International Game Technology PLC (IGT) 2004 Q4 法說會逐字稿

Hello and welcome to today's IGT fourth quarter and fiscal-year 2004 release conference call. All lines will be in a listen-only mode until the question-and-answer portion of today's program. At that time, you may ask a question by simply pressing star 1 on your phone keypads. At the request of our call leader, this conference is being recorded. Any objections, one must disconnect at this time. I would now like to turn the conference over to Mr. Pat Cavanaugh, Director of Investor Relations. Sir, you may begin when ready.

Thank you, operator, and good morning. Thank you for joining us today. With me today on the call are Tom Baker, our Chairman; TJ Matthews, our CEO; and Maureen Mullarkey, our CFO.

Before we begin, I'd like to note that during the quarterly earnings conference call, certain statements will contain forward-looking information, such as forecast of future financial performance. Although IGT believes that the expectations reflected in any of this 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 our forward-looking statements are subject to change and to inherent known and unknown risks and uncertainties.

IGT does not intend and undertakes no obligations to update our forward-looking statements, including any comments regarding our earnings expectations 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 judgment only as of today. You should not assume later in the quarter or year that the comments we make today are still valid. Actual results may differ from current expectations based on the number of factors effecting IGT's businesses.

Information on factors that could effect IGT's future business and financial results or causes not to achieve our forecast are included in our annual report on Form 10-K for the year ended September 30th, 2003. And other public filings made with the Securities and Exchange Commission. During this call today, references made to non-GAAP financial results, investors are encouraged to review these non-GAAP financial measures, as well as the reconciliation of these measures to the comparable GAAP results in our 8-K filed with the SEC today, a copy of which can be found on our website at www.igt.com.

This call, the webcast of this call, and its replay are the property of IGT. It is not for rebroadcast or use by any other party without the prior written content of IGT. If you do not agree with these terms, please disconnect now. By remaining on the line, you agree to be bound by these terms. With that said, I'm pleased to turn the call over to Maureen Mullarkey, our CFO.

Thanks, Pat. Welcome, everyone. Thank you for joining us today on our fourth quarter and fiscal 2004 call. We're happy to report on another record year here at IGT, and the financial results for fiscal '04 reflect the commitment of our 5,000 employees to be the leading provider of gaming machines, platforms and systems for worldwide gaming markets. While most of you have probably read the press release by now, fiscal-year statistics that are notable to highlight include revenues of 2.5 billion, that's an increase of 17% from last year. Gross margins on product sales total 52%, representing a year-over-year improvement of 300 basis points. Operating income of 814 million increased 22% from the prior year. Cash flow from operations of 624 million expanded by 53% from last year. Non-GAAP adjusted income from continuing operations and related EPS totalled 493 million and $1.35 per share respectively. We sold over 159,000 machines worldwide, including 92,500 in North America and 66,700 internationally. We grew our install base of gaming operations by 3,200 games to 37,200.

We also deployed significant cash flows back to investors with share repurchase totaling 129 million, or 31% of free cash flow, that would be free cash flow before the dividend payment, and we also paid cash dividends of 139 million, comprising 34% of the same base of cash flow. We also strengthened our balance sheet during the year with net-debt redemptions of 80 million. For the fourth quarter we generated our second highest level of top-line revenues of 622 million, representing a 14% increase over last year. In addition, adjusted income from continuing operations for fully-diluted share of 35 cents increased 21% over the prior-year quarter. These increases were primarily due to record gaming operations revenue, improved international results, higher pricing realization on our product sales and a greater mix of casino system sales within our product sales line of business.

Operating income during the quarter was 195 million, or 7% over the prior-year quarter. Current quarter adjusted net income totals 127.7 million or 35 cents per fully-diluted share. Please refer to our Q4 press release for the reconciliation between adjusted and GAAP EPS. These operating results, as well as the efficiencies and working capital yielded record quarterly cash flows from operations of 253 million and for the year, 624 million. Of all the financial records realized for the quarter and the year, we view our ability to generate such hefty cash flows from our business as a notable and distinguishing feature of our Company.

I'm going to drill down a little bit further into our 2 lines of business, Gaming Operations and Product Sales before moving on to the balance sheet. On Game Operations, revenue for the quarter totalled 309 million, that's an increase of 34 million from Q4 of '03, representing growth of 12%. Gross margins were 52%, down from 57% in the prior year. Lower interest rates were the primary driver behind the lower gross margins. Excluding the effected interest rates, our gross margins would have been approximately 55% for the quarter.

Please also remember that we began consolidating revenues and expenses from our Atlantic City Trust due to the change in accounting rules related to variable interest entities, VIE's, beginning in the third quarter of this year, or the June quarter. As you might recall, the consolidated reduced quarter gross margin by approximately 2% when compared to last year. Therefore, excluding both these items, the effected interest rates and the VIE impact, gross margins would have been approximately 57% or the same as last year's quarter. Internally we continue to work to improve our game mix with all of our MegaJackpots connected to our wide-area progressive systems where we benefit from slightly higher revenues.

We also continue to work on improving our jurisdictional mix, placing more units in higher earning jurisdictions, such as California, Arizona and Connecticut. We are also seeing the benefit of expansion into new racino and the emerging Central Determination or CDF markets of New York, Alabama and Oklahoma. The installed base of IGT-owned recurring revenue games, which is comprised of machines operated in both casinos and racinos, ended the quarter at 37,200 representing an increase of 3,200 machines over prior year. Casino installed base at the end of the quarter totalled 30,800 and racinos, 6,400 for that 37,200 mark.

The year-over-year growth of 1,500 games in the casino market category primarily resulted from increased placements in the emerging central determination markets of Alabama and Oklahoma and also from Class 3 Native American markets. Included in this figure would be also 1,000 units of our Wheel of Fortune Special Edition, that is our latest Wheel of Fortune brand extension, which we launched on our new AVP platform. Growth in games placed in the racino category totalled 1,700, including 1,200 units placed in New York, related to the commencement of video lottery operations at the 4 racetracks within the state, including Saratoga, Finger Lakes, Buffalo and Monticello. We also saw growth of 500 games in our other racino markets of Delaware and Rhode Island related to the strong play performance of our games.

Fiscal 2004 marked our first deployment of games in the CDF markets of New York, Alabama and Oklahoma. CDF development efforts have enabled IGT to expand its geographic reach through modifications of existing technology to serve new opportunities. During 2005, we anticipate further unit placements in the markets I just mentioned, as well as new CDF units placed in casinos in Florida and Washington.

Before moving on to Product Sales, I'd like to point out a few reminders related to both margins and the calendarization of results related to our Game Operations line of business. Looking forward to fiscal '05, we will, as always, face fluctuating margin percentages driven by changes in interest rates, which effect our costs to pay jackpot winners. Our best estimate for next year for margins is between 53 and 54%, which is consistent with both the trend in fiscal '04 and in fiscal '03. I'd also like to point out that this segment is influenced by certain calendar events, specifically in the first quarter of '04, benefited from an extra week which generated about $11 million in gross profits or 2 cents per incremental EPS share.

Product Sales, revenue during the quarter totalled 313 million, that's an increase of 15% over the prior year. Quarterly shipments of 32,500 were comprised of 20,200 domestic shipments and 12,300 international shipments. Average prices consolidated average revenue per unit, which we are now calling ARPU, was 9,600 for the quarter, that's an increase of 16% over 8,300 in the prior year and 7% higher than the sequential quarter due to the ongoing improvements in pricing realization and a favorable shift in product mix during the quarter. Domestic ARPU totalled 11,700, that's an increase from 10.4 in the prior year and 10.8 in the sequential quarter, due to a greater mix of domestic gaming systems revenue, stronger domestic pricing realization for both machines and parts, which include game theme conversions and machine retrofits.

International ARPU was 6,300 for the quarter, up from 4,700 in the prior year and 5,700 in the sequential quarters. The increases were due to improved geographical mix with a higher percentage of casino market units shipped versus machines sold to low payout markets, which include Japan and the AWP market in the UK. With the rollout of our new agreement with Sammy in Japan leading to a transition period during the quarter, there were fewer Japanese pachisuro units shipped, which favorably impacted the ARPU. The current quarter ARPU was also effected by favorable foreign currency exchange rates, leading to approximately $400 benefit compared to the prior-year quarter.

Domestic product sales revenue totalled 235 million, that's up 9% from the prior year. Unit shipments totalled 20,200 during the quarter, including replacement sales of 15,800 units and 4,400 new and expansion units. Unit sales were down slightly from last year due to fewer new casino openings during the quarter, which is reflective of the trend in the entire fiscal year. 15,800 replacement sales were shipped in the fourth quarter and included the following, in Manitoba we shipped 4,500 units, completing the 5,375-unit order, we did recieve100% share of this significant sale. The Resorts Hotel Casino and Sands -- sorry, the Resorts Hotel Casino and Sands Hotel & Casino properties in Atlantic City with combined market share of 70%. The Pepper Mill properties in northern Nevada are in the process of transitioning to cashless and we shipped 100% of the units ordered. Domestic replacements in fiscal 2004 exceeded 73,000 units.

New and expansion units totalled 4,400 during the quarter. Large new and expansion shipments for the quarter included British Columbia Lottery Corporation, the Silverton Casino expansion in Las Vegas, Majestic Star Casino in Indiana. Total fiscal 2004 domestic shipments to new or expanding venues in fiscal '04 were approximately 19,000 units.

During our -- turning to our gaming systems business, our EZ Pay TITO systems continue to be one of the primary drivers of domestic replacement sales. At the end of the quarter there were 179 TITO systems in operation. In looking at total gaming systems, inclusive of Acres, there were 263 systems in operation at the end of our quarter, communicating with approximately 253,000 machines. International product sales totalled 12,300 units during the quarter, an increase from 12,100 in the prior year, due primarily to increased shipments in all of our international markets with the exception of Japan. Additionally, we benefited from favorable foreign exchange rates as compared to last year. For the quarter, international operating income was 16 million, an increase of 16% over the 13.7 in the prior year. Favorable exchange rates added approximately 1.2 million in operating income for the quarter as compared to the last year.

In total, our international division achieved solid results with total revenues and gross profits posting year-over-year growth of 36% and 25% respectively. For the year, international revenues totalled 330 million, that's an increase of 46% over the prior year, due to broad-based improvements across most international markets. For the year, the international subsidiaries contributed 81 million in operating income, or 10% of the total as compared to 50 million in fiscal '03, or 7.5% of total operating income.

Product sales gross margins in the quarter totalled 51% versus 52% in the prior year. This slight year-over-year decrease resulted from the large shipments to the Manitoba Lottery which carry lower average margins. These are offset somewhat by product cost reductions, increased systems revenue, and favorable pricing realization. We experience a mixed shift during 2004 towards higher margin business of non-machine-related revenues that are inconclusive of game conversions, machine retrofits and gaming system sales. In fiscal 2004, product sales gross profits of 690 million were inconclusive of approximately 160 million of these non-machine-related components as compared to 115 million in margin in the prior year. This particular source of revenue generates margins of approximately 65% for the Company.

Looking forward in fiscal '05, we anticipate the domestic product sales gross margins will trend between 55 to 57% on the continued strength of stronger price realization, the greater mix of systems-related revenues, game conversions, machine retrofits and continued material cost reductions. As we also see a greater contribution of revenues and related operating income from international sources in fiscal '05, specificly in Japan, we estimate that the consolidated margins in a quarterly range of 50 to 53% throughout fiscal '05.

Moving on to operating expenses, operating expenses in the quarter were 125.8 million, versus 116.3 million in the prior year. SG&A expenses for the quarter at 73 million were flat compared to the prior year. R&D expenses for the quarter totalled 33.5 million, up from 27.3 million last year. These increases primarily related to the acquisition of Acres Gaming in late October 2003, along with additional investment in R&D, and increased expenses for international business as a result of higher exchange rates.

Depreciation and amortization in the quarter totalled 17.2 million versus 11.2 million in the prior year, primarily due to increased amortization associated with the Acres acquisition. Bad debt expense decreased to 2.1 million in the current quarter versus 5 million in the same quarter of last year. Our largest shipments during the quarter was to the Manitoba Lottery, and this customer completed its payment for the complete order in the same quarter that the products were shipped, or the fourth quarter. As a percentage of total revenues, current quarter operating expenses totalled 20%. For the full year, operating expenses trended between 20 to 21% on a quarterly basis, and this trend is appropriate for future periods as well.

Other expense net was 116.6 million for the quarter, up from 20.1 million net expense last year, primarily due to the redemption of the remaining 570 million in senior notes due in 2009, which we completed on July 16th. The early redemption pretax costs totalled 121 million. On an after-tax basis, this one-time charge totalled 77 million. Other one-time adjustments in the quarter included a benefit of 3.6 million in tax, related to the additional utilization of prior-year foreign income tax credit resulting from changes to the international mix of annual taxable income. These 2 adjustments accumulated to 20 cents per share and are included in the adjusted EPS of 35 cents for the quarter.

Looking forward, other income and expense will contribute almost equal and therefore offsetting amounts to operating income in 2005. In addition, the tax rate declined to 36.4%, this year is applicable for fiscal 2005, although we will see slight fluctuations in the coming year due to the relative quarterly contributions of international operating income.

Just a couple comments on the cash flow and balance sheet for the year, again, we generated significant operating cash flows of 624 million on income from continuing operations of approximately 430 million. Our cash balance of 765 million, down from 1.3 billion at the end of last year. Our total debt has been reduced to 792 million from 1.6 billion at the end of fiscal '03, primarily as a result of the redemption of all senior notes during the year. Working capital statistics remain strong in the fourth quarter. Day sales outstanding were 74 days during the quarter compared to 100 days in the prior-year quarter and 79 days in the sequential quarter, due primarily to the collections of the Manitoba sale.

Inventory turns were 3.8 times. This sequential increase was primarily due to slight increases in raw materials and finished goods inventory related to new game releases post G2E. In the area of capital deployment we closed on a new 1.3 billion senior credit facility and 200 million term loan in July. Using the proceeds of the term loan and available cash, we redeemed all of the 570 million face amount outstanding of our 8 7/8 senior note due May 2009 and cancelled all corresponding interest rate swamps for the payment of 683.4 million.

As a result of our new credit facility and subsequent redemption of our senior notes, we have increased our liquidity by almost 500 million. As we continue to return value to our shareholders, the Board of Directors increased the cash dividends 20% during the fourth quarter from 10 cents to 12 cents. For the full fiscal-year 2004, dividends totalled 139 million. In addition, share repurchases in the quarter of 3.4 million shares for 106 million at an average price of $31 per share. And again, for the full year, we repurchased 4.1 million shares for approximately 130 million and an average price of just under $32. This represents approximately 31% of our free cash flow and is consistent with our past experience of using approximately 1/3 of our annual free cash flow on share repurchase. Our Board has authorized a share repurchase program and as of the end of September 30th, 2004, there are 35.8 million shares remaining that may be purchased from time to time in the open market or through privately negotiated transactions.

Our capital expenditures for the year were 211 million due to increased spending in all 3 CapEx categories, included in that is 49 million for property plant and equipment, which approximately half is related to the start of our new Las Vegas campus, and facility expansion in Reno. We spent 132 million for game operations equipment, due to higher machine placements and approximately 30 million for intellectual property.

Before I turn over the call to TJ, I'd like to reiterate that we are extremely pleased with the operating results for Q4 and for all of fiscal 2004. Not only did we improve the operating results of the Company, but our focus on operating efficiencies translated into significant cash flows to the Company and subsequent deployments back to our shareholders. Thank you very much.

Thank you, Maureen. Before opening the line to questions and answers, I have a few closing remarks regarding the year just ended and on the primary growth drivers that we see going forward. In fiscal 2004 we saw continued growth at IGT as we entered into the 3 new markets, New York, Alabama and Oklahoma, with a new product for Central Determination. These new markets created incremental growth of over 2,000 recurring revenue machines with the potential for more placements in the near future. And in addition, our strong cash generation from operations, we had a great year in every measure of our business, including record revenue, machines sold, games operated, operating income and earnings per share. We're proud of 2004.

We saw enabling legislation pass in Pennsylvania. This will open the market to us beginning in fiscal 2006. We saw further agreements reached between the state's of California and New York and their respective Native American tribes, which will also allow for expanded gaming. Elections are being held today in a number of states that could provide IGT with more opportunities to expand our footprint. Oklahoma is the election that we're most excited about. When we talk with you next year at this time, I anticipate we'll have additional markets to talk about, as we move closer to our stated expectation that there will be an installed base in North America of over 1 million machines by the year 2009.

Our positive outlook isn't just limited to North America, however. As we witness strong momentum in our international market throughout 2004. Our international businesses reached a record level of operating income and our future prospects for growth in the international markets have never been brighter. Our new agreement with Sammy Corporation will begin to bear fruit this quarter as we've already released The Terminator, the first game under this new agreement. McCall welcomed its first Las Vegas style casinos during this year, and the process to reform gaming legislation in the UK continues to move forward, with the recent introduction of enabling bill in the parliament yesterday and its referral to committee. We also reentered the vast Russian market during 2004 and anticipate that our efforts there will gain momentum during 2005. All of these efforts will help us reach our previously stated target for $175 million in operating income to be realized from our international operation by fiscal 2009.

As within the case over the past 10-15 years we believe additional states will continue to evaluate gaming as a legitimate industry that adds jobs to local economies and is a viable means to raise taxes versus tax increases on their existing constituencies or having to cut spending for vital state programs. Equally important, the macro trends appear positive in terms of the demographic trends and in the public's acceptance of gaming as a legitimate form of entertainment. These same principals apply not only to the U.S., but to the expansion of gaming in a number of foreign countries, where competition for tourism, spending and a need for additional government revenues makes spanning gaming a compelling option.

During this past G2E, we exhibited over 180 new gaming titles on our 5 different platforms. Many were focused on the recent trend of player preference for lower denomination games, and this trend has made the video spot segment of the machine market the most competitive within the industry. We at IGT remain very confident that we'll provide the highest earning machines to our casino customers, along with the most innovative and entertaining content to their patrons. Our Fort Knox multi-level progressive received positive feedback at the gaming show and is aimed at increasing play on low-denomination machines. We anticipate we will debut this machine on casino floors during this quarter and that it will be additive to our gaming operations business segment.

As we mentioned during our last call, over the next few years we see gaming systems technology reshaping casino floors to a more system-centric server-based environment versus that of the current machine-centric environment. During the gaming show we demonstrated a prototype server-base gaming or SBG system to positive reviews from both casino operators and gaming regulators. This remains a long-term process, but we're happy with the progress that we've made so far.

In addition, we continue to move forward with our market and product development strategies, focused on Central Determination base systems and related games. Growth in this area includes Class 2, as we discussed for Oklahoma and New York, video lottery, as occurred this year with the racino market in New York and charitable gaming market that took place in Alabama. During 2005, we anticipate that we will have further placement to CDS products into additional markets, including directly distributing products to Florida and Washington for the first time, as well as some other existing markets in which we operate.

At this time we remain comfortable with the previous earnings guidance given on our last call of 30 to 35 cents in each of the first 2 quarters of fiscal 2005. We also continue to see the potential for breaking out from this range during the second half of the year as California and other new markets become more clear. For fiscal 2005 we believe we will benefit from expansion within existing gaming markets. We've seen opportunity in the opening of new markets that have served the IGT CDS products. We believe we will continue to see a favorable change in product mix with more non-box unit sales, that is game conversions, more revenues from leveraging our integral property and continued increases in gaming system revenues, which will all lead to additional margin expansion for IGT.

We should also see the continuation of growth in the revenues and profitability of our international operations. These drivers help us remain confident with current estimates for fiscal 2005. However, the actual timing of the opportunities mentioned could effect our results during the year. We remain confident in the long-term outlook for IGT and we continue to target annual EPS growth of 15% over the next 5 years. We thank everybody for your interest in IGT and for participating in this call and are now ready to open it for questions and answers.

Thank you. (Operator Instructions). Our first question comes from George Smith of Davenport.

Good morning. Question related to international sales, the numbers that we saw this most recent quarter and the growth, do you think that is -- to what extent that sustainable going forward?

Well, I think that we've mentioned that we've been very successful in growing the international business this last year from 50 million to over $80 million of operating income with eyes set for $175 million in operating income from the entire segment. The 4 real drivers for us are the expanding market in McCall, our new partnership in Japan, our re-entry into Russia and the expected liberalization of gaming laws in the UK, and all of those give us great confidence that the operating income performance from international is sustainable.

You mentioned, in the second half of the year, California potentially contributing to results. What are you expecting in terms of California and the number of units that could potentially be shipped into that market this year?

Well, we have model shipments for 2005. I don't know that we've given out specific numbers, but we anticipate what will happen is, today Propositions 68 and 70 are likely to be defeated, that then the state will kind of re-energize its re-compacting program with both existing casino operations in California, as well as new compacts for tribes that have been waiting to establish casino operations. And we expect that that will be a second half event that will allow us to ship new and expansion units into the state.

All right. And, Maureen, I apologize if you mentioned this figure, but as a percent of the whole systems business in the quarter as a percent of product sales.

For the full fiscal year, systems trends at about $100 million in revenue, so about a little less than 10% of product sales.

And then sequentially, game placements were up a few hundred, I believe. Is that driven more so by racino or casino placements?

They were up sequentially by 800 units and that was primarily expansion into Oklahoma.

Okay. And can you -- I know you are targeting roughly 15% earnings growth for this year. Do you have any idea or even a range of what you would be looking for in terms of top-line growth?

George, we just forecast on an EPS basis.

Okay. That's perfect. Thank you very much.

Thank you, George.

Thank you. Our next question comes from David Anders of Merrill Lynch.

Great. Hey, TJ, could you just give us a little more color on the Russian market? I think there was 180,000 slots currently operating there. How are you going to be distributing there? And how do we quantify the growth rates in Russia? And then also, Maureen, if you could talk a little bit about your margin guidance on the product sales. If I understood, you said 55 to 57% U.S. margins and consolidated 50 to 53. That means international is pretty far below domestic. Can you just help me understand exactly, is that just all pricing of pachisuro in Japan?

Well, David, you're right about the size of the Russian market. It is now about 150,000 to 180,000 machines. It looks like it could grow to upwards of 300,000 machines over time. That is a very competitive market that we have excluded ourselves from participating in now for about 3 years' time, due to really our inability to establish an appropriate sales network. We have now made a decision to sell direct into that market, as well as establish a local distributor, who will have a representatives service office open in Moscow by December, and we shipped over 1,400 machines in that market this past year. We anticipate that we can ship more machines and slowly capture market share, you know, because of the fact that our content is the best and that realistically some of the other competitors that have entered the market have probably overpenetrated the market, given their relative strength in game content.

David, on the margins for product sales, the figures for the domestic range include the beneficial mix of the higher margin systems and game conversions revenues that we talked about. And then in international, you're right. It is all about Japan and the improved results that we expect in Japan, and, again, the pachisuro games and the AWP UK games are what we term as low payout and they do carry lower margins. We are happy to say, though, I think that the relationship with Sammy really will give us a slightly higher contribution per game margin on each and every game we ship, so we're happy about that, but you'll hear us talk more about the mix between domestic and international as we see growth from the international markets.

Okay. Thank you.

Thank you, David.

Thank you. Our next question comes from Aimee Marcel of Jefferies & Company.

Thanks, guys. I know that you guys recently won the win systems contract. I was wondering if there are any other systems contracts that we should be looking out for to contribute to fiscal-year '05?

We had a good year in gaming systems in 2004 and we will have just as good a year in 2005. I don't know that there's any particular announcements to be made, but we certainly anticipate that we're going to continue to be the system of choice for new casino openings, and that we are going to be able to take business away from existing system providers who have not been able to maintain appropriate feature sets at the current rate that we've been doing so.

Okay. Now, being that it's election day, what is the most optimistic situation that could come out of today for you guys?

I think that, you know, we've been watching the various polls and anticipate that the election has the best chance of passing is that in Oklahoma. That in Oklahoma what would occur is clear regulation, which would accommodate an immediate expansion of the market. Even in the absence of that, however, you know, obviously the state government and the Native American tribes have a good working relationship and that market will continue to expand just as probably not as quickly.

Same in California. If you take a look at the propositions that are outstanding, those would obviously facilitate immediate expansion in the market in their absence of passing, which is unlikely to occur today, then we anticipate that the continued compacting efforts of the state are going to continue, that you've already seen them compact -- you've seen the Governor now compact with 10 tribes, that 9 of those have been approved by the State Legislature, 5 of those have been approved by the Department of Interior, I anticipate that process is pursued in ernest, kind of post-election.

Florida is up in the air and we'll see, but certainly the debate in Florida whether voted on today successfully or not, the debate's not over. There will be likely expansion of gaming in that state at some point in the future as it continues to be discussed among the various constituencies. So those are really kind of the 3 big areas that we've been focused on.

Okay. Now in California, I recently heard about tribes using lottery-based slots with their own lottery system. Do you have a product in this segment, or do you not even think that is a possibility?

That product would be a subset of our Central Determination systems efforts. However, we're not certain on what the legality and the views of the state will be on such a product. And so as you know, we're generally demonstrating much restraint in areas that are -- that have unclear regulations. I anticipate that the state is going to sort this out probably immediately in the wake of these elections, and that if appropriate, we will have a product, and if appropriate, we'll refrain from having a product really depending on how the states and the Native American tribes work that out.

Okay. Now, just a quick maintenance question for Maureen. Can you tell us the interest expense and the interest income for the quarter?

Sure. Interest income in the quarter was 15.9 million and interest expense was 13.7.

Thank you. Good quarter, guys.

Thank you.

Thank you. Our next question comes from Harry Curtis of J.P. Morgan.

Hi, guys. Can you start off with an outlook for, or an early indication on demand for Terminator.

You know, we are very optimistic that our relationship with Sammy is going to result in substantially greater market share over time in that market. In fact, we've said that we target over the next 5 years, been able to grow our business to about 5% market share, which would be roughly about 80,000 units or so. The Terminator machine was launched in October. Thus far is has been very well received. We're very satisfied with the order flow, but we haven't commented on units.

So in fiscal 2000, you sold roughly 20,000 units to Japan.

We did.

And do you see that -- that number going higher in '05 just as a general direction?

We're certainly hopeful that we will be able to exceed that number, and you remember last year we really only had 1 game introduction, Orbinaga [ph] in the first quarter and then we were making a transition from Kiawa [ph] to Sammy and so this year we anticipate just by virtue of having more game introductions that perhaps we can exceed that number, but we don't know yet.

Thanks. And the other question that I had was with respect to Florida. If Florida does pass, what kind of legal obstacles do you expect to see and how long would it be before you would see any likely shipments?

I certainly wouldn't put Florida in our '05 or '06 outlooks. You know, irrespective of really what happens today. The difficulty with a pass vote is that the legislature then still needs to pass a law that needs to be agreeable for -- by the Governor that needs to survive any court challenges that would then need to be voted on in Dade and Broward counties. And so there's just a lot of things that still need to occur before you would have gaming there. In the absence of that, I anticipate that those -- that the constituencies that are advocating the expansion of gaming device deployment are not going to cease on their efforts. So I would anticipate that, you know, maybe in 2007 there is some form of expansion there. In the meantime, of course, we enjoy a very successful relationship with the Seminoles and, you know, have a very substantial market share of the number of devices deployed on those casino floors and now that with our own Central Determination system effort are able to provide them with MegaJackpot product as well.

Very good, thank you.

Thank you, Harry.

Thank you. Our next question comes from Robin Farley of UBS.

Thanks. Can you clarify, I'm not sure if you said what your shipments to Japan were in the quarter.

We had, I think-- maybe less than 100 shipments in the quarter to Japan. As anticipated, we sunset [ph] the prior relationship in Japan and commenced the new Sammy relationship at the very end of our fiscal year.

So you will start to see results of that you think in Q1?

Right, in the fiscal '05 period, starting in Q1, sure.

Okay, great. And you mentioned share repurchase, about 30% of your free cash flow. Is that the level you expect share repurchase going forward?

Well, if you look at -- the answer is yes, approximately. If you look historically, IGT has purchased at a minimum of about $100 million in share repurchase that's in any 1 particular year, and that's looking back all the way to '97. So we've been very consist in that regard. You know, the first use of capital is back into the business as we invest in new markets, new technologies, new opportunities, intellectual property, and then we also look to strengthen the balance sheet, which of course we did this year. But really our default use of capital with excess cash on hand would be back to shareholders. So we think that the capital deployment in '04 is notable and significant and we don't see any change in our strategy moving forward essentially.

No change in strategy, but can we expect an accelerated level of share repurchase in '05 given that that's the priorities, return to shareholders?

Well, we obviously have a lot of liquidity and the wherewithal to do so. What we have said is that we want to return roughly 1/3 of our cash in kind of systematic share repurchase, 1/3 of our cash to shareholders in the form of dividends, and then the final 1/3, as well as all of kind that have excess access to capital that we enjoy, will be used on a much more opportunistic basis, whether it be to acquire things that will improve our existing business operation, or it be to restructure the capital so that we have less shares outstanding. We've done a pretty good job of pursuing share repurchase both systematically and opportunistically in the past. I would think that you can anticipate the same good job done in the future.

Okay. Great. I guess I wonder if you could just give a little more of the geographics breakdown in sales that you sometimes provide.

Sure. Let me get there for you, Robin. Which is your preference, the year or the quarter?

The quarter would be good.

Sure. In Nevada we shipped about 3,800 games; Atlantic City, 2,200; in the eastern region, which includes all the river boats, et cetera, 2,400; and the Native American markets, 5,600; public gaming markets, which would include Manitoba, 5,500; total domestic 20,200; and for the total international, 12,003; shipped about 8,000 to Bar Crest; 1,500 to Australia; 1,400 to Europe; and other international, which includes mostly South America is 1,600 games. Total shipments, 32,500.

Okay. Great. Thanks very much.

Sure.

Thanks.

Thank you. Our next question comes from Bill Lerner of Prudential.

Thanks. Just on pricing, you guys posted great -- or demonstrated great price realization in the quarter. Would you say, is too much being made about your inability to exercise pricing power next year, particularly in light of the consolidation we've seen on the casino side?

Well, I mean obviously we have raised prices in advance of fiscal 2005 and anticipate that we're going to be able to realize price increases throughout the year. That will increase the average price of games sold. We think that we'll continue to have the ability to reduce the cost of sales, as we have been very successful in doing that over the last few years, and that we should be able to accomplish the same again this year. We think that the mix of product will be less reliant on absolute number of units shipped and will rely on more sales of parts conversions, hardware upgrades into the market, we'll continue to realize substantial amount of revenue from our licensing of key intellectual property and technology to the industry, that we are going to continue to grow our gaming systems business. And so there is a lot of things that are contributing to the average revenue per unit. I think that we are, you know, we are optimist that we're going to be able to continue to grow that figure as our product mix shifts slightly away from just exclusively providing boxes to the market.

Thanks, TJ.

Yeah, thank you.

Thank you. Our next question comes from Dex Vlasas of Gates Capital Management.

Yes, I was curious, on the cash flow for the full-year number, what was the non-recurring costs in that item that would not occur in future years?

Okay. I'm looking at the cash flow statement. Not sure which -- which section, Dex, operations, investing, financing?

Operations, please.

Well, we had an operations, the loss on the debt, which was 121 million pretax. Of course, we redeemed all of our outstanding notes. I think that that's really about it.

What do you expect to spend -- capital expenditures came in a little higher than I thought they were, but what do you expect to spend in -- in the current year?

In '05? I would say it would range between 175 to 200 million. Because we will -- we do anticipate additional game placements next year. We will move forward with the buildout of our new facility in Las Vegas. We'll probably spend about $50 million next year, so that's -- same -- same sources, or same uses pretty much between deployment within the business and then game op intellectual property and then upgrades to the facility.

Then, of course, the thing that we're going to be opportunistic in our pursuit is of intellectual property, and so if interesting intellectual property portfolios are presented to us, we are likely acquirers, and if we can work out right valuation and, of course, we're going continue to pursue those efforts internally quite vigorously.

And just one more comment on the operations cash flow, net income, the top-line item, is also inclusive of the -- reduced by the cost of the debt redemption and then you add it back. So essentially the 623 is absolutely reflective of the cash flow generation of the business.

Right. And then so has the -- has the churn for your gaming, gaming machines basically, the gaming system sales of 30,800, has the churn of that increased? Is that why your capital expenditures have been increasing?

Well, no. We've expanded our install base by a substantial number of units this year. That was a contributor to reinvestment. We too are subject to new technologies and had a requirement to replace many of our existing games with Ticket-In, Ticket-Out functionality, and there has been, as you know, a kind of a substantial amount of activity that people have called churn, referred to as churn, but it's no different today than it's been for the last 2 years.

Thanks a lot.

All right. Thank you.

Thank you. Our next question comes from Joanne Barry of Deutsche Asset Management.

Hi. I wonder if you can tell us what your interest rate assumptions are for fiscal-year '05?

Related to game operations?

Yeah.

Well, I'm not Alan Greenspan. We are -- I think we are assuming maybe 2 different interest rate increases within the year. It's anybody's guess really. We are hopeful that post election perhaps there's a little bit more, or less volatility in the rates, because the rates, actually the rates from the June quarter to the September quarter, we probably had the largest swing we've ever seen, approximately 140-basis point swing quarter-to-quarter. We probably had an interest rate impact -- we estimate the interest rate impact for all of '04 about 5 million, almost 11 million fell in the fourth quarter. So looking forward we make a conservative estimate on rates and that's why you see us with the estimate of about 54%, you know, north or south of that number for next year on game op.

Okay. So --

Flat.

Flat. Flat. Not much.

And just a semantic clarification, TJ said that you reiterated your EPS growth of 15% over the next 5 years. Is that 15% every year or is that a CAGR over the next 5 years?

No, the goal will be to have it at a compound annual rate.

Okay. So are we looking for 15% next year?

I mean I -- it's going to be our goal to accomplish that each and every year. It obviously, you know, the constraints on IGT's growth is that it's large market share, really makes it difficult for us to grow much faster than the existing marketplace, and so it is our responsibility to go out and find new markets, help create them, to do a better job in places where our market share isn't as high, like in some of the international markets, to figure out ways to have technology, to emulate demand, and of course, make sure that we're weary of competitors so that our products, you know, exceed theirs in subsequent performance. I think we've done a great job in all of those areas. I think that we're going to continue to do so, and, you know, I think we have a good view of our ability to accomplish that 15% effort. We, of course, also have the wherewithal to continue to look at our capital structure and continue to pull out our capital in a way in which we either strategically acquire or we reduce the number of shares outstanding in ways in which we can also contribute to EPS growth.

Thank you.

All right. Thank you.

Thank you. Our next question comes from Steve Kent of Goldman Sachs.

Hi. Good morning. Just a quick follow up. On sort of the second half outlook, TJ, that you referred to, is part of the equation also some pent-up demand from maybe the MBG, MGG merger that if that closes, that that might facilitate some more cashless Ticket-In, Ticket-Out sales and that's also a swing factor in addition to some of these states that you referred to?

You know, in the case of both of the big mergers that are outstanding, the acquirers in Harrah's and MGM are 2 of the most aggressive operators of gaming devices in the industry. Aggressive meaning that they keep up with current trends, and generally speaking, adopt new technologies first. The 2 companies that they are acquiring, Caesars and Mandalay, Mandalay in particular, hasn't been necessarily as up to date in terms of converting their floor for Ticket-In, Ticket-Out. So certainly that is a possibility. In the meantime, I think we have seen a slight impact on demand from those 4customers as they are busy doing other things, but not as much as possibly would anticipate. And, of course, after the fact, I mean we've been in preliminary discussions with our customers and we anticipate that as they get bigger they are going to want to negotiate bigger discounts, but as the question earlier kind of referred to our ability to sustain increased average prices over time, we believe that we'll be able to do so.

Okay. Thanks.

Thanks, Steve.

Thank you. Our next question comes from Celeste Brown of Morgan Stanley.

Good morning. Can you discuss briefly your expectations for the first quarter, as well as what you see as the opportunity for IGT if Oklahoma does pass tomorrow?

I mean the first quarter for us is always our seasonally weakest quarter. It is a quarter in which we see lower game play levels in gaming operations and it's because of -- because of its timing relative to just kind of seasonally effected markets and beginning of fiscal years for month, many of our casino customers, it's generally the quarter in which we sell the least number of gaming devices. Last year was a bit of an exception due to the extra week and due to Harrah's, but that's been a long-standing trend at IGT and I would anticipate that that be the case this year. That said, it should be a fine quarter. You know, we've obviously given some comfort relative to the guidance for the quarter in terms of what we expect performance to be, and we expect that to be the result of, you know, what we are, which is an international company so that we can have sourced demand, not only in the U.S., but from international market and that we can go out and create new demand in markets like Oklahoma.

In Oklahoma, whether or not the law passes, you know, new legislation passes today, realize that there's about 20-plus thousand slot machines there and our market share right now is less than 5%. So, you know, we have a lot of progress to be made just in terms of going out and increasing our footprint against the existing background, if in fact, the legislation passes it plays to our strength because it will accommodate games of skill, primarily Video Poker and as you probably know our share of Video Poker devices in the country is in excess of 90%.

Great. Thank you.

Thank you.

Thank you. Our next question comes from David Vas of Banc of American Securities.

Yeah, thanks. TJ, can you give us a little bit more specific feedback on your debut or unveiling of your downloadable platform to regulators and customers? And maybe follow up with when you would expect to submit to GLI and possibly even place your first Class 3 system?

Well, obviously, you know, we think what is going to occur is there's going to be more and more system delivery of the 2 basic game functions, financial transaction processing and determining and presenting game outcomes. That is already happening in a big way with Central Determined outcomes, that's happening through our bonusing product at Acres, it happened with EZ Pay. Server-based gaming is just really the next evolution of that.

Really what that represents is as we make this shift from the hardware business to more and more to software business, we need to reduce really the cumbersome nature of making changes to gains on the casino floor. Right now it's a very manual process. We anticipate that if we can do that electronically, via game download, that we will facilitate a much more active management of the casino floor by the casino operators in a way in which they can maybe address pricing, they can address game mix for different periods of time and realistically generate increased revenues as a result, and then of course, we anticipate that we can be exposed to -- better exposed anyway, to the subsequent performance of our game content. We showed that to game operators and to regulators at the G2E and had, I thought, very favorable response. It's still a work in progress, probably some of that's going to take us throughout 2005 to complete, but maybe by the end of 2005 we have a product that is demonstrable for regulatory approvals and maybe sometime in 2006 can be actually deployed.

Gotcha. Okay. In terms of product development, at what point do you decide that you, you know, go after a more sizable presence in McCall in developing product for that market specifically?

Well, you know, the big thing that the international group has done so well in these these last 3 years is become local to each market, and so, you know, now in each of the 8 distinct subsidiaries in which we operate, they are manned by individuals that really are local nationals. Well, the same thing has to happen with your product. You have to localize your product and you have to translate it into the appropriate language. You have to choose game themes that resonate with that particular population, and so we now have over 50 people here in Reno, but directed by our IGT international group that works on customization of games for various markets.

For the most part, the core technology in markets like McCall is the same. You see they are trending more towards low denomination, video game play, similar trend we see here in the U.S. and a trend that we really try to capture in terms of our GTE showing -- G2E showing with the Fort Knox product, our wheeling [ph] air product, you know, we had really a real strong effort in terms of increasing the number of lines, increasing the average wager per line, and so I think that all of those efforts then when subsequently customized for McCall will cause us to have growing market share. That market is so young right now. You know, there's still only 1,800 machines there that we have time to kind of perfect our product and over time capture the market share that we're used to.

Okay. Last question, in terms of intellectual property, do you guys believe that there are competitors out there that are sort of not necessarily playing by the rules in terms of IP, and if so, you know, is there anything we should be thinking about in terms of enforcement?

Our patent portfolio is so broad that for the most part I think it's safe to assume that just about everybody infringes one of our patents. And we are, you know, I think a fairly reasonable organization in that our first effort will always be to license that intellectual property to third parties or to get them to refrain from continuing that activity. At times as well, there is intellectual property from third parties that we would like and so often times a great resolution is cross-licensing agreements. Occasionally you are not able to reach agreement with companies, and so that really results in a need for litigation strategy and I think that was best demonstrated this past 6-month period of time, really past new few years, but in the past quarter we successfully realized a verdict in our Action Gaming infringement suit against Alliance in which we were awarded a judgment in excess of $7 million, and, you know, have our patents declared valid, have the scope of patents well defined, and I think that really helps us in the future ensure that people don't inappropriately copy that technology. There are probably other instances in which we may have to pursue similar strategies, but nothing really to remark on specifically.

Okay. Thank you very much.

Thank you.

Thank you. Our next question comes from Joe Greff of Fulcrum Global Partners.

Good morning, guys. Most of my questions have been answered. This is just clarifying something. You didn't mention domestic units for next year. Has that target changed from 3 months ago in the last conference call, 75,000 to 80,000 domestic units?

No, we haven't made any substantive change, well, we haven't commented on specifically the impact between -- or the contribution between domestic and international. We remain with the same estimate as we had previously. If we see any sort of define from new unit sales, it would be offset by improvements in international results.

Do you have an international target that you could talk about?

No, we do not.

Okay. Thank you.

We have time for one more question. We are at the top of the hour.

Thank you. Our next question, our final question comes from David Bain of Merriman.

Hi, guys. Just on the table systems arena, seems like a young market, and I saw what you guys had at G2E. Can you explain what makes you guys different than the competitors out there right now on the table systems side?

Well, there's all different kinds of table systems that are being distributed. Right now we have the leading table system in Table Touch, which allows for automation of managing player relationships. There are some folks that are talking about trying to automate game play or better track cards or better track chips, and it is likely that Table Touch will act as a back-end interface to any of those product efforts. And then of course, separately within your host accounting system, you have your cage credit and table game module, which we have now kind of undertaken a rewriting for customizing to the new win property, which I think really will give us the industry-leading application in that respect as well.

Okay, and are there any tribal development projects in your outlook for '05?

Well, I think, you know, I think that we're going to see continued expansion of Native American gaming. Oklahoma and California are certainly the 2 most likely, but there may be a tribe that gets compacted and up and running in New York before the year is over, and then there has been continual expansions really throughout all of those markets. I mean, realize that markets like Connecticut and Arizona and Minnesota and Wisconsin continue to be growth drivers for this Company, not through the completion of new facilities, but through the expansion of existing facilities. That's going to continue.

And I was speaking more to if you were going to be assisting any of the tribes financially in doing that..

Well, we are, you know, we have an internal effort that we call IGT Capital, in which we extend credit to customers, both existing and potential new customers to kind of aid with the industry's development of new casino locations so that we can operate more gaming devices. We do that very actively now and I imagine that we'll continue to do that in 2005, and it is probably the Native American community that most relies on that kind of assistance.

Okay. Great. Thanks.

Thank you.

Well, thank you very much. We are very proud of our fiscal '04 results, and again, from the operating results of the Company, but also in our significant cash flows of the business and, again, the subsequent deployments back to our shareholders. Thank you very much.

Thank you, participants. This does conclude today's conference. You may disconnect at this time and have a good day.