International Game Technology PLC (IGT) 2003 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, welcome to the IGT conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session with instructions given at that time. If you should require assistance during the call, please press zero and star. As a reminder, this conference is being recorded.

Before we begin, I'd like to note that during the quarterly earnings conference call, certain statements will contain forward-looking information such as forecasts of financial information. Although IGT believes that the expectations reflected in any of its forward-looking statements are reasonable, actual results could differ materially from those projected or assumed. IGT's future financial conditions and results of operations as well as any forward-looking statements are subject to change and to inherent known and unknown risks and uncertainties. IGT does not intend or undertakes no obligations to update our forward-looking statements to reflect future events or circumstances. All forward-looking statements in this conference call reflect IGT's current analysis of existing trends and information and represents IGT's judgments only as of today. Actual results may differ from current expectations based on a number of factors affecting IGT's businesses.

Information on factors that could affect IGT's future businesses and financial results are included in our annual report on form 10K for the year ended September 28th, 2002. And other public filings may be found with the Securities and Exchange Commission. This call, the webcast of this call, and the replay are the property of IGT. It is not for rebroadcast or any use by any other party without prior written consent of IGT. If you do not agree with these terms, please disconnect now. By remaining online, you have agreed to be bound by these terms. With that being said, I would like to turn the turn the conference over to your host, Maureen Mullarkey, IGT's Chief Financial Officer. Please go ahead.

Thanks and thanks for joining us today. Since Tom Baker is attending the ICE gaming show in London, today T.J., Chuck and myself will take you through our first quarter results. The end of December marked the completion of our 1st quarter of fiscal '03. It also marks the 12th consecutive quarter in which our EPS increased over the corresponding quarter of the previous year. Despite a difficult economic environment, we continue to perform strongly in all facets of our business. Two primary factors are responsible for the current positive tone of our business. One, gaming is becoming a growth industry again. As a result of growing fiscal crises, many states are considering gaming to close budget gaps. As well, the new ticket-in/ticket-out technology is stimulating n acceleration of the replacement cycle of slot machines.

Two, against this favorable macro backdrop, we believe we're executing extremely well. Our game developments, manufacturing and sales efforts are yielding higher margins and a greater efficiency in our earnings. While reviewing the business highlights in each of our segments, I will touch on the financial drivers and answer a lot of the questions we've gotten today. I will assume at least most of today's participants have read the press release. After my review, T.J., Chuck and I will open up the call for questions and answers. Product sales during our 1st quarter reached 241 million, a record for IGT, growing 21% on the revenue line, and 39% in margin contributions while total shipments at 29,700 were down slightly from the prior year. The higher revenues resulted from a greater mix of domestic shipments, which comprised 65% of the totals, compared to 39% in the same quarter of last year. Product margins domestically were strong due, first and foremost, to a higher demand and a greater mix of new property sales, and also, because of the trend toward a higher percentage of traditional and real gains. Last year these gains comprised about 35% of total domestic shipments. In September, 38%, and for this quarter, 44%.

This trend results because of the fact that we're seeing more full-scale floor replacements as part of the acceleration currently underway in our markets. We also sold very few games into Japan during the quarter. So, international margins were particularly high. Clearly mixed impact product margins. For the remainder of '03 we will continue to benefit from the drivers mentioned above, but we will layer on Japan's sales. We are currently selling an Adam's Family game into the market and anticipate sales to pick up. These margins are between 30 and 35 percent. Also, in fiscal '03, we will begin shipments into the Quebec market, we talked about this market before, where we secured 8400 of the 15,000 machines that the province put out for RFP. These particular machines, because we're required to make them in Canada will have margins of approximately 35%.

Because of these factors, I believe that a run rate of between 44 and 45 % is a better percentage to move forward. Therefore, our performance in improving product margins remains quite robust, as witnessed by the actual results of the past two years and in the current year. Over one month product margins were 40%, growing to 43% in '03, and now in the mid-40s for fiscal '03. Domestic product sales saw increased demand in all three categories: existing markets, new markets, and the replacement markets.

Domestic shipment totals for the quarter were 19,300 as compared to 12,600 last year. We shipped to several new properties in existing markets, including The Borgata in Atlantic City, The Cannery and Tuscany in Nevada, and several different expanding Native American casinos. This subset of shipments sold over 4300 total games in the quarter, where we enjoyed an aggregate share of approximately 72%. We also shipped products into the newest gaming market in New York, with over 1700 games sold to the Seneca Falls casino, representing a 72% share for IGT. This sale is particularly significant because it marks the opening of the New York market to Class 3 gaming. Five additional New York tribal casinos were provided for in enabling legislation signed by Governor Pataki last year, and each of these are in various stages of discussion with the state .

The replacement market compromised 58% of domestic shipments for the quarter, or 11,100 versus 7,200 in Q1 of fiscal '02. We remain confident that we will reach our replacement goal of 50,000 games during fiscal '03. Easy Pay continues as the primary driver of replacement sales in the U.S. market, and we estimate total machines in the field now over 90,000. This is up from 45,000 a year ago, and 72,000 at the end of Q4. Easy Pay highlights in the quarter include the107th system installed by the end of our quarter. We currently stand at 109 systems. We shipped over 3300 replacement games to the MGM Mirage organization during the first quarter, for our previously announced Easy Pay agreement.

We recently announced an agreement with Horseshoe Gaming to upgrade their casino floors in [indiscernible] Louisiana, [indiscernible] Mississippi and Hammond, Indiana. This program includes the purchase of over 3,000 new IGT machines and three Easy Pay systems over the next three years. The opportunity for additional Easy Pay-driven sales over the next several years remains excellent, as the large nonTIDO, non-upgradable portion of our domestic-installed base provides a target-rich environment. The ongoing sales drivers in all markets also remain solidly in place.

Our games cover all segments, including spinning reel, video poker and simulated spinning reels. In the S2000 category or the spinning reel, we have Super Spin 7, which is the 5th all-time highest win-tested game. Six Times Pay, the second highest. And Five Stars, which is also a top tested gaming. Our I-game top performers include Tobasco, Money Storm, and Uncle Sam. In the premium products category we currently have available Multi-Strike Poker, 18-Reeler, Spam and Beetle Bailey. In the [indiscernible], we have several different games which I'll mention later, but also 8-Ball and Video Mega Bucks.

An additional driver derives from the fact that virtually every manufacturer of cashless gaming systems and gaming machines is licensed to the cashless patents in the intellectual property package, or IPP, administered by IGT subsidiaries. This is a positive for cashless gaming and for the gaming industry as a whole, as it clears the way for any U.S. casino to implement cashless technology on its floor using virtually any combination of systems in gaming machine providers they choose. It's a positive for IGT, in that no matter what system is selected by an operator, broader adoption of cashless technology results in greater game sales for IGT, as we see the replacement market accelerating. Total international units attend 5, are down from the 19,900 units shipped last year, mainly due to regulatory issues in Japan and Australia. International average prices at 4600 1/4, compared to 3600 last year and 4200 in the prior sequential quarter. Both average prices and margin improvement resulted from the lower mix of [indiscernible] games that we sell into the Japanese market, and the strength of machine and part sales at IGT Europe.

IGT Europe was again the big winner in our international family as it was in fiscal '02. This subsidiary continues to build strength with sizeable shipments into Holland, Portugal, Ukraine and Sweden during the quarter. Game operations revenue at 248 million was up 3% from the 242 million reported on a proforma basis in Q1 of '02. Sequentially, revenue for Q1, which was due to normal seasonal factors as the lowest of the year, was down 16 million or 6% from the seasonally strongest quarter, the 4th quarter, and in line with our expectations and slightly ahead of industry trends for seasonality. As an organization, we've been extremely focused on improving yield in this segment of our business, and the results during the quarter were very encouraging. Year-over-year, coin-in, per machine, per day increased by over 7% in our wide area progressive system.

With double-digit increases reported in Nevada, New Jersey, Mississippi and Louisiana. Our jurisdictional mix is also enhanced where Nevada units, the industry's lowest net-win market, now comprise 39% of the total as compared to 44% last year. Increases in yield per machine simply underscore the fact that better games produce more robust play. We fully intend to continue in the reinforcement trend. The install phase of IGT-owned recurring revenue games, which is made up of machines operated in both casinos and rosinos, grew by 400 gains sequentially, and 600 as compared to last year. In the casino category, we ended the quarter at 28,500. For rosinos, the total was 4000. For a total of IGT-owned games at 32,500. The number of games in the casino market category was aided by the commencement of gaming in New York, but reduced by managed removals of former anchor standalone units as these products are now technologically obsolete and, therefore, determined to be end of life. Installations within the casinos end of quarter as mentioned at 28,500 versus 28,600 at the end of September.

The rosino or public gaming category benefited from increased market share in Delaware rosinos awarded to IGT due to our superior game performance. Market share in Delaware is now approximately 60%. Later this fiscal year, the games we placed in New York's racetracks will flow through IGT's game operation segment. The New York lottery has indicated that game placement, at the initial procurements, will be a function of game performance. Given our recent success in Delaware, we are enthusiastic about this potential opportunity. The product pipeline of recurring revenue gains continues to produce top performers. Titles released during the quarter include I Love Lucy in Nevada and New Jersey, where performance is at twice the jurisdictional average, as well as Lifestyles of the Rich and Famous, which is our first ADP, or advanced video platform game. And Beverly Hillbillies, our first Penny Progressive, both of which are putting up very large numbers in the limited numbers of venues thus far. Highly anticipated games that are still in the pipeline include: Magic 8-Ball, Hunch a Bunch, a brand new extension on the Price Is Right, Family Feud, and M.A.S.H.

Moving on to our third business segment, lottery and paramutuals. This is a consistently profitable cashflow positive part of our business, with the best growth opportunities existing in international markets. On December 2, 2002, IGT Online Entertainment Systems, formerly known as AWI, and the Korean lottery services went live with Korea's first online lottery. While our revenue from this source is proportional to play, it is potentially quite profitable since there will be over 5,000 retail outlets will be online by midyear. IGT intends to continue to pursue international opportunities. In addition, we will continue to be a strong player in the domestic arena. We will not seek to gain market share by making poor economic decisions.

Some additional considerations, cashflow. During the 1st quarter, the company generated 32 million in operating cashflow and ended the quarter with 441 million of cash on the balance sheet. Working capital used approximately 60 million as we saw our inventories grow modestly related to higher demand, inventory turns at the end of the quarter were 3.3 times as compared to 3.4 times in September. Receivables also increased due to late in the quarter shipments to Borgata, The Cannery, and Tuscany. We also extended approximately 16 million in credit to the Seneca tribe. IGT has a long and quite successful history of using our invested grade balance sheet in advance of new markets opening. We've done this primarily to our subsidiaries so that gaming sells our products in 18 different Native American markets that operate Class 3 gaming facilities. Day's sales outstanding for receivables in December were 97 days down slightly from 102 days in September.

Current liabilities also declined by approximately 80 million, related to payments in the quarter of cash-sharing, profit-sharing and incentives for our employees' outstanding performance in '02. And because of timing payments made during the 1st quarter. During the quarter, IGT also repurchased approximately 274,000 shares for an aggregate value of just under 20 million or $72 per share. We're very proud of our balance sheet, our debt to equity ratio is at 1.3 times and interest coverage in excess of 8 times is quite strong. We have a current ratio of 2.6 times to 1. We believe that IGT that these items, for instance strong cashflow and balance sheets, are particularly important for our shareholders, not only for their own sake, but also because they give us the flexibility to undertake appropriate financial initiatives for both the benefit of shareholders and bondholders when the opportunity to do so presents itself. Before we open up the call for Q&A, I'd like to briefly touch on the topics of diversification and gaming expansion.

Diversification, we talk about this every quarter, but one cannot really understand the resiliency of our business without touching on diversification. We've seen gaming markets grow substantially over the last decade from [indiscernible] and Atlantic City from the beginning of the 1990s to now 11 different states operating commercial casinos, 23 different states operating Native American casinos and 6 states operating rosinos. While Nevada and Atlantic City are still significant to IGT they provide about 15% and 9% respectively of our EBITDA with the remaining 75% widely spready among riverboats, Native Americans, lottery, international, Canada and the rosino markets -- naturally, the more diversified span of markets, this correlates directly with a much broader base of customers for IGT as well. By business segment, IGT is also widely diversified over virtually every aspect of legalized gaming worldwide. Somewhere in that mix there are opportunities surfacing at almost any point in time.

On expansion, the subject has been well analyzed. We believe that gaming industry is on a growth path once again. A few macro trends to remember about expansion, growth in existing markets can be meaningful. California Governor Grey Davis' recently published budget proposals including increased revenue from Native American gaming in the state. This is to suggest that additional tribes wishing for additional machines or for new tribes who wish to compact, could get receptive hearings from the governor. Tribal states gaining compact will begin renegotiating in March of '03. The expansion underway in the existing Native American market of Arizona also provides further opportunities for IGT. In November, Arizona voters approved compacts that allow non-gaming tribes to provide machine allocations to gaming tribes. This change could result in an additional 5,000 to 6,000 games in this market, and we could see shipments relative to this expansion late in our current fiscal year .

In New York, class three gaming is under way in gaming machines placed at the state's 8 rosinos operated by the New York lottery, we think, should commence by late this fiscal year. The outcome of the November elections was, to a very large extent, positive for gaming expansion. Along with this, 40 of the 50 states have significant fiscal deficits, and historically, we've seen gaming grow as casinos and rosinos are used as a means to plug deficits. While many unknowns exist regarding which states passed legislation, the macro trends show an expansion is under way, there by growing the markets we serve. These trends benefit all parts of our business: product sales, gaming operations, and our lottery segment. Most of you have heard myself, Tom or T.J. remark that our goal for EPS growth is between 10 to 20% on an annual basis. We've established this goal because we believe in these broad macro trends reiterated today will benefit IGT, and that the internal transits in the company are, in fact, yielding higher margins. During our last call in November, we commented that '03 could see growth of 15%. Due to the strong performance in Q1, we are now more comfortable in the range of 15% to 20%. I would like to remind listeners, again, that our business is seasonal, particularly in game operations. And so to expect, as you have seen historically, greater earnings in the latter half of our fiscal year. Operator, that now concludes my prepared remarks, I would like to open up the call for Q & A.

Thank you. Ladies and gentlemen, if you would like to ask a question, please press one on your touch-tone phone. You will hear a tone indicating you have been placed in the queue. If you would like to remove yourself from the queue, you can do so by pressing the pound key. If you are using a speaker phone, please pick up your handset before pressing the numbers. Once again, if you wish to ask a question, please press 1 at this time. And we have a question from the line of Steve Kent with Goldman Sachs.

Good afternoon. Could you just comment a little bit on the number of participation games going into rosinos? Clearly this is a big opportunity for you. It's becoming a greater percentage of your participation games. Could you comment on the profitability of those machines compared to ones in casinos since you have to share some with the horsemen, the track, the other people.

Well, the markets that are established to date are Delaware and Rhode Island where the rates for deploying machines in those markets is somewhere between 5% and 8%. We would anticipate that the installation of machines in New York would also fall within that range. In both Delaware and Rhode Island, the machines usually earn about $300, and so you can kind of derive your math from there. But, of course, we like that model. We like the recurrent revenue aspect of it, we like the fact that on average, we do realize more moneys from those machines than we do in the for sale model. But in exchange, the state, of course, is absent any capital requirements, and is assured of us making those floors up to date with our best earning games, and so I think generally speaking, the customer reception of that model is one in which they say -- they get more value realized as well.

We've taken some pains in today's call to break out those IGT-owned games and demonstrate they've gone from $3,500 to $4,000 that shows that New York is a meaningful market that is going to impact our '04 numbers. One should realize that the allocation in those markets kind of were initially mandated by various constraints of the ideas of governments being fair, but ultimately they do turn over the floor to the marketplace, in Delaware, where earlier we were mandated to a much smaller market share, due to the IDS fair mindedness, now we have over 56% of the floor due to the fact that our machines are performing. So we expect much the same to occur in New York, where we started off with about 25% market share and expect to earn our more normal 60 to 75% market share in hopefully short order.

I guess, T.J., what I was asking is the profitability of the rosino participation game as compared to the casino participation game.

They are not. They are definitely, on average, we earn less per unit from those machines than we do from a casino-operated game. In those markets, we are working, however, to have traditional participation games also introduced into those markets at our traditional participation pricing.

So, net, you think you're going to be similar in just dollar contributions?

Net-net, a participation only market is more lucrative for us than a for sale and a casino participation model market.

Thank you.

We have a question from the line of Harry Curtis with JP Morgan.

Quick question going back to your international sales, Maureen. You mentioned that regulatory issues have impacted Japan and Australia, could you give us a little more color on that, please.

In Japan, the police, as I understand it, are the regulators, essentially changed the volatility requirements on the game. And so we had to -- there was a gap of three months before we could introduce games into that market that were compliant with that new regulatory requirement. It was not just an effect on IGT, but a change in regulation that impacted the industry. And then in Australia. Two things are happening in Australia right now. One is what's called har minimization, and efforts in that jurisdiction -- for instance, there's also smoking bans and a severe drought in Australia that's impacting the profitability of our customers, so we saw machine sales decline in the quarter. Australian sales were about 1,700 in the 1st quarter, and Japan with 24 games sold.

Do you think these trends are going to last for some time?

We are currently selling games in the Japanese market. We have an Adams Family game that is approved and is for sale. And the Japan market -- I mean, we don't have any grand hopes for that driving earnings this year, but we think it's going to be a contributor. In Australia, I think the har minimization efforts could last through this year. That's not a new trend, they've been in that market for really the last two years, we're starting to see the impact now.

There's been some talk about Mexico going one way or the other. It seems like a ping-pong ball. Where do you think it stands now?

It's still a ping-pong ball, in that you have a number of government authorities now in Mexico being much more pro-gaming, particularly as a solution to bring tourism back to kind of a historic level. And so I think that it is those kind of environments that ultimately accommodate gaming expansion, and so, you know, we're optimistic about that market place, but don't count it in any of our forecasts. The markets that are most meaningful to us is obviously, California is going to expand and impact '04 as is New York. Places like Maryland, Pennsylvania, Massachusetts, the U.K., Mexico, those are things that could impact our profits.

Very good. Thank you.

We have a question from Matthew Jacob of UBS. Please go ahead --

Hi, actually, it's Robin Farley. A couple quick questions. The shipments made in the quarter, is that the kind of thing where 30 days later the -- [ indiscernible ]

That's correct, Robin, some of the sales made late in the quarter, for instance by late in the March quarter, have been paid for, sometimes they're net 30, sometimes they're net 45.

I'm sorry, you said the margin quarter.

Cash sale can be either net 30 or net 45.

Okay. And then in terms of the Seneca financing, what are the terms of that?

We don't specifically disclose the terms of our financing or transactions as that would obviously be competitive and sensitive. But we remind listeners that Zodiac Gaming has done a terrific job in extended product to the Native American tribes, and Zodiac who is now our -- you know, now who we own, but back in the early '90s, they did a lot to develop the market by extending credit. We've been very successful with that. And you did see with the opening of the California market, we actually financed the Verona casino. That was a wildly successful casino and we're quite comfortable in using our balance sheet in advance of the market in this manner.

For Borgata, have you shipped everything that you are going to ship for Borgata?

With the exception of the recurring revenue games, we won't ship those until they're up and operational, and I think that casino is scheduled to open in July.

And then you mentioned some new games production -- in game operations at the end of the quarter, is it much different today than it was at the end of the quarter. Has there been enough installations or movement?

Well, I'm not sure that we would comment on numbers in terms of the install base, but the install base looks much different today than it did a year ago, that's really one of the things we try to make sure that people understand, is that one of our business efforts besides increase in the install base very much has to do with the managing the yield of the existing install base. And we think we've done an exceedingly good job at that. One of the big pushes is to get our products into more lucrative markets. For instance, our penetration in Native American casinos in the last five quarters is up over 1500 units. And that for us remarks on a very good job done, exposure to much better performing units that obviously the brand extensions is about taking existing -- what's on the casino floor and making sure we extend their life and increase their performance.

Another aspect of managing yield is managing removal. And we talked about the fact that we have been taking games off the floor, that we want to target lower-earning games and replace them with higher-earning games. The anchor games that were inherent at that merger are now technologically obsolete. They don't have ticket-in, ticket-out capabilities. They're not on IT platforms in some instances, so those are games that we're targeting, but we also have a much bigger effort on moving to more lucrative pricing. We had for a while focused here on making participation the primary means for new product introduction. That is no longer the case. Our primary means is pricing our games, wider progressed pricing. When we -- we've increased a couple percentage points in the last quarter, the number of games that are priced with the aggressive pricing model as opposed to the 80/20 participation model, you've seen us really focus on IGT-wholly-owned games. We're willing to do partnership with other folks that bring unique gaming concepts to the market. But we obviously prefer our 100% wholly-owned internally derived games and have made sure that that hasn't had a big focus on our install base. And so, our install base has changed a great deal in the last year. I would expect that those two things over time will increase yield.

To increase the install base is all about managing our product. The bubble strategy has been very successful in terms of our ability to take existing links, fashion the market, have less expense associated with the game introduction, but more importantly, have constituted a plan for our products to be more diverse than its ever been. We really for some period of time, because of the video game mania that existed in the industry, we too had a huge focus of resources based on video games. Right now our focus has touched every single market, spinning reels, video poker, video game devices in every denomination, and to always use intellectual property to make sure these games can't be replicated by others. We're doing a great job in that, and you'll see that reflected in numbers later this year.

It actually looks like the gross profit per unit was up for year over year -- and the total gross profit was up -- even proforma, is that right?

It was up. And Maureen had a great statistic that said plus 7% on coin-in numbers and wide area progressives, and double-digit increases in our four of our big jurisdictions. Mississippi, Louisiana, Nevada, and New Jersey.

Great. Thank you.

We have a question from Joyce Minor with Lehman Brothers. Please go ahead.

Can you follow that up and give us a sense of how many of those obsolete games were removed in this past quarter and was that more than in previous quarters? I know that's been an ongoing strategy.

Yeah, we've inherited, from Anchor, about 2200 devices, we're down to just over 1600. We've removed 600 games from that inventory in the last four quarters, but more than half of those -- or about half of those were removed this past quarter. So it's definitely accelerating. Those are definitely places that we're going to take with better performing IGT game introductions.

So, you are saying there are 300 of those removals in the most recent quarter -- and I guess the casino install base was down by 100, so excluding that impact, it would have been up by 200.

Our install base away from the Anchor implementation is up, yes.

Okay. By about 200 it that sounds right?

Yeah, I mean, you'd have to do the math, but that's a fair number to get to.

Okay. And then Maureen, can you speak to, I guess, the mix on the domestic versus international product sales, that margin you're talking about for the rest of the year -- that kind of 44 to 45%, what kind of domestic versus international mix is that based on? Or can you speak to maybe the number of international units? Should we see it go back to more like the 13,000 at quarter range?

Well, nothing's linear, so I don't want to comment on the pattern per quarter. But it's not only the international margins, it's also the order that we have to SO & Q, which is Quebec. And IGT was awarded an 8,400 machine order, and we will commence shipment of that order in our fiscal 2nd quarter. And based on what the lottery in Quebec is telling us, a majority of those will flow through this year. So and those carry 35%.

The only reason they carry 35%, is that we have to -- for the RFP, manufacture those up in Quebec. We have brought manufacturing from that subsidiary deal into Reno, and that is yielding higher margins on our games, produced for that subsidiary. But that particular segment will have lower -- the lower margins. So -- and then, in international, really, I don't think there's a substantive change in any of the trends internationally -- Australia might show a little bit lower, but it's still a profitable company, and we will continue to have sales in Japan. I think kind of run rate basis.

Okay. One more number, can you tell me what the backlog looked like at the end of the quarter on product sales.

The backlog on the quarter was approximately --

16,000.

Right. And it was 13,000 last time we talked to you.

Great. Thank you.

Thank you.

We have a question from Michael [indiscernible] from Solomon Smith Barney.

Thanks. A question for Maureen or Chuck, if he's there. Can you comment on the dividend philosophy, both on an absolute basis and relative to share repurchase in the current environment as well as the tax law exchange?

Well, I'll let Chuck comment, but, initially, you know, there's been no change in our philosophy of using our free cashflow, to buy back stock as a means of a return for shareholders. We are absolutely monitoring the -- we always monitor the alternative uses of cash to enhance your value. I think you've seen it undertake several different positive financial initiatives over the years, but there's a significant amount of uncertainty regarding the Bush proposal, but, up and until then, there's been no formal board consideration at this time of the dividend.

We support the proposal, think it makes a lot of sense fortunate the future. For the legislation to be passed, we would certainly be examining that, as one possible use of our funds. Does that answer that question?

I think so.

I think so.

Thank you. We have a question from Larry Claskins with Jeffries. Please go ahead.

The question goes in another direction. On the lotteries, I know there's a couple big lotteries coming up for bid in the next quarter, one is one of your's in Florida, any feelings for how they may go and what that means?

Obviously, we hope to retain our contract in Florida and grow our install base of customers in that segment. The things we're working on, obviously are means for us to be technologically sound and competitive from a pricing point of view. We want to be able to grow that business from a revenue production point of view, and so we have a real focus there, just like we do on our gaming machine business on contact. And we think long term that will make a difference for our subsidiaries to kind of get out of this commoditized pricing that does take place in this industry, and get to a place where we can produce much better returns on investment and much better margins in terms of operations.

Should we lose Florida, which is our only near-term contract coming up for bid. It will not necessarily have a very big impact on the profitability of that business segment. We've done a good job in making sure that costs are rationalized. It's a nice big flagship for us, and it's certainly one we want to keep. But it is not particularly profitable to us as a company.

Any big contracts coming up that you think you have a chance of grabbing from someone else?

The biggest opportunities for us are not necessarily the ones where we have to compete. The Korean lottery was a terrific example of us taking a brand new lottery introduction in the marketplace, becoming the vendor of choice, having opportunities for us to share, and the profitability of that lottery, in terms of us getting a portion of our payments paid as a percentage of revenues, but also deferring the risk in that we have no capital risk in that lottery and it was a third party buyer of our equipment. And so we realize profit in that part of the transaction as well.

All right. Thanks a lot.

Thank you.

We have a question from the line of David Anders with Merrill lynch. Go ahead.

Maureen or T.J., maybe a little comment on the win per unit growth for the progressives, or the share revenue gain. Do you think mid single digits would be reasonable for the next several quarters given the portfolio shift, is that right?

At a minimum, we hope we will be able to grow revenues of our mega jackpots at the same rate that you would anticipate revenues growing in the outstanding gaming market. So to the extent that those are kind of solid single digit numbers, then we would suggest they use those. Of course, our goals are to exceed that.

Right. But if you're improving your portfolio games out there, it should be north of the industry average, correct?

Right.

Okay. And Maureen, the 15% to 20% growth, was that for the full year 2003 versus '02?

That's correct, David.

Okay. Thank you.

Next we'll go to the line of Kent Green with Boston American Asset Management. Please go ahead.

I had a question about the lottery business, I understand that some larger technology companies are starting to put bids into some of these states along with lottery operators-- are you doing any joint ventures with larger technology companies?

Well, we haven't seen larger technology companies bid on any contracts, but there's definitely a move for the industry to contract with other providers. For instance, you'll see the telecommunications aspect of the lottery change a great deal here perspectively -- satellite is used more so than our hardlined telephones. You'll also see the terminal technology that our subsidiary OES has been done in conjunction with a third-party provider. [Indiscernible] is a provider for our terminals for new lottery bid. Because they have a particularly specialization, in those kinds of point of sale terminals. I think you'll see the partnerships will be the traditional lottery companies are still the bidders.

And then, all these deficits out there in the states, are you getting some same store sales growth to do game introductions? Or maybe increasing, you know, some of the stuff like, you know, keno and things like that.

Well, the brand extension strategy is all about taking existing footprints on casino floors and increasing their earnings on a same store sales, year-over-year basis. We're definitely seeing that as part of our yield story. Besides managing machines and locations of individual casinos and managing market selection, where we introduced products are also having an impact on our yield strategy.

Thank you.

Thank you. We have a question from the line of Tom Zenko with Arridian. Please go ahead.

You said on a proforma basis, Maureen, what did you say the gaming operations revenues were up?

Proforma basis, 3%.

Okay. And why would the gross margin be up in that business? Albeit not all that much, given interest rate declines year over year.

Well, you have some operating efficiencies and it also is a function of mix of the type of pricing.

Thank you.

Ladies and gentlemen, once again, if you wish to ask a question, please press one at this time. There are no questions. Please continue.

Okay. Well, thank you. We'd like to reiterate again, that we think there are several broad macro trends in our market, and that gaming is a growing market. Whether this is resulting from expanding markets or new markets resulting from the many state fiscal crises, or the greater adoption of our technology, IGT is very nicely poised to benefit from these trends. I'm also quite proud of our team at IGT in our ability to execute yielding higher margins for the business. I would like to thank you all once again for joining us and for your continued support. Thank you.

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