the balance sheet with debt reduction is sound business policy. And in moving forward, we are going to continue to use our cash flows in this prudent and effective manner. I'd like to thank you for participating in today's call. And we look forward to talking with you again, after the end of our fiscal year. Thank you.

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