International Game Technology PLC (IGT) 2002 Q4 法說會逐字稿

Ladies and gentlemen. Thank you for standing by. Welcome to the IGT fourth quarter 2002 conference call. At this time all participants are in a listen-only mode. We'll have an opportunity for questions and answers. If you should require assistance press zero followed by star. I'll turn the conference call over to your host, Chief Executive Officer Mr. Tom Baker.

Thank you, and we welcome everyone to our call. This is our conference call for the fourth quarter and the end of our fiscal year. We are proud of the results for our fiscal year and especially our fourth quarter. I'm going to turn it over here to Maureen Mullarkey, our Chief Financial Officer with a couple of preliminary comments and then a few comments about the press release we put out earlier today.

Thanks, Tom. Before I begin I would like to read a brief prepared statement. We may make forward-looking statements regarding events or future performance of IGT. Actual events and our results may differ materially. We refer to the document from time to time in the SCC. Actual results could differ materially from those contained in the forward-looking statements we make today. We do not undertake to update any of the statements made in today's call.

We'll spend a couple minutes talking about the financial results of the fourth quarter and the full year. Today we reported several records for the quarter and full year. Records were achieved in revenues, operating profit, net income and EPS. Cash flows and EBITDA reached record highs for the same period. We completed the acquisition of Anchor Gaming on December 29th 2001 and these results for the year include the first quarter of IGT alone and the subsequent three quarters of the combined company.

For the fourth quarter we reported total revenue 523 million compared to 334 million last year. Operating profit 152 million compared to 104 last year. Adjusted net income of 84 million compared to 56 million and adjusted EPS of 95 cents versus 73 cents in the prior year. The 95 cents compares to a mean estimate of 92 cents and high on the streets of 94. For the year-to-date total revenues a record of 1.9 billion compared to 1.3 billion last year. Operating profit [INAUDIBLE], a 35% improvement. Adjusted income of 29 million compared to 216 million in '01. Adjusted EPS $3.36 compared to $2.83 in the '01 period.

EBITDA for continuing operations in the quarter was $199 million and 686 million for the twelve months improving 56% and 44% respectively. Cash flow generation for the company remains quite strong due to the above mentioned strong operating results and efficiencies realized in working capital management in all subsidiaries. Net cash flow totalled 145 million in the quarter and 503 million for the full year. Deducting for Cap Ex spending of 11 million in the quarter and 35 million for the year. IGT generated free cash flow of $1.52 a share for the fourth quarter. Full year free cash flow generated $469 million or $5.45 per fully diluted share. IGT's ability to generate this level of cash flow truly sets us apart as does the ability to generate free cash flow in excess of earnings. We view this as a true measure of a company's value.

We had a few one-time items I want to summarize. As an extraordinary loss related to the early redemption of a portion of our long-term notes of 1 million for the quarter, 13 million for the year, 14 for the quarterly, 15 for the year. That was the reduction of the 250 million subnotes from Anchor. The current quarter included a onetime item with obligation. This relates to a dispute with a former gaming distributor in South Carolina.

During September of this year, our appeal of the case was dismissed due to technical legal issues. Because of this we determined it appropriate to accrue to noncap amount in the fourth quarter. We are vigorously appealing a review of the dismissal and income from discontinued operations. Income from discontinued casino ops was 4 million for the quarter or 5 cents per diluted share. 8 million or 9 cents for the year.

Looking at our balance sheet cash and cash equivalents totalled 404 million. Working capital 628 million total debt of 928 million. An interest coverage of seven which compares to 1.5 times last year and coverage of 4.7 times at the end of '01. This improvement included the repurchase of the Anchor that I mentioned and repaid Anchor's line of debt.

In addition, we also purchased 3.6 million shares or 214 million during the year. For clarity's sake, all that took place during the June quarter. Moving on to a few segments and financial highlights, product revenues for the fourth quarter totalled 218 million, 16% higher than the 188 last year. Gross margin combination was up 22% over the prior year.

Fourth quarter margin improvements were driven by lower costs and also as a result of a slightly favorable product mix with a higher percentage of our S 2 2000 products and international margins up across the board but most note in the U.K. market. Gross -- full year product revenues 846 million for an increase of 3% from the prior year with margin contribution up. Shipments during the quarter were 30,700, an increase of 14% from last year. Domestic sales totalled 17,100 in the quarter and included over 11,000 replacement games. Nevada sales picked up momentum in Q4 totaling 4200 games of which 3800 were replacements. Shipments included 800 games, 700 games delivered to Arizona Charlies, 510 to Caesar's palace. Other shipments included 1,000 to MGM Detroit, 400 to Nova Scotia, Canada and -- Louisiana. Consistent with trends, domestic average prices for the quarter were 9400. That includes a high mix of Native American lottery shipments in the state of Washington where average prices are lower.

International average price of 4200 is up 9% from the June quarter and 4% from last year. Strong volumes in Australia. The U.K. and Europe supported the increase in this average price. Moving on to proprietary game operations. Game ops were 264 million for the quarter compared to 146 million in the prior year. For the full year revenue for 915 million versus 518 last year. The growth resulted from the inclusion of Anchor joint-venture activities. A favorable jurisdiction mix and enhanced yield per game.

Our year-over-over on IGT progressive games across all markets grew by 5% during the quarter. Lottery and paramutual systems produced profits of 41 million and 15 million or 38% of revenue. This was an increase of 5% in revenue and 26% in gross dollars over 'Q3 over 2002. Improvements related to higher revenues in Florida and Pennsylvania. For the quarter, operating expenses totalled 106 million or 20% of total revenue compared to 74 million or 22% recorded last year.

The inclusion of expenses related to the Anchor Gaming subsidiaries, amortization for intangibles consistent with FAS b 141 and 142 and continued investment in resources. Pretax other net expense which excludes the one-time litigation accrual for the quarter was 17.4 million compared to 15.7 million last year. The primary reason for the increase finance net expense was the additional interest expense for the Anchor senior debt.

In conclusion, I'm pleased to communicate that all of IGT's business segments contributed to the success of the quarter and full year and pleased with ongoing efficiencies we see in the income statement and balance seat. We see this as excellent for '03 and beyond.

Thank you, Maureen. I'll try and keep my comments brief but there's a few things I want to talk about before we get to the question and answer period. In Maureen's remarks, she talked about the financial records hit for the year and fiscal '02. It's notable because when you look back at where you were a year ago, our company and our industry was in a significant amount of flux. At that time we were communicating optimism about IGT's growth potential.

There were a number of unknowns at that time but our positive outlook was based on the fact that we were financially strong, we had achieved and have achieved even more diversity of our markets. We believe that our technological capabilities and game design capabilities were second to none and we felt we had the strongest and most enthusiastic management team as well as a roster of employees that were poised to take on whatever it was that we had to face. And so it is gratifying today to talk about some of those achievements.

The things that I want to talk about that were major and will have an impact on '03 and beyond are really two things. The first was the Anchor Gaming transaction. We moved ahead with this because it was apparent that this company fulfilled all the preset criteria that we have for mergers. It gave us strategically the ownership of technology and intellectual technology related to the mechanical wheel patent as well as patented portions of cashless technology that advanced the ticket-in, ticket-out capabilities in the casino. It increased through our presence in the public gaming sector and this is going to be an important gaming process for us in the future and expanded our business into other areas of legal gaming, specifically the online lottery where we hasn't had a presence but it gives us more diversity in our revenue.

Finally -- well, not finally, secondly, the management talent we were able to pick up, we picked up a number of strong people and added to our team and I think most notingly T.J. Matthews, our chief operating manage will continue to make significant combinations to IGT's success in the future. And lastly as far as Anchor acquisition was the accretion we were able to achieve.

The second factor notable for '02 is the growing popularity of ticket in, ticket-out and the growing penetration. During the fourth quarter and during 2002 as a whole, we've seen an increase in the interest in ticket-in, ticket-out and easy pay. We went live with 15 easy-pay systems bringing the total installed to date to 95. That's 54 installations during '02 which is more than double what we had at the beginning of the year, the 41 we had at the beginning of the year. Ticket-in, ticket-out ins doubled in 2002. It rose from 34,000 over 70,000 and that's all suppliers. Most are IGT but that's all suppliers whether or not they are connected to a system. Ticket-in, ticket-out is a must-have feature of a modern casino. Once players experience this, they come to expect it. Casino operators have told us that the reduction in overhead, labor and other costs related to the floor as well as the cash inventory can give them returns approaching 50%.

But maybe more important, we've enhanced the functionality of the machine to give the customer of the casino a better gaming experience and earnings have increased on the machines. The pace of the replacement buying cycle we believe will quicken in 2003. More properties are implementing the technology and nearby properties will respond because they want to stay competitive. In Las Vegas, easy-pay is going to be implementing at the MGM Grand, Treasure Island, Mirage and Paris Resorts. In New York city we'll see an expansion at the Park Place properties. It's going to draw a lot of attention from the players and operators alike. In Connecticut, Mohegan Sun, one of the most successful casinos in the world announced an agreement with Kodak gaming to replace 2500 machines. These machines will include AFT or advance funds transfer capabilities and all of the IGT machines that are currently being shipped will have an upgrade path to AFT. The Mohegan Sun is anxious to upgrade to that.

I want to mention some of the financial goals achieved before the year before I get into operational comments. We return to our shareholders through the growth and operating income through the strength of our balance sheet of tremendous value. Maureen mentioned several records hit during the year and these translate into positive year-over-over EPS comparisons for each and every quarter of 2002. We've had 11 sequential quarters of favorable comparisons and constitute a record of growth that is difficult to match in today's landscape.

The strength of our earnings and management style which we believe is prudent toward the balance sheet has resulted in significant operating cash flows which surpassed 500 million during 2002. We deployed our capital prudently. Reduced debt levels from 1.5 billion to under 1 billion at the end of September, that's a decrease of 25%. We returned 214 million to our shareholders by repurchasing 3.6 million shares during the year. The financial strength of our balance sheet provides us with flexibility to do this in an otherwise economic environment.

On product sales during this year and this was a year where we saw capital spending curtailed by a number of the operators, our product sales increased up from 824 in the prior year. The number of sales units reported was under 124,000 up from 120,000 a year earlier. Our backlog at the moment is 13,000 and that's up from 10,000 at the end of the second quarter. We were able to grow our business as well as increased market share by what we believe is nearly 5 percentage points in this environment. Our ongoing commitment of time, talent and money to R&D and product development is the reason we believe this happened.

We've introduced almost 80 new games in fiscal 2002, two-thirds of those were for-sale games and we now have the best suite of games we've ever had. Some of the top selling games, Enchanted Unicorn, Neon Knights, Triple Lucky 7s, Crystal 7s are hitting record numbers. Games that have the highest test scores that we've seen and we believe there will be strong demand. They were too late to make the 2002 best sellers. Larry's Lobster Mania, Little Green Men Family Reunion, Big Time's Pay as well as games based on Spam and tabasco make the games look good.

Next year will be a year of replacement sales. This year was as well but only three major new properties that opened during the year. Delta Downs in Louisiana, the Amristar and Blackhawk in Colorado. Replacement sales carry the bulk of our business. We sold on the replacement side almost 41,000 machines up from less than 38,000 a year ago, but in the fourth quarter it was over 11,000 up from under 10,000 in the fourth quarter a year ago. The great games that we have and the growing demand for ticket-in, ticket-out will be the important drivers of the replacement market and gives us a clear line of sight toward achieving a goal of 50,000 replacement units in fiscal 2003.

We have great geographical diversification both at home and international markets. Our shipments to Nevada down 8,000 units year-over-over were offset by Atlantic city, Canada, Colorado and some gaming jurisdictions. That's good news but we believe there's better news than the Nevada market which is the highest focused market was the strongest fourth quarter in some time. International had the strongest year ever in terms of operating property despite the much publicized around tinnian crisis. Some of the notable points, IGT Europe had an all-time high operating profit. Its profit contribution was highest than any of the subsidiaries. It was aided by change in the Euro where we saw enhanced parts and retrofit income as well as sales.

IGT Europe is within itself another example of geographic diversification. They did business in 23 different countries in 2002. Our subsidiary Bar Crest during 2002 sold 32,000 units which is the second highest since we acquired the company in 1998. They continue as the market leader, and limited pay off in market. They ended in excellent position. Their game design and market capability is very strong and we believe they will be a factor in taking advantage of the U.K. gaming liberalization. We look for the benefits of that in the '04, '05 and beyond. They have now met all of the financial and operational goals we set for them at the time of acquisition and completely paid off the inner company note which was set up at the acquisition price. They paid it off.

Australia continues to do well. They had their ninth consecutive profitable quarter. For the year they sold 10,000 ins and a year where they have to face the Harmonization regulatory environment revenues and gross profits despite reduced casino traffic year-over-over primarily in the Nevada properties, we have had a challenging business environment but we've been able to manage our brand mix. Simply put, we have better games that we're introducing and poorer performing games are coming out.

We have used brand extension to replace revenue from games that are experiencing falling levels of play, and we have worked hard to manage our geographical mix. We have more games in undersaturated areas and areas where the jurisdiction is high. We have continued to raise the bar continuing to introduce new games. We out-win all other games that are in the market with the new product that we're putting in. Sometimes our biggest competition are games we introduced at an earlier time. Our games are so popular with the gaming public that the casinos must have them.

New titles that have introduced during the year that fall into this category: Harley Davidson, Elvira which was just introduced and, of course, the perennial favorite, Wheel of Fortune and Price is Right. These lead to games gross profit, yield per unit and size of the installed base which had the best quarter in Q4. The installed base including the former Anchor standalone games with international units was 28 ,600 up 350 during the quarter. The total installed base for all reccurring games including all of the above plus the games that we own and daily see games in the public gaming units was 51,500, up 600 on the quarter. We look forward to stronger growth in this segment.

The games that we believe will deliver this growth and they are the strongest lineup we have had in some time. I Love Lucy will be introduced in November in New Jersey and Nevada in December. Lifestyles of the rich and famous will be late November and Native American following that. This is the first advanced video platform that IGT has had and working successful in the Native American casinos where it was tested. view Megabucks will be introduced in November. It had a roll-out in November. Beverly Hillbillies will be in Nevada in November. This will be the first penny mega Jackpot game. [Family] Feud in Nevada in January and from there a strong schedule of recurring revenue game that is we'll roll out in 2003. Some of these games, some of the additional games in the expansion of definite but we have many in the development stages.

New properties such as the Boregata, the Cannery which will open in the second quarter will have a good representation of re curring revenue games. In California, Native American Expansion is likely and good for our growing base of revenue games. Casinos in California have historically had 5% or more of their floors in these games and have exceptionally high win per day. The casinos and profitable expansion in Rhode Island will be recurring revenue games and the New York Native American casinos when it happens will have recurring revenue games. Additional expansion would give rise to opportunities in addition to the above numbers. In the lottery and paramutual, this is a new business for us. It has been profitable throughout the year. A good cash flow business.

The online business has not been much of a business but it has become commoditized. We believe we can do things to change that and bring content and reserve the pricing power. We believe in fiscal '03 we will do better. We believe the growth in revenue as well as operating income will be percentage wise one of the best categories for IGT in '03 another reason for our upbeat views are jurisdictional expansion. Budget short falls which we've talked about in the past are real and Tuesday's elections benefited IGT in a positive way.

In New York, the budget is currently over 5 billion and things are pretty set in New York. The casinos are going to open, we believe late in the year. We've been named as one of four game providers. All of the units will be recurring revenue games. Contracts covering the agreements between the providers and states have not yet been signed so we don't have any more details than that and unsure when the legislation regarding the native American casinos will be signed. We know that the seneca tribe in New York is compacted with this date and moving ahead with plans to open their casino at the Niagara Falls convention center.

In Pennsylvania, as a result of the elections, we have a Governor who is supportive of expanding machines to the racetracks. Polls there indicate 6 % of the population approved this move. There's four tracks operating in the state plus one new track so that's very positive for us. They have indicated that they believe the tracks could operate with as many as 2500 machines in each of these. The Governor Elect has been a supporter of expanded gaming starting with the tracks as the first step.

There were a number of other things that happened in the election on Tuesday that we may get into those during the question and answer period or a little later if we can talk about them, but we think it was very positive in terms of the future of IGT.

At this time I'm going to open it up to question and answers from you.

Ladies and gentlemen, if you have a question, please press the on the touch tone phone. You'll hear a tone and you may remove yourself from queue. If you have a question press the 1 on the touch tone phone. We'll go first to the line of Robin Farley. Go ahead, please.

First is on the revenue games. Nice to see revenue growth. Would you say this is a reversal of pushback from the operators or more color on the trends we can expect to continue? And then separately you see breakout on the release provision for bad debt, and deappreciation. Give us a little more on that? Thanks.

I'll take the revenue sharing gains. The fourth quarter was strong. I don't know if it was a reversal of people's attitudes. We've seen more interest and a strong array of games available. Many that haven't been available until the fourth quarter and some that were in the marketplace continued to hold stronger. But there's a lot of games being installed and a lot of games pulled out. As I said the biggest competition we have in this area, although competition is stronger today than it's ever been, the games are the strongest competition we have. As the games earn more money, the operators have to have them in their casino. And we've said that all along and we believe this is the side of the business that's going to continue to grow as long as we put the games out there. I don't know whether it's a reversal or not. It was a damn good quarter.

And on the question of expenses, the bad debt of 2.5 million and SG&A of 6 a million and of 14 million, you can see in the EBITDA table, the total deappreciation was 46.3 million in the September quarter.

Great. Thank you.

For our next question to the line of David Anders with Merrill Lynch.

Maureen, just some house keeping. Did you give us the Bar Quest?

Sure, 8,000 for the quarter. Japan was 1500, Australia was 2500, all of the other international were 900.

Okay. Just as a follow-up, the MGM shipments, you've started putting those out with respect to announcements a week or two ago?

That's correct.

Thank you.

Next to the line of Mike with Salomon Smith Barney.

First a follow-up to Dave's last question. When exactly did you sign the agreement with mgm and what's your policy in announcing agreements like that and did you book revenue under that agreement in the quarter you just reported?

We signed the agreement just pretty simultaneous with the announcement, maybe a day before the announcement. Actually it was MGMs announcement.

And our practice to comment on any large transition during the call and quarterly release process.

And normally less the customer announce it. It would depend on the situation. In this particular case, MGM wanted to make the announcement and we looked at the announcement and feels it was not any more we would add to the situation.

Okay, so assuming you have not booked any revenue under that announcement.

We sell them in machines all the time and machines that would fall under that announcement that they took prior to signing. So capable of being ticket-in ticket-out cashless machines along with their program. So there was revenue to the MGM that I would consider under that agreement in the quarter just ended.

Got it. And two quick questions. If we look at the market share that you guys got at the Borgata, would you view that as being representative of what your market share is likely to be in the jurisdictions or were there sort of unusual circumstances in some of the processes or the criteria that they used. And secondly on that, is it going to be in New York, at least, a mechanism for resetting market share on the performance from the machines from the different providers?

T.J. Matthew is with us and chomping at the bit to answer that question.

In New York it was the intention of the lottery all along to have virtually even distribution up to five different manufacturing promoters so the market share really was exceeding our expectations some in that there were only four vendors selected. Every six months they'll use a formula-based system to determine whether or not they should change the penetration rate of any one manufacturer. It will be in accordance to the way we sell in the market and performance based so we would anticipate overtime we'll see a much greater market share in New York than on the allocation and good evidence of that is in Delaware or Rhode Island where overtime similar models have facilitated increasing market share from us because of the performance of our games being better than that of the average.

In the case of the Borgata, there's a historical situation that established a 50% rule. So as a result the penetration rate of equipment on a floor there is lower than it would otherwise have been without that restriction. The Borgata used existing market trends as a mean for benchmarking how they thought the floor should look which does not correspond with the way sales patterns are taking place. In other words our percentage is higher than the percentage realized in the case of Borgata. We anticipate this will be on maps of performance and we expect our market share to continue to increase as they perhaps add machines or manage their floor in a pro active manner. When new markets come on line, that's where we get large market shares than we do in the replacement market and anticipate that is the normal to be expected for other openings.

Thanks. And last quick question. Tom, the consensus for next year's 385, your earlier comments implied you are comfortable with that. You want to say anything?

In the past I said I was comfortable that in the foreseeable future we could grow the EPS 15%. The EPS that we just reported is higher than expected at that time. I'm still comfortable with that prediction and comfortable telling you that we'll sell 50,000 machines next year. That's as far as I'll go.

Next question to the line of Harry Critters with JP Morgan.

Thank you. Could you guys discuss the unit sales versus fiscal year third quarter. They were about the same yet your gross margin increased 250 basis points and wondering what that was a function of and do you think the higher margins are sustainable.

You're correct. The domestic shipments, 17,100 in Q4, similar to 600 in Q3, same for international, we have benefited throughout the year from lower component cost and sequentially improving the reno plan. We had a better mix of 2,000, a 36% tomorrow domestic shipments compared to a run rate of 25%. Carry a little bit higher margin and then the international subsidiaries all showed slightly higher margins but most notably bar Quest due to the U.K. club market. So we're happy with the margins of the fourth quarter. For an '03 perspective, you'll see a gaming division, casino sales channel with improving markets, we'll have a higher mix of public gaming units next year. From a consolidated basis, 43%, around in there, maybe up to 45 is probably the good range to go in.

And my follow-up question is can you give us your thoughts on the potential sales in 2003 to the Arizona market given the positive election results there.

Sure, well, you saw that the market basically facilitates upwards to 5,000 additional machines installed in Arizona as a result of proposition 202 passed and sales of licenses from one tribe to another. We have a small portion of that anticipating that event built into our internal 2003 efforts but the bulk of that benefit would be realized in 2004.

Very good. Thank you.

One additional comment on the Arizona market, that proposition allowed for interstate gaming where as Arizona now is the only state in trust state.

Now to the line of David Bain with Seidler.

Very good quarter. Do you believe it may give you an advantage for future online lottery contracts?

Obviously in each substance it was an unfortunate occurrence that obviously we work very hard in our own operations as do they to prevent those cheating activities. We certainly don't believe that really those substances are indicative of our failures that would be found in our operations and perhaps can be used to our advantage. Our anticipation is that we would rather major sure the soundness of our technology, our ability to increase revenues is the basis for us winning new business whether a lottery and the lottery begin is more important trying to give a rosy color to it if we can make content work and that is our focus. Ads a result of the two activity that is have taken place, we have gone back and revisited our paramutual activity, our online lottery activity to make sure we don't believe we are susceptible to the same problems and our results are that we are not.

Great. And one last question, trying to put my figure on the replacement market internationally. Can you see some of the trends there and how they differ internationally compared with domestically with cash and things of that nature.

Most of the international market is replaced. In the Australian market, it's all replacements, every machine. In the U.K., the bar Crest market is pretty much all replacement market, and then in the IGT Europe which we mentioned 23 countries, that's really the international casino market. Because of the different regulatory bodies and so on that govern each of the jurisdictions, there hasn't yet been much impact from ticket-in to ticket-out. Some of those exist in a different form. The way we're doing it hasn't really been felt. There has been interest.

Okay. So with ticket-in, ticket-out be -- how long would it take to get the regulatory issues in check?

The numbers we're talking about today are a North American number and wouldn't look much in the international market in the year of '03. We're still going to have -- the businesses are going to operate and we'll be profitable. The growth in cashless gaming is going to be North America in '03.

Great. Thanks.

Next question will come from the line of Joyce Miner with Lehman Brothers.

Just a couple of questions. Tom, does that 50,000 target for '03 include the LTs into Canada and that as well?

Yeah.

Great. Thank you. And when you look out at the budget shortfalls, do you think of the risk of tax increases particularly in states like Missouri and Iowa and worry that you'll see participation games increase and Illinois when you saw taxes go up there?

Well, you know the increased taxation is a threat in every jurisdiction. Even Nevada has talked about it. As far as that impacting recurring revenue games, it won't impact recurring revenue games unless the tax structure is such that it makes the games less profitable than ones they would buy. That's the only logical reason it would go down unless there's a temporary message someone would send us.

Is that the case in Illinois?

I think so unless the games come back in terps of units there. The games will come out if they're not profitable for the operators. If the earnings are high enough no matter what the tax rate is, it's on whatever game is there. For-sale or recurring revenue or whatever. You're going to pay more taxes from a recurring revenue game but the amount left over is what the operators are focused on. And if it's more than the alternative choices they have, the games will stay or go back in.

Then can you help me understand a little bit better the recurring revenue games trends. I know on your last call, you said you were installing 250-20-250 a week and yet net installs were 300. Is that that you're installing a lot of your own games and removing others, how do you explain that and did the trend change and are you seeing that pattern?

The change in the trend is that there were more installs and less removals but still a high number. There's a turn there and we expect that with what we are doing now and doing a lot of brand extensions and we have a number of game that is fall within a category with the Spooky Series slots and so on. You'll see a lot of these that may come up as an install and a removal that may merely be a conversion of the game in the field. So not a true pulling out of a unit and a complete installation of another unit. We're getting into technicalities here that probably getting away from some of the meat of the issue. The real thing here is that we're working to build higher earning games than anything in the field and that includes the games we put out. And as I said earlier, often times in this area which is a competitive area now, everybody wants to be in it but the strongest game that is we have to compete against in most cases are the IGT games that are already out there.

You expect we should continue to see the differential between net installs and growth installs.

I don't know what you're going to see. Overall you'll see the numbers grow in terms of revenue. We'll focus on revenue per unit and focus on where they're placed and work with the casino operators to do the best job for them and give them the best choices they could possibly have. We hope that units will grow as well. We think the revenue is definitely going to grow and over time the units will grow, too.

A question from the line of David Bartel with Wells Fargo.

First in Q4 could you tell me what interest expense and interest income was and secondly could you comment on quarter end as far as revenue participation base, the number and white area of machines in the field compared to lease or fee-based games.

On interest expense, interest income was under 13 million, interest expense was 28 million and we don't break out the population by type of games between participation or white area progressives.

And some of the games will vary from market-to-market. Just a level of detail that we think we give more detail --

Competetively sensitive. That's where we draw the line.

Okay. Thanks.

Once again, ladies and gentlemen, if there are questions please press 1. We have a follow-up from the line of David with Merrill Lynch.

Thank you, very much. Can you give us an update on the sale of the casino and how that is progressing?

We remain in active negotiations for the two casinos in Colorado. The route in Nevada think those of progressing fine and anticipate to close transactions as early as our second quarter this fiscal year.

Thanks.

Next question will come from the line of Jeff Martin with Roth Capital Partners.

Thank you. Maureen, what was the share repurchase information.

We did not have share repurchase in the fourth.

I want to comment on that because we had questions this morning. Traditionally we've not been a fire when there have been a strong market. We don't compete with you guys to buy the shares. We buy generally when there's a lot of shares for sale. The other thing is during the quarter, there was a lot of news that was pending and we generally don't -- we're not in the market when there's anything out there that we feel might be criticized for doing a transaction with pending news.

Okay. And then could you comment on the gross margin on the paramutual operations and if that 38% is sustainable.

Obviously quarter over quarter went from 31% to 38% and we're happy with that without having any dramatic impact on and it's been because we remain very aggressive and managing costs and the cost structure of that business makes sense and continue to be aggressive on that front and continue to product reasonably good margins. 38% is likely on the higher side of the range because of some one-time revenue events within that business that effects marge but didn't maturely effect revenues. Obviously we think that probably in the mid-30s is a decent run rate to expect for the business.

Thanks.

The final question will come from the line of Neil Miller.

Hi. Tom, I have a change, I'm a worry wart. I'm wondering whether anyone else is worrying about getting in and out of casinos, whether it's too easy and measures are taken to check people and that sort of thing. Obviously the impact on the amount of floor space devoted to slots.

Neil, you mean in terms of -- good hearing from you.

Boy, good hearing from you, too. Boy, what a quarter. Yeah more getting -- it's tough to get in and out of the casino.

You mean security wise?

Right.

I think this last year, the whole world in our country has been faced with that, and I think that's something that the casino operators are dealing with. I think by and large they deal with it on an individual basis depending on what their jurisdiction is like.

But you haven't heard of any like they're doing in stadiums now, back checks and that sort of thing which again could complicate the experience or the amount of floor space devoted to what kind of activity, et cetera.

I have not, Neil.

Okay. Appreciate it. Great quarter, good to hear from you.

Thanks. I'm told that was the last question. Is that true? Alan, are you there?

Sir, that was the last question. Please continue.

We want to thank you for listening in. Just a few thoughts and maybe just a review for a moment. A year ago we told you it was going to be a good year for IGT and we thought that it was despite pessimism that was out there in the business landscape. We communicated that optimism to you. We went out and made it happen. This was a result of all the people that was the family of IGT. As this year gets under way, I want to tell you we are as confident about our continued growth and as confident as ever. Our feelings about the future are as strong as they've ever been. We talked about the technological advancements. That's one reason we are confident. Easy-pay for all of our games and megajackpot games find favor with the operators and operators' customers. We'll continue to grow and the bulk of the replacement is in the future.

As far as the elections, they were good for us but the existing markets were not impacted at all by the elections are very strong. We're seeing and will see the development which won't open this year but it's going to be talked about a lot in this year and that's the new casino in Las Vegas. It's going to change that marketplace again. It's going to change Atlantic city. You will see, we believe, expansion in California. There's a new casino that is opening in Auburn that will open in the spring of the year. So there is strong expansion in the existing casinos.

In the elections that just took place, there were twelve Governors that were elected. Ten were new Governors. Two were incumbents. Of these twelve Governors, they have all indicated support for some form of gaming. Many of the states have no gaming currently. We think this is a pretty good situation for us. We think that all the trends that could impact our business are moving in the right direction. We thank you for your interest and look forward to talking with you again in January when we talk about our first quarter. Thank you, very much.

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