International Game Technology PLC (IGT) 2003 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the IGT third quarter earnings release conference call. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session. The instructions will be given at that time. If you should require any assistance during today's call please press the star followed by the 0 on your touch tone phone. As a reminder, today's call is being recorded. I would now like to turn the conference over to Chief Executive Officer, Mr. Tom Baker. Please go ahead.

Thank you. Thanks everybody for joining us today for a conference call reporting on our third quarter of fiscal 2003. This morning we reported another record quarter, and our results were once again underscored by the diversity of the company's business segment, as well as the breadth of our market and continued focus on providing our customers with the best technology and gaming content in the gaming industry today.

For the quarter we posted financial results, and I'm pleased to communicate that the current quarter results marked the 14th consecutive quarterly period in which earnings have increased over the comparable prior year. For the current quarter, both income and EPS from continued ops improved 29 percent and 36 percent respectively, primarily on the strength of record replacement sales volume.

I'm also pleased to communicate that in early June our board of directors declared a stock split, four for one, and a cash dividend of seven and a half cents per share on the post split basis. We also announced the signing of a definitive merger agreement with Acres Gaming. In terms of the agreement, IGT will pay $11.50 per share, all cash, representing an aggregate purchase price of 130 million on a fully diluted basis. We estimate the acquisition will be neutral to slightly accretive to our EPS on a full-year basis. However, more importantly, the acquisition represents our long-term commitment to the systems business. We are excited about the strategic opportunities that will result from this deal.

The strength of our core business, coupled with our strong cash position, gives us more financial flexibility than we've ever had before. As evidenced by these recent announcements, the quarterly dividend is yet another example of which we can extend upon our longstanding practice of returning value to shareholders while also funding the future growth of our business through the Acres acquisition.

I'm now going to turn the call over to Maureen Mullarkey, our CFO, who will discuss the operating performance and business highlights, and we'll continue with questions and answers, and I will wrap up with closing comments. Maureen.

Thanks, Tom. Good morning everyone.

Before I 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 operation, as well as any forward-looking statements are subject to change and to inherent known and unknown risks and uncertainties. IGT does not intend and undertakes no obligation to update our forward-looking statement to reflect future event or circumstances. Our forward-looking statements in this conference call reflect our current analysis of existing trend and information and represent IGT's judgment 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 business and financial results are included in our annual report on Form 10-K for the year ended September 28th, 2002, and on other public filings made 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 use for any other party without our prior written consent. If you do not agree with these terms. Please disconnect now. By remaining on line you agree to be bound by these terms.

Today I'm going to cover our three business segments. In an effort to maximize time for Q and A on the call I intend to just cover the highlights and direct everyone to our press release for a more detailed year over year comparison for both the third quarter and year to date results. I'd like to remind everyone that the current period and prior period share amounts that we speak of today on the call are reflective of our recent four-for-one stock split.

Kicking off with product sales, product sales revenue during the quarter totalled a record of 301 million, an increase of 35 percent over the prior year, and 18 percent over the sequential quarter, primarily due to record replacement volumes. Total quarterly shipments at 37,500 were comprised of 24,200 domestic shipments and 13,300 international shipments. Average selling prices were up in the quarter to 8,000 an improvement of 12 percent over the 7100 from the prior quarter and a 9 percent sequential improvement. This improvement primarily relates to a greater mix of domestic versus international shipments. Domestic shipments comprised 64 percent of the total in June as compared to 56 percent last year.

In addition, domestic ASP's were up to $10,000 and greater than the prior year of 9600 and sequentially of 9700 due to increased easy pay and related systems revenue and game conversion and content fees. International ASP's were also up from the prior year, 4300 in the June quarter versus 3900 last year and 4200 sequentially. This is due to stronger parts and conversion sales in Australia and favorable FX rates in both Europe and Japan.

Gross profits on sales in the quarter was 48 percent versus 42 percent last year and was again due to a higher mix of domestic gains and because of the improved operating efficiencies related to higher production volumes. For the first nine months in the Reno plant we produced over 75,000 games compared to 60,000 games in the prior year to date period. During the June quarter we produced over 29,800 games and came within 10 of the all-time record set back in 1994. We at IGT are particularly proud of this fact given that we went live with our new ERP system at the beginning of this calendar year.

Consolidated margins also improved due to a greater mix of spending real product our S 2000 which were sold into several new casino openings and because of more significant systems revenue. Looking forward, margins should fall within the 45 to 48 percent range due to a conservative view on geographical mix of sales, contribution related to higher margin easy pay systems, ITT royalties and foreign exchange rates.

Drilling down a little bit into product sales, domestic shipments totalled 24,200 and were comprised of 72 percent replacement sales and 28 percent of new and expansion sales. The replacement market accounted for 17,500 units, which is a new quarterly record for IGT. This brings the total domestic replacement sales to 42,500 for the year-to-date period, or 85 percent of our previously stated goal of 50,000 games for fiscal 2003. We think that the correct range for replacement sales in '03 is now between 55,000 to 58,000 machines.

We shipped an additional 33200 machines into the province of Quebec during the quarter and we have approximately a thousand games left of the previously announced order for 8400 machines. As anticipated the Canadian provinces of Quebec and Saskatchewan have been a strong source of replacement for IGT in fiscal 2003. In fiscal 2004 we expect to benefit from the replacement programs announced in the provinces of Alberta and Manitoba, but they will not be of the same magnitude, and it's likely that our Canadian deal to replacement sales will be less next year.

New and expansion units in the quarter totalledtotaled 6700 machines and was concentrated in Native American markets. We shipped 1500 games to new Thunder Valley Casino in northern, California with an 80% market share. We shipped a thousand machines to the (inaudible) Gold Casino near Fresno with a 60 percent market share, and we shipped 440 games to the Arizona Casino Del Sol with 100 percent market share.

Clearly the tide of our easy pay related orders continues to gather momentum and is a primary driver of our domestic sales growth. Easy pay highlights in the quarter include the installation of our 134 th system. That's an increase from 95 systems at the beginning of fiscal 2003 and 120 systems at the end of just last March.

We still remain confident that we are at the beginning stages of the current replacement cycle and estimate that the replacement market will continue to be robust for IGT over the next three to four gains. As always, exceptional strong gains produce exceptionally strong sales. Our current lineup is the best ever, including top of the line entries in all of our categories. That includes spinning wheel , video poker, and video simulated spinning wheel.

Internationally, units totaled 13,400 during the current quarter versus 13,700 in Q3 of '02. During the period, bar crest shipments improved 15 percent over last year increasing by over 8700 units. IGT Australia continues to experience difficult business conditions due to restrictive government, anti gaming regulations known as harm minimization which are impacting operators and suppliers across the market.

Moving on to our second business segment, game operations, revenue at $261.7 million, increased approximately 1 million from Q3 of last year and decreased 12.7 million, or 5 percent from the immediately preceding quarter. The sequential decline in revenues is primarily due to the higher revenues realized in the March quarter resulting from the record Nevada mega bucks jackpot that was hit in late March for 39.7 million.

Excluding what we call the mega bucks effect in Nevada, the sequential growth in our wide year progressive play levels was up 3.5 percent for the quarter, our year over year quarterly growth was 2 percent, and for the year to date period on a year over year basis it was up 5 percent. Therefore, we believe the yield growth remains on track.

Quarterly margins came in at 52 percent and were down approximately 250 basis points from last year, resulting primarily from lower interest rates in the period and to a lesser extent, higher operating costs. We have been successful in the current year mitigating higher jackpot funding costs by improving our mix toward wide area progressives and instant winner games and by deploying on our brand extension strategy which lengthens the life of our assets and therefore lowers depreciation expense. This quarter, however, we did realize more operating expenses, some of which were one-off in nature. For instance, we paid more commissions to our Atlantic City distributer for recurring revenue gains (inaudible) and we had a slightly higher allocation of casino service cost into the segment. Net-net, we do expect margins to improve to close to or at recent historical levels of 53 to 54 percent.

The installed base of IGT-owned recurring revenue gains, which is made up of machines both in casinos and (inaudible) increased by 800 gains sequentially and by 1900 when compared to last year. The number of games in the casino market category was aided by an increased number of installations in Native American markets on most notably California and Arizona and in Atlantic City. These games were partially offset by the continued managed removal of the end of life former anchor stand-alone units, which -- there were 100 removals sequentially and 400 year over year. Casino market major contributors for the quarter included the Borgata [ph] for 289 games and several different Native American locations for 146 games.

New game introductions for the remainder of 2003 include Uno, Magic 8 ball, Mash, and Video Sinatra. We also announced today that we have acquired the licensing rights with (inaudible) to develop a Star Wars gaming machine. The Star Wars machine will be developed on our MegaJackpots (inaudible) system using our AVP or advanced video platform. We are very excited about this development opportunity and plan to debut our first games, Star Wars: a new hope, which was the first movie of the series, at this year's global gaming expo held in December.

Lottery and pari-mutuel, our third and final business segment, as discussed in our call last quarter, IGT on line entertainment systems and the Korean lottery services, or K L S, went live with South Korean's first on line lottery in early December 2002 and we are very pleased with initial play levels. The Korea contract has quickly become one of OES's most profitable contracts and on an annualized basis is the second largest contributor of cash flow behind our Pennsylvania contract.

As we also discussed last quarter the Florida lottery commission issued an RFP with responses required by the end of March 2003, and the anticipated award is no later than July 31st of this month. As a reminder, we remain under contract with Florida through December 2004, and our current contracts generates over 30 million in annual revenues and approximately 4 million in annual cash flow.

Last quarter we announced our plan to divest our non-strategic pari-mutuel wagering business, United Tote, which was acquired in connection with Anchor Gaming acquisition. We have entered into exclusive negotiations with prospective a buyer and expect to consummate the sale no later than the end of this fiscal year. We also previously announced our intent to divest of our Colorado Casino operations, which were also acquired in connection with the Anchor acquisition. In late April of this year the company announced the closing of the Casino sale to the Isle of Capri in Blackhawk for total gross proceeds of 84 million.

Operating expenses for the quarter and year to date period totaled $112.6 and 332.7 million compared to 100.22 million and 273.9 million respectively in the prior year period. Operating expenses increased due to additional employee-related costs, including salary and wages, incentive and group insurance cost, as well as ongoing investment investment research and development. This is partially offset by recoveries of previously reserved Argentine receivables. We have successfully restructured all significant receivable balances that were affected by the December 2001 Argentine devaluation. We recently reached an agreement with our largest debtor in Argentina that resulted in strong cash collection.

All of this cumulated into operating income during the quarter reaching 178.6 million, or 30 percent of revenues, as compared to 145.6 million in the previous year, or 28 percent of revenues.

During the quarter, we lowered our estimated federal tax rate to 36.6 percent, which on an annualized basis results in a new tax rate for fiscal 2003 of 37.3 percent. This was previously 37.7 percent. Going forward, we believe that the appropriate run rate for taxes is approximately 37.5 percent.

EPS from continuing operations, as Tom mentioned, was up 36 percent to 30 cents per fully diluted shares, versus 22 cents in the last year.

Before I turn the call back over to Tom, I would like to make a couple of comments on cash flow in the balance sheet. Cash flow provided by operating activities totalled 242.7 million for the nine months just ended as compared to 398.4 million in the prior year. The decrease in operating cash flow for the year primarily resulted from increased trade receivables of 64 million related to higher revenues, increased notes and contracts of 40 million, primarily related to sales in the markets of New York, California, and Washington, and also due to increased inventory balances due to higher gaming machine demand and also increased income tax payments. We did see improvements in working capital statistics, day's sales outstanding of 101 days as compared to 103 days in the March quarter and 116 days in the comparable prior year quarter. Inventories remain relatively constant from the preceding quarter levels. Inventory turns were up to 3.7 times as compared to 3.3 times in the prior year quarter.

The strength of our balance sheet continues to provide us with flexibility to capitalize on strategic and financial opportunities as they arise. During the quarter, SAP updated our investment grade credit rating from BBB minus, to BBB. We are extremely pleased with the operating results due to both ongoing demand for our products and the efforts internally to improve both the efficiency of our earnings and the strength of our balance sheet.

This concludes my prepared comments on the operating results. I will turn this call back over to you, Tom.

Thank you, Maureen. And I want to move to give you a chance to ask us any questions you might have. I'm here with Maureen. TJ Matthews, our Chief Operating Officer, is normally with us on this call. He's on holiday, and I understand he's listening to the call but will not be available for any questions. We'll open it up to you. Are there any questions for us?

Ladies and gentlemen, at this time if you would like to ask a question, please press star, then 1 on your touch-tone phone. You will hear a tone indicating that you've been placed in queue, and you may also remove yourself from this queue by pressing the pound key. If you are using a speakerphone, pick up your handset before pressing number. To ask a question, please press star and number 1. One moment for our first question.

Our first question comes from Harry Curtis with J P Morgan. Go ahead.

Good morning.

Good morning.

Can you just talk a little bit more about the replacement run rate of 17,500 machines? Do you see that this level is now sustainable for a number of quarters or a number of years?

Harry, I think Maureen commented that she thought the run rate -- she gave a range there in her comments. It would be a bit less than 17,500 a quarter, but we did move up the run rate to about 55 to 58, I think was the range of numbers she gave.

Right. So that implies that the fourth quarter run rate will be slightly less than the 17,500, but still quite good.

I think that, we've been over these numbers in terms of how many machines there are, how many have already been converted to cashless machines, how many the competition is putting out there, and so on, and it leaves us with, you know, still a fair number of machines that we think will be replaced over the next two to three years, maybe even a bit longer. But we see a good amount of business left to go.

And, Harry, we just completed our annual census. We go out and count the machines out there every year. So we have some updated information on the number of gaming machines out there that have ticket-in ticket-out technology and we believe we're only penetrated at about a 25-percent level. If you look at the order flow that comes into the company for replacement sales, it is really become very broad-based and indicative of, you know, casinos across many of our markets gradually replacing their older technology for ticket-in ticket-out games.

The last question, when you look at the spectrum of the age of the machines that are on the floor now that are not ticket-in ticket-out, can you give us a sense or a cutoff date on which of the ones that are retrofitable versus the ones that you really need to replace because the technology is so old, like really the '98 machines or '99 machines, something along those lines?

The new platform, I think the machines we've delivered within the last couple of years are probably going to be retrofitable. Three years, possibly, maybe even machines that were done three years ago. Not all, but a good number of those could be converted to the new cashless technology. Anything older than three years is going to have to be replaced. You can't convert it.

And, Harry, even the conversion sales do have margin for IGT in that we are seeing a pickup in our parts revenue and game content sales as properties do upgrade or retrofit some of their games to the ticket-in/ticket-out compatible. So we have seen in increase in that part of the business as well.

Our next question comes from the line of Bill Lerner with Prudential. Go ahead.

Thanks guys. Great quarter. Couple of questions here. One is you just mentioned you finished the slot census. What can you share with us about total units in the installed base? In North America, there's obviously always different numbers floating around if you can say specifically how you're characterizing. If you are excluding VLT's or including. That's one. Two, at this stage Japan seems to be an opportunity cost and that's it. What's been going on there? I know you had a good game, bulldog, awhile ago. What do you as to the situation there? Finally, I just wanted to get your sense on guidance going forward. Thanks, bye.

The census, the total for the market came in at about 720,000 games, which is a 3.5 percent increase over last year. The video wheel was up slightly. Spinning wheel strong at 44 percent, and poker games were about flat. In our aggregate share across all those markets, which it does include Canada was 70 percent. We're very pleased with the results of the census.

So the 720,000 unit includes VLT's?

Correct.

Yeah, it would include them. As far as Japan, you're right, it's an opportunity. And I guess the opportunity has yet to be realized to the extent we'd like it to be. We're going to continue to stay in Japan. We have a good -- a small but very good group of dedicated people over there. And the ingredient that we really need is stronger game development, and we're continuing to work on that. I know there haven't been a lot of exciting things to say about Japan for a couple of years, but we're going to stay there. We recently had our international summit where all the people from IGT international locations were here in Reno, and we spent one week, and some people were here two weeks, talking about what's going on in the international markets. All we asked of these places is that they show us some growth and profitability. We still think there's hope in Japan. We still continue to work on that but I don't have anything exciting to say right now.

Then I think your last question was on guidance, and I think we've talked about earnings expectations in the past and that we were comfortable with EPS growth of 15 percent. Our earnings through the first nine months have certainly exceeded that goal that we set a couple of quarters ago, so we're quite a bit above that for this year. Looking at the future, I think next year we're probably in the ballpark of a buck and a quarter or so, which is on a pre-split basis around the old numbers $5, the new number is a dollar and a quarter. And that's pretty much what we have to say now. The last quarter, I think we said the third and fourth quarter would be comparable to the second. This quarter has beat it by a bit. And the fourth quarter, we're sticking with what we said a quarter ago, probably around 27 cents or so.

And I think the fourth quarter, too, of this year, will be comparable. It might be slightly less than this quarter, but we will see, as we mentioned before, slightly lower replacement sales, but we will see improving margins on the game ops again.

Thanks a lot, guys.

Our next question comes from the line of Robin Farley with UBS Warburg. Go ahead.

Couple of questions. One, can you comment on, looks like the win per unit in the game operations segment was down year over year. And I know what you explained about the mega bucks jackpot would explain the sequential decline, but can you comment on the year over year, just on the casino segment, not necessarily this racinos [ph].

It really is -- the explanation is also Nevada. The year over year quarterly growth was actually up 2 percent when we look at our play levels on wide area progressive when we take out Nevada. So we think that there was, if you will, a Jackpot fatigue phenomena of the quarter, you know, after the big jackpot hit it kind of dips down below normalized levels. So we look closely at that, Robin. We do believe that the yield growth is on track, but the Nevada results did impact the quarter just sequentially and year over year.

Are you still seeing that now in July so far, in terms of just Nevada?

I don't know if we're really prepared to talk about July that much. I think the jackpot on mega bucks is starting to grow, but I don't know that the levels are at -- high enough that I'd say that it's a meaningful change in that as of yet.

There's one other factor that Maureen didn't mention, and that's in terms of the number of units, there was several hundred units that were placed very late in the quarter. And although they're in the unit numbers, did not really contribute much in terms of the revenue. They just weren't there very long. Borgata [ph] was one. There was a couple of others. New casino openings, we had several hundred machines that just weren't there except very late in the quarter.

Okay. That makes sense. The guidance you just gave in your last comment, the buck 25 for next year, is that assuming no new approvals in either Pennsylvania or in California? In other words, would there be upside if there were announcements that more units were going to be allowed in California properties?

California is a market that we think still has quite a bit of growth to go. You know, there's ongoing negotiations there to amend the compacts. They're under the way. But, of course, the governor is under siege, and we're not sure exactly what's going to happen or when it's going to take place.

When I give you a number, as we have in the past, we don't really condition it on any particular thing happening. There's so many things going on right now. That's just a number that we're saying we're comfortable with.

And we've said continually that we think the new markets are going to continue to open. The New York market, for instance, we expect to see activity there before the end of the calendar year. And we think the New York market, based on what we know today, is going to be bigger than what anybody expected. But it is starting later than what we thought a year ago. And when we gave guidance for this year, we originally probably thought there would be some New York activity in the market, and there really hasn't been much from the racetrack area. Of course, the Niagara falls casino opened up, and that was a good piece of business. So I don't think it's conditioned on anything, Robin.

Also, as we stated in the last call, any new legislation into the specifics of your PA comment or question, we wouldn't anticipate that that would be an '04 event, because it takes a year or more for the regulatory process to go through and be settled.

That's a good point.

You're not expecting anything in Pennsylvania to be announced or legalized in the next quarter?

No, no, P.A., every day you get a new update on that, and it looks like it could extend beyond just racetracks and the slot parlors. You know, it's hour by hour, almost. Maybe today even. But when you look at the time line between the passage of legislation to when it becomes commercial for IGT, if you look at New York as a proxy, that took 15 months. And I think that Pennsylvania is going to -- is going through a procurement process, so we anticipate that that time line is probably relevant for Pennsylvania.

And then two last questions if I could. For SG&A, did you indicate that -- should the run rate going forward be similar to this year's SG&A?

That would be okay. The reason it fluctuates, or it can fluctuate because of incentive payments related to operating income growth over plan, I think that this particular run rate is reasonable. Nothing's ever on a straight line, and it could be a little less or could be a little more.

Great.

And we do have additional expenses sometime in Q4, or typically in Q4, related to the gaming show.

The last question, I know you don't usually break out a lot of detail on systems revenue, but I wonder if you can comment on what it was, maybe versus last year, especially since that's going to be a bigger part of your business after Acres.

At this point, Robin, it's not large enough to break out. When it does, when it is, and it will be, we will break it out more specifically. And we are monitoring that and looking at that from a disclosure perspective, but at this time it hasn't reached that threshold yet.

Thank you.

Sure.

Our next question comes from the line of Steve Kent with Goldman Sachs. Please go ahead.

Good morning. Maybe you could just talk about some new products coming out. You did mention this morning that the new Star Wars game will come out and you will introduce them in the fall. Could you talk about any preliminary indications for placement and also if you're going to have any tie-ins with specific operators, like the Price Is Right, which you did very successfully the last time. Also, just to go back to the participation games, because they were a little bit softer than even we expected. Are there any new additions or new enhancements to the existing game line that you think could start to accelerate that growth again just simply maybe changing Wheel of Fortune around or doing something like that in the next couple of quarters?

Maureen, you want to take the second part of that question.

Okay. As -- there were a lot of questions in there, but we do have, as always, a lot of new game introductions. I think at the show we're introducing over a hundred.

150 plus.

And we have Maureen Mullarkey here, and he's going to give us an update. 150 new games.

Yes.

We are deploying new technology in the game operations segment with the advanced video platform. We currently have had in some of the, I think primarily in the California market, our Lifestyles of the Rich and Famous. We are putting our third brand extension of Wheel of Fortune on the AVP platform for introduction late in the fall. So we're very excited about that particular introduction, as it has greatly enhanced sound and video features. And then the Star Wars that we just mentioned will also be on the AVP platform.

And the AVP platform will deploy in the wide area progressive platform exclusively. So we're very excited about that. As I mentioned in my remarks some of the new introductions for the remainder of this year include Uno, Magic 8 Ball, Mash, and Video Sinatra for the recurring revenue segment.. Maureen Mullarkey, do you have any other comments?

We have some very, very strong games right now that are testing. We have Kenny Rogers, which is a (inaudible) game, as well as Cops and Doughnuts which are just knocking down record numbers; and tRipletriple Double Stars, one of our new S2000 games which uses ticket-in-ticket-out technology, is just another reason why, you know, we're replacing games out there. Obviously Wheel of Fortune, AVP and some other interesting AVP surprises. Of course, Star Wars: A New Hope. Everyone will get a glimpse at the very special product at the show. I don't think the sales team has quite solidified their strategy for the roll-out, but I'm sure it will be spectacular when it does occur.

I think at the present time maybe we're asking more about branded games. Star wars is, of course, the big one. We're continually talking and evaluating various branded products. And I think we've announced a number of them. There's more people that we're talking with. Star wars, of course, is the most recent announced just today.

Thanks.

Our next question comes from the line of Dave Anders with Merrill Lynch.

Thanks. Maureen, could you give us the growth adds to the web systems, excluding the racinos. And then also if you have pastacero [ph] games equipment sales numbers. And then last lastly, I know you're getting close to I think the convert, we're getting close there, where we have to start accounting for that in the share base. Is there any way to offset that, or are there any nuances to the convert that I should be aware of as we get closer to the strike?

First question, casino markets, installed base Q3 '03, 29,100.

Right. And the growth adds too, you sometimes give that out.

The placements, the growth adds. I don't have that, David, but we have been trending at I believe, 800 to 1,000 per quarter. So --

I'll follow up with you. That's fine.

On the pastacero [ph] games for the quarter, we have 1700 games for the quarter, just a little bit over -- 48 games over the 1618 in the March quarter.

As far as the convert goes, it has to trade at, I think it's $33, $33.5 for 20 consecutive business days after the start of the quarter for the convert to be convertible into, I believe it's 22 million shares. And those are the facts. There's no special new answer there at all.

Our next question comes from the line of Maria RickerRickert with Jeffries & Company.

I've got a couple of questions. First of all, what does your backlog look like right now for replacement sales?

Total backlog is up and over 20,000 games

How far are we into the replacement sale cycle? You had said in the first quarter of fiscal 2003 that the total number for ticket-in-ticket-out was around 90,000 machines. Where does that number stand right now?

Close to 150,000 machines.

About 25 percent into the replacement cycle just using those numbers.

Okay. And then, last question, the D & A was a little bit higher than I expected. Why is that, and what's a good run rate?

No, it was in line, really, and I don't think it was that much off.

On the cash flow statement?

I would say use the run rate of the current quarter.

Thanks.

Ladies and gentlemen, as a quick reminder, if you would like to ask a question please press star, then 1.

We will move on to Kent Green with Boston American. Please go ahead.

Hi, Kent.

I had a question about the replacement demand driving -- I mean, easy pay driving replacement demand. Is a lot of that easy pay going in?

Yes, it is. That is the primary driver.

And you obviously have a lot of other casinos that you're going to roll that out in over the next three to six months.

Well, over the next three to six months and over the next couple of years. I think there's still quite a bit of business.

We have signed corporate agreements with the MGM Mirage, we're essentially done with that, those installations, the Horseshoe, Isle of Capri, Park Place. A whole host, and they're all multi-year deals.

Thank you.

You're welcome.

Next is the line of Joyce Minor with Lehman brothers. Please go ahead.

Maureen, you may have mentioned this already but could you speak a little bit to your manufacturing capacity? I think you had said on your last call that you had taken it up to 400 machines a day. Is that where you still are? And would you anticipate that that's a good run rate to look at going forward? Also if you could also talk about the U.K. and kind of your thoughts around that opportunity a little bit, both in terms of timing and then maybe some metrics comparing the business over there versus your domestic business in terms of market share and revenue per unit and gross profit per unit, that would be helpful.

Tom wants to take that question.

Yeah, I'm ready for that one. I think our production levels are a bit above the 400 a day at this point. Probably up around the 440 or so.

Right.

In terms of capacity, I think we still have a ways to go. But it's getting better all the time, and we're comfortable with the level we're at. We're not following behind. And it was getting a little dicey the last quarter, but it's much better now.

Also, we're adding another line. We have nine lines going. As far as the U.K., I think the effort over there to reform the gaming industry may be delayed a year.

The legislative proposal may not be in the Queen's speech this November. And so it may not be a priority for parliament this year. But we believe that the reform remains on track, and either the parliamentary action or a method called carry-over legislation, we're not sure which, but we think there's a tremendous amount of support over there for passage of this legislation, and that the timing may be uncertain, but it's not uncertain whether it's going to happen or not. We're pretty clear that it's going to happen. We've always said that we thought the change would take place by the end of 2004. We always thought it was speculative and unpredictable, as any political process, but it's going to happen.

As far as the industry, right now I think you will probably see our products that look very much what we're selling to the North American casino market. I think that you will see progressive and branded games and so on. I don't hear of anything going on that would change the character of the game or the technology platform. So I would expect it's going to look pretty much like what we're doing here.

And the legislation is by venue, and we do anticipate that there would be tourist-type casinos. But there's also a large population of bingo halls there, so we do anticipate that some of the footprints, there's live or machine gaming in the live bingo halls, but there will be more square footage aligned towards that. IGT, we are on the ground in the U.K., not only with our Barcrest subsidiary that's a leading provider of the AWP market, but we have established IGT U.K. Casino. We have a small staff on the ground working with customer base and the industry associations that are forming relative to the rewrite of these gaming regulations.

I think we're well positioned in the U.K.. I think some of our customers have formed alliances in the U.K. with some of the existing places there. But through Barcrest, we've been dealing with these people for the last five years. So it's not a new market for us.

Thank you.

And our next question comes from the line of David BartelBarteld with Wells Fargo. Please go ahead.

Good morning. Would you care to comment on any up-front (inaudible) or what the financial agreement was regarding Lucas and Star Wars? The second thing is, in the evolution of the automation of the casino floor, where are you, or what can you tell us about the development of a new game platform that's capable of functioning with a centralized computer system allowing downloadable gaming software? Can you comment on that? What do you think of the timing or regulatory hurdles might be?

As far as Lucas, we can't comment on the financial details of that deal. We are prohibited on that by the agreement we made with Lucas.

As far as the game platform, we have been working, as have others, and a number of customers and governments, specifically in the lottery business, are interested in downloadable product. And I guess conceptualizing that someone would be in a central location and could change the games and possibly factors regarding the games from a central location. That is being done today in some venues. The only issue is that it takes a lot of time, and sometimes the quick availability of the game has not been perfected to the state that it would have to be to work in the environments that the casinos are used to right now.

How long will it take? I don't know. Certainly in the next few years I'm sure you'll something like that. New York will probably have some download capability within the first couple of years of their operations.

The lottery side.

The lottery side of New York. And so I think it's coming. We're working on it. Some other people are working on it, too. I don't anticipate any major impact on 2004. 2005, it's too early to say yet.

I think it's important to remember the regulatory cycle that we experienced when we rolled out easy pay. It was clearly almost two years or so before we were able to get all the different approvals for this technology. In fact, Illinois remains still unapproved, although we think it could happen this calendar year.

Thank you.

You're welcome.

Next question is from the line of Dave Anders with Merrill Lynch.

Just a quick follow-up, Maureen. As far as the New Jersey tax situation, how do we think about that? I know it's incorporated into your 15-percent growth rate, but if we wanted to model it in a bit, is there any way to do that?

Well, the law has now passed, or still -- we're still in a stage where a couple of the regulations have yet to be formed, but among the new -- the new legislation was an 8-percent levy for wide area progressive games, which was commonly referred to as the IGT tax. We do believe that the final outcome was probably the least injurious of the different proposals. All things being equal, it's probably about a 6 million dollar pretax impact to the company. The legislation does allow for performance-based pricing versus a fixed fee, and anytime that we operate in a performance-based environment, we prefer that, it is sort of the core foundation of our business. And also the legislation eliminated the trust. So those are the facts. New Jersey, it's hard to say how everything will roll out next year. But we do believe that we came out okay in that one.

Great. Just a follow-up. In Nevada when that happened if I remember correctly, you did reprice a little bit. Do you think any of that could occur in New Jersey?

Well, it's going to completely change in New Jersey because of the trust elimination, and we will operate all of the progressive systems and the stand-alones there. So it -- we wouldn't change.

Right. But I mean you were able to pass some of it onto the customer

Only time will tell.

I'll turn the call back over to Mr. Baker and Ms. Mullarkey at this point.

We want to thank everyone for their interest in IGT and listening to our call today.

I just want to reiterate a little bit in closing, a comment we made over year ago. We predicted that ten markets would open in ten years, and we've talked about some of those today. New York is the first of these, and it's certainly taken longer than anybody predicted a year ago. But it looks now that it's on the verge of opening before the end of the calendar year and will probably be quite a bit larger than anybody thought.

Pennsylvania and Maryland are two of the states that a lot of people thought were going to happen, were imminent. So far, nothing has happened. I think probably one of these will make a decision positively in terms of expanding gaming activities by the end of 2004.

But I also want to say that there's new markets that may open up for IGT. And these are jurisdictions where we currently don't operate. Some of our competitors do. But the regulatory process is evolving and becoming more defined. And as the world changes, it may present an opportunity for future growth.

It's been our pleasure to discuss the highlights of the third quarter with you. The results of this quarter and the last several quarters have -- I think have reflected the diversified nature of our business and our focus on our core competencies. All of these factors have worked well, we think for the benefit of our shareholders, through some difficult financial markets of the last few years, and we really don't see any reason why we can't continue this in the future. So our expectations for continued growth remain intact.

I want to thank you for listening, and we'll talk to you again at the end of the fiscal year. Thank you very much.

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