International Game Technology PLC (IGT) 2008 Q2 法說會逐字稿

Welcome, and thank you for standing by. At this time, all participants will be in a listen-only mode. (OPERATOR INSTRUCTIONS) Today's conference is being recorded. If you have any objections, you may disconnect at this time.

I would now like to turn the call over to Pat Cavanaugh, Vice President of Corporate Finance and Investor Relations. Sir, you may begin.

Thank you, operator, and good morning and welcome everyone to IGT's second quarter fiscal 2008 earnings call. Joining me today are T.J. Matthews, our Chairman and Chief Executive Officer; and Danny Siciliano, our Chief Accounting Officer and Treasurer.

Before we begin, I would like to note that during this earnings conference call certain statements and responses to questions may contain forward-looking information including forecasts of future performance and estimates of amounts not yet determinable, the potential for growth of existing and the opening for markets for our products, play levels for our install base of recurring revenue games, as well as future prospects and proposed new products, services, developments or business strategies.

Actual results could differ materially from those projected or reflected in our forward-looking statements and our reported results should not be considered an indication of future performance. IGT's future financial condition and results of operation as well as its 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 statements, including any comments regarding our earnings expectations to reflect future events or circumstances. All forward-looking statements made in this conference call reflect IGT's current analysis of existing trends and information and represents IGT's judgement 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 materially from the current expectations based on a number of factors affecting IGT's businesses including unfavorable changes to regulations or problems with obtaining or maintaining needed licenses or approvals, a decrease in the popularity of our recurring revenue games or unfavorable changes in player and operator preferences or a general decline in play levels, decreases in interest rates which in turn increase our costs of jackpots, slow growth in the number of new casinos or the rate of replacement of existing gaming machines, and failure to successfully develop and manage frequent introductions of innovative products..

For more information on the factors that could affect IGT's future business and financial results or cause us not to achieve our forecast are included in our most recent Annual Report on Form 10-K and other public filings made with the Securities and Exchange Commission. During this call today, references may be 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 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 consent 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, today we reported results for the second quarter of of fiscal 2008. Net income in the second quarter totaled $68 million, or $0.22 per diluted share compared to $128 million, and $0.38 per diluted share in the prior year quarter. Included in the quarter were a number of significant financial items which negatively impacted our results.

These items totaled $20 million after tax or $0.06 per diluted share. Last year's second quarter saw significant items which increased net income $17 million after tax or $0.05 per diluted share. A comparative schedule detailing the items affecting the quarter and last year's second quarter is included in our earnings press release which we issued earlier this morning and I will give more detail on the items in my forthcoming discussion of the business.

First, gaming operations. Our gaming operations business generated revenues of $341 million in the second quarter. Revenue on a quarterly basis was up 3% sequentially and flat with the same quarter last year. Our installed base ended the second quarter at 58,700 units and earned $64 in revenue per unit per day, compared to 54,800 units and $69 in revenue per unit per day in the last year quarter.

The decline in revenue per unit year-over-year is mostly due to the growing mix of lower yielding units and to lower play levels given the current operating environment. On a sequential basis, the 3% increase in yield to $64 from $62 in the first quarter is primarily attributable to seasonality as our second quarter usually sees an uptick from our seasonally slowest first quarter.

Historically, our second quarter has shown an average yield growth of 6% to 8% compared to the first quarter due to seasonal play level improvements. The under performance in the most recent quarter we believe to be the result of lower play levels given the current operating environment as well as shifts in our product mix. Going forward we anticipate that yields will be between $64 and $66 per day with the caveat that yields will continue to be subject to the current operating environment.

Placements were up 3,900 units over the prior year quarter but off slightly at 100 units. In the casino operations sector of our installed base, we ended the quarter at 39,700 units, up 1,600 over last year's second quarter and down 800 sequentially from the prior quarter. The increase over the prior year was generated by additions in Oklahoma and Florida, while the sequential reduction was primarily the result of the transition away from Class II and into the for sale Class III units in both Florida and California.

In the lease operations sector our installed base totaled 19,000 units representing growth of 2,300 units year-over-year and 700 units sequentially. Mexico made up the bulk of the year-over-year growth while growth in Delaware and the U.K. contributed to the sequential increase. Gross profit on gaming operations totaled $184 million for the quarter, down from $211 million in the prior year quarter.

Gross margins were 54% for the quarter, down from 62% in the prior year with most of the decrease attributable to significant items. Margins were reduced by unfavorable jackpot expense as a result of the 200 basis point drop in the prime rate during the quarter. The margins for the quarter were also affected by other significant items with current quarter technological obsolescence charges related to the transition toward our innovative new cabinets and platforms as well as last year's benefit from the hurricane property insurance proceeds.

Adjusted for these significant items our Q2 margins would have been approximately 60%. The remainder of the reduction of margins was mostly due to lower play levels. While our gaming operations margins are negatively impacted by lower interest rates, on the whole IGT is somewhat mitigated or hedged as we incur lower borrowing costs when rates are declining.

However, there is a 60 to 90-day lag due to the timing of rate adjustments on our line of credit. So we were not able to realize this benefit during the second quarter. Taken into account lower interest rates and current market expectations for rates game ops gross margins are expected to trend within a range of 57% to 60% with fluctuations based on the timing of jackpots, interest rates and the mix of games on our installed base.

We expect the installed base to resume growth in the second half of '08 and beyond as new and expansion opportunities begin to open and we expand our footprint in Florida, Alabama, and Oklahoma.

Now moving on to product sales. Product sales revenue totaled $232 million for the quarter compared to $269 million in last year's second quarter. Worldwide we shipped 12,100 machines in the second quarter down 35% from prior year quarter shipments of 18,800.

As expected the second quarter saw a continued low levels of marketplace demand and minimal new capacity added. Nonmachine revenues comprised of gaming systems, game theme conversions, table parts and intellectual property fees came in at $87 million for the quarter, or 38% of total product sales for the quarter compared to $90 million and 33% of total product sales in the prior year quarter. Average revenue per unit for the year was $19,200 compared to $14,300 in the prior year.

The 34% increase was driven by increased share of revenues from nonmachine sources and reduce in [ban] in lower priced machine markets of Japan and the U.K. Product sales gross margins were 55%, up 100 basis points from the prior year quarter due to favorable product and jurisdiction mix and fewer machines having been shipped into Japan and the U.K. The second half of fiscal 2008 we expect product sales margins to trend between 49% and 52% as new and expansion openings and the rollout of new IGT products drive increased box demand.

As IGT realized additional box demand relative to non-box revenue our mix resulted in lower margin percentages. Breaking product sales down domestic versus international. First domestic. Product sales revenue totaled $148 million on volume of 6,500 units for the current quarter compared to $181 million and 9,700 units in the prior year quarter.

Domestic replacement shipments totaled 4,300 units for the quarter down from 6,400 units in the last year's quarter and up from 3,200 in the immediately preceding quarter. As expected, new unit shipments were 2,200 for the quarter, down from 3,300 in last year's quarter and down from 4,200 in the immediately preceding quarter. Domestic nonmachine revenues totaled $67 million in the quarter, down 6% on a year-over-year basis. The decrease was the result of lower systems revenues which fluctuate from quarter to quarter on depending on the timing of installations.

Domestic average revenue per unit was $22,800 compared to $18,600 in the prior year quarter. Sales of machines utilizing our AVP platform reached 57% of total North American machines shipped during the second quarter. We are devoting more resources towards this platform including creating more exclusive game content. Because AVP machines have a higher price point than in our legacy platforms we expect to see higher average sale prices in the future.

For the second half of the year, we anticipate replacement demand to begin to pick up as we release our latest products, including six new cabinet designs utilizing the AVP platform. New unit demand should also reaccelerate in the second half of 2008 due to scheduled openings of new and expansion products.

Moving on to the international product sales. Revenues were a total of $84 million on volume of 5,600 units compared to $88 million and 9,100 unit in the prior year quarter. The quarter saw continued minimal levels of unit shipments in the lower priced markets of Japan and the U.K. which combined were down 2,800 units from the prior year.

Our international casino market saw slightly lower units sold coming off record levels seen in the first quarter. International nonmachine sales were $20 million up 7% over the prior year. International average revenue per unit totaled $15,000, up 55% over the $9,700 realized in the prior year quarter. The RPU increase was driven by fewer lower priced machines shipped into Japan and the U.K. and a higher contribution of nonboxed sales and favorable exchange rates.

As we expected, international operating income for the quarter was down 60% sequentially and 15% compared to last year's quarter coming off the record, immediately preceding quarter. We anticipate international results to reaccelerate off the lower volumes of traditional slow second quarter of the fiscal year. We also saw a number of sales originally projected for the second quarter shift into the second half of 2008.

Despite this, our international unit achieved record results for the first half. These operations will continue to see results fluctuate from quarter to quarter depending on geographic mix of sales, but should continue to increase their contribution to our consolidated business as we continue to believe that at some point in our future the contribution from our international business will exceed that of our domestic business.

Now moving on to operating expenses. Total operating expenses were $184 million for the quarter compared to $154 million in the prior year quarter. SG&A inclusive of bad debt totaled $112 million an increase of $24 million over Q2 of 2007, mostly due to a number of significant items. Last year's quarter included a business interruption insurance proceeds related to Hurricane Katrina of $12 million and a gain on the sale of a corporate aircraft of $6 million.

Professional services increased during the quarter as submission efforts and costs increased in order to roll out our new products in the future. Bad debt provisions totaled $6 million in the quarter compared to a $4 million credit in the prior year quarter. Excluding bad debts and other significant items, SG&A was flat year-over-year.

R&D expense totaled $54 million for the quarter, up 13% over the prior year quarter as we continue to invest more heavily in future product innovations in [SB.]. Depreciation and amortization within operating expenses totaled $19 million for the quarter. Depreciation and amortization inclusive of depreciation on game ops machines was $77 million for the quarter, up from $66 million in the prior year quarter. The increase was driven by the 3,900-unit growth in the game ops installed base compared to last year's second quarter.

For the remainder of fiscal 2008 we anticipate our total operating expenses to return to a range of between 26% and 28% of total revenues driven by the anticipated ramp up in product sales. Other income and expense was expense of $9 million for the quarter compared to other income net of $2 million in the prior year. Higher other expense was mostly due to higher interest expense related to additional borrowings on our line of credit as well as reduced interest income on lower corporate investments.

Tax rate during the second quarter, our tax rate increased to 42%. The increase was a result of our fixed cost of interest for our FIN 48 liability to be applied to a lower pre-tax income amount and due to some discreet one-time tax items. We anticipate our book tax rate to return to 38.5% to 39.5% for the balance of fiscal 2008 as we continue to see the effects of the implementation of FIN 48 which will drive more volatility in our book tax rate than has historically been the case.

Moving on to the balance sheet. Cash equivalents and short-term investments, inclusive of restricted amounts, totaled $359 million at March 31 compared to $401 million at September 30, 2007. Debt totaled $1.7 billion at March 31 compared to $1.5 billion at the end of fiscal 2007. The increase in debt is directly related to the Company's stock repurchase efforts. In the quarter, we repurchased 2.3 million shares for an aggregate cost of $95.8 million, or at an average price of $40.87 per share.

We have 27.4 million shares remaining under the stock repurchase authorization and we continue to expect this authorization to be exhausted by the end of March 2010. Through the first six months of the year IGT has deployed back to shareholders at total of $333 million through share buybacks and dividends. IGT will continue to be prudent in its capital deployment as we continue to find ways to grow our game operations business and acquire important technologies and intellectual property.

Working capital totaled $718 million compared to $596 million at the end of fiscal 2007, with average days sales outstanding of 75 days and inventory turns at 3.2 times. Inventories have increased by $36 million since the end of 2007 as we begin ramping up for the delivery of new products over the rest of the fiscal year.

For the first half of the year, IGT generated $195 million in cash from operations, down from $367 million in last year's first quarter. The decrease is primarily attributable to net income, timing of payments in working capital, and additional prepayments made to secure long-term licensing rights to recognize brands which help favorably differentiate our products in the market place.

Capital expenditures for the first six months of the year total $150 million compared to $182 million in the prior year. The decrease is mainly attributable to the prior year purchase of a corporate aircraft. CapEx for the remainder of fiscal 2008 is expected to trend in a quarterly range of $60 million to $75 million.

That concludes my prepared remarks regarding IGT's second quarter results. Thanks for your time and attention. I will now turn the call over to T.J. for his closing remarks.

Thank you, Pat, and good morning to everyone. Before we open the line for questions, I have a few comments that regard our business and the outlook here at IGT. While this was a disappointing quarter financially we still made progress in achieving our long-term objectives.

We had new products that began shipping in the third quarter and our anticipated new cabinets have delayed some of our customer orders with them expecting to take part in our latest offering. Of course we continue to concentrate on introducing new game themes particularly for the AVP, that is a real core strength here at IGT. We made several deals during the quarter which move us further along the path of successful deployment of server-based gaming.

This morning we announced the deal for CityCenter. We also previously announced the orders that we have for NexGen with Harrah's, the strategic partnership established with WMS and that with BGIC as well. We also announced this morning through our Barcrest subsidiary a partnership with the global draw and games media in the U.K. and then we have the pending potential transaction of Cyberview. All of these should help us with our SB efforts as we continue to make progress on the timelines that we previously announced.

To remind people of those timelines '07 was really the introduction of the concept to the marketplace, regulatory agencies and customers. '08 really has been the effort to prove the concept to ourselves technologically, to the marketplace in terms of impact on the customer. We expect to have a field trial of SB 3.0 later this quarter and continue to feel comfortable that our timelines for having meaningful impact on '09 in terms of being able to prove the concept and starting to get floor share for it will impact 2010 and beyond as previously articulated.

Our efforts continue to focus on driving this technological innovation forward and we want to provide the best content and applications available for gaming floor and for casino operations. On our capital deployment and strategy aspects of our business, we continue to invest in our business, first, with capital expenditures. That's still where we'd rather deploy our money is in continuing to expand our game operations and devising new technology.

With that, we were going to consistently use our cash flow as opportunistic use of the balance sheet as demonstrated previously with our stock repurchases and continuing to pursue that activity prospectively. Our liquidity in the midst of this credit crunch remains solid. We have $1.7 billion available to us on our line of credit and our current borrowing rate at LIBOR plus three-eighths is approximately 3%.

All of these opportunities, as well as others being considered, will allow us to assist our customers who face tight credit conditions, will allow us to pursue partnerships that will acquire access to market and/or technology, and at this time valuations of our peer companies for purposes of considering partnerships and more are more attractive than they have been in recent periods.

Market expansion continues really in a very robust way even though there has been a couple of setbacks. For instance, in the back half of '08 we are going to have new shipments to the two racetracks in Indiana and we have the systems deals for both of those racetracks. We expect here in Las Vegas, the Eastside Cannery to open up. There's going to be tribal expansions that are going to take place in Oklahoma and Connecticut.

You're going to continue to see expansions for instance with the Seminoles' transition to Class III. The results of the compacts in California and the ongoing buildout of the market in Pennsylvania. And the outlook that we have remains positive in that although there may be a project or two that is deferred and there may be some projects that are delayed in terms of their opening, there are a number of projects that are already out of the ground and are likely to be completed despite the credit conditions and we remain very optimistic that there will be over 100,000 new machines added within the next few years here in North America.

The international markets, obviously, are less affected by credit conditions to this point. Nonetheless, we will be paying attention to them as well. The market development efforts that continue to exist for opening new markets. We are still very optimistic. You have the slot referendum in November for 15,000 machines. You've had successful votes this last quarter in Florida and in California.

And though Massachusetts and Kentucky were unsuccessful, we remain optimistic that both will probably approve gaming sometime over the next few years and that the first serious attempts, we remind people, the first serious attempt in these kinds of states generally fails.

In Pennsylvania, for instance, it took three tries and the election year is a very difficult time frame for passing new legislation and so it really would be in a post-election cycle starting next year in which you would see progress made in those two jurisdictions.

Also, internationally you are hearing about the new government in Taiwan starting in debate for expanded gaming operations there. There are proposals for large casino resorts in the Philippines. Macau continues to grow and in fact that whole area of the world competing for emerging entertainment opportunities for kind of the growing wealth that is taking place there.

In the way of guidance, we continue to expect an uptick in our business levels during the second half of the year as new and expansion opportunities open and we release our new cabinets and game titles. However, given current operating conditions we maintain our guidance at $0.35 to $0.40 for the next four quarters with the possibility of coming in at the high end, if not slightly exceeding this range in the second half of this year.

Similar to what we expect to see in fiscal 2008, new and expansion opportunities are again more weighted toward the second half of 2009, so we will revisit our guidance on future earnings calls as we gain further clarity to those opportunities. Again, we want to thank you for your time this morning and your interest in IGT. And we will now open the lines for questions.

Thank you. We are now ready to begin the question-and-answer session. (OPERATOR INSTRUCTIONS) The first question comes from David Katz from Oppenheimer. You may ask your question.

Hi, good morning.

Good morning, David.

I have a couple. Going back to a couple of Pat's earlier comments and you do give out quite a bit of information. I apologize if I missed any. Did you give out an average selling price domestically and internationally?

I know you gave average revenue per unit. But we are trying to break out the product sales business between the nonmachine, domestic and international, and if you could talk a bit about the margin on each of those three pieces, that would be helpful also. Irrespective of the nonmachine sales.

Okay. David, I didn't give ASP. I gave ARPU, just a second let me find it here.

Right.

David, I will have to circle back. I don't have it with me.

Can I move to the next issue, it was. I heard all the comments about the back half of the year. In terms of sort of new product, new content and your new cabinet, impacting this current quarter that we are in right now as well as the following one, are we, are our expectations still the same as they were two, three months ago in that respect?

They are. More than 50% of our shipments in this last quarter were AVP related and we expect that that percentage is going to grow in the back half of the year. We have the normal issues with introducing new products to the market place.

You freeze some purchase activity. I think that is probably a little bit of what happened with the numbers in Q2 and you have, of course, the risk of getting timely approvals for the cabinets, the hardware, the underlying platforms, the games to be deployed on those, and there certainly is some timing elements we need to get through in Q3 and Q4.

But we feel very good about the products to be introduced. All of those, of course, make the floors SB ready as they are deployed and so far very favorably received as we present them to our customers. And so as a result our backlog is up a great deal quarter-over-quarter.

Okay, and then lastly, then I will give someone else a chance. The memorandum of understanding, you announced this morning, can you give us some sense of timing as to when that product has to be completed, approved and ready to deliver to CityCenter and how the timeline works out?

Sure. If you remember, there is a number of system products that we already deploy into the market that there really is no development associated with. That includes Advantage. Advantage is a patron management. It includes bonusing, the back of the house. Accounting.

That will remain as it currently is operated for CityCenter and for other new installations. There is also our table ID piece. There is the opportunity for us to obviously introduce ticketing and at CityCenter, we may have an opportunity to deploy [Mariposa] as well. We continue to kind of explore that opportunity. So really what we are doing is layering on top of that the speed functionality.

The SB functionality timeline goes like this. 3.0 hopefully will be in the field with a field trial for purposes of getting Nevada approval sometime this quarter with the approval probably lagging upwards of 60 or 90 days if all goes well. And that is the core functionality of download and game configuration being implemented.

Later in the year, you will see the SB window implemented in two phases. First, it being incorporated onto the box themselves and, secondly, being activated by player card insertion allowing for a more interactive experience. It isn't until we get to SB 4.0 that you start realizing some of the applications deployment that we've been talking about that really could make a difference in terms of point-of-sale marketing. Providing functionality like tournaments on demand. Being able to have a more robe bust bonusing effort, being able to target consumers as we recognize them and their play activity. Being able to as a result maybe tailor the experience some.

All of that comes with SB 4.0. And our goal is to have it available to CityCenter upon opening. Right now, we feel comfortable that we will accomplish that goal. The good news is the functionality of the floor is not dependent on us realizing that goal and so right now I would say that their opening is aimed for November of next year, and for the time being we could say that we are comfortable that we will meet all their required timelines.

And, I'm sorry, one last one, and there was no sort of Company announcement or anything like that, but we did pick up in some of the trade rags about some of the changes being made in your SB team. Is there anything that is [discussible] about any of that on or any color you can offer us on any of that?

For the most part the team remains as it has been. SB applications and the definition of the product have been led by a fellow named Rich Schneider for all this time. Rich Schneider came to IGT with the acquisition of Acres Gaming back in 2003. He was president of Acres.

He has managed the integration of our systems businesses between the two respective companies and for the last couple of years has had been the responsibility of overseeing SB. He really has played the pivotal role of going out and helping us secure customer agreements and some definition as to what the first phase of the product needs to be, and, of course, has been integral in the kinds of cooperation we need from our peer companies as well and so has been helpful for that as well.

From that perspective, there have been no changes. We did have a fellow by the name of Andy Ingram who was in charge of all networked gaming systems for us that included not only the SB effort, but included Mariposa, EZ Pay and Table iD and he has left the organization. He was important for us in terms of communicating the open platform publicly, but realistically, if you take a look at Rich Schneider who has a very long history in the industry, that's something that he's been doing for 20 years.

In fact, he is the past president of GSA. GSA is the industry association that we support for advocating open protocols and something that we anticipate as required for the network floors of the future to be able to bring functionality across the floor. I think there is a little bit been made of this one departure, but really no changes to the underlying core team both defining the product and developing the product.

Got it. Thanks for your comments.

Thank you.

Our next question comes from Steve Kent with Goldman Sachs.

Hi, good morning. Could you talk a little bit about, with some of the weakness in some of the sales especially domestically whether you think that's a function of competition or the slowing economy? And maybe you could address this issue about operators facing a tougher time over the next few quarters and their desire or ability to commit to CapEx on slot machines?

Sure. To answer the first question about replacement sales, we've remarked in the past about the fact that we perhaps over penetrated the market in the wake of EZ Pay deployment, that we were early adopters of that technology and had an advantage with that first mover positioning.

So, as a result of that there has been some recalibration of floors and I think it continues to show itself in ship share to replacement opportunities and that's lower than what is our historical installed base.

I think some of that is the result of our own activity. I think the slowing down on replacements in some instances is an easy decision for deferral of CapEx by our customers, as probably less that they are affected by the economy but trying to understand whether they will be affected by the economy for an extended period of time. As well as some of their own capital structure issues as a result of their access to capital given the change in the credit markets.

I certainly would be remiss to say there was no competitive impact. There is. Competitors are doing a better job right now, both having access to current technologies and doing a better job with their games. I would say we would never use that as an excuse, though.

It is our job to go out and secure 60 plus percent of the floor and if you take a look at new properties, which is really still to me the beacon of our strength, you see that we still accomplished those kind of penetration rates when places open.

So I feel very comfortable about what our competitive standing is understand that on the margin and the replacement environment we have slipped a bit, but it is with these new products that we are introducing this quarter. And the biggest effort ever in the history of this Company for introducing new cabinets, new platforms, new games all in advance of this very industry changing technology that we call SB.

I feel very comfortable that we are going to start growing our share of replacement demand. And in fact can start stimulating some replacement demand, but the economic factors that cause the timing to be determined are in the hands of the operators not ourselves.

T.J., just changing for a moment, on participation revenues where we're seeing some regional markets show some weakness.

From your perspective, is the demand still so high for your product that you are not seeing the impact as much as maybe the broader market would suggest and maybe in that light if you are or you're not have you been able to see any deceleration as we've gone through the quarter and as the economy seems to be softening in play on your participation games?

I think the primary impact on play levels this quarter is seasonality. And that's why they are up sequentially. But that year-over-year comparison I think going into the quarter we would have expected a slightly bigger uptick due to seasonal factors and as we started measuring both directly since we can with our wide air progressive systems and indirectly just seeing some of the results of the market. There's no doubt that play levels weren't as robust this year as were hoped for. Our games always -- they work because they are the most popular and so we've always said that we think they're first games played and the last games to stop being played. And, yes, we think our products probably are slightly less impacted by the overall economic impact on play levels than are other of our non-participation games. But that said, if there is less total spend going on in the casino environment our games will be included in that.

Okay. Thanks, T.J.

Thank you.

Our next question comes from Joe Greff with Bear Stearns.

Good morning, guys.

Good morning, Joe.

What is your estimated domestic ship share in the March quarter and how does that compare to the last few quarters?

I think we were probably in the 40% range. And that's been about where we have been now for the last four to six quarters.

Okay. And as you introduce new cabinets and new titles I presume you are going to see somewhat of a decline on the nonmachine, nonbox revenues. How much of a decline do you anticipate with new cabinets, new titles being introduced?

The goal of SB is for us to figure out incremental applications. Change the way we sell game content into the marketplace. So there could be a little hiccup in terms of the run rates but we really haven't anticipated much.

If you take a look at nonbox revenues, they are split about a third, a third, a third to intellectual property, systems and conversions -- conversions and parts. And so, it is really only that last category that is a bit at risk as people stop supporting the older platforms and move to these newer platforms. But our systems business we expect will continue to grow and we think there are some real opportunities for us to continue to grow our IT business. And so I think in total, we anticipate that that is still a growing line item.

Okay. Then in that $0.35 to $0.40 quarterly EPS range for the next four quarters I am presuming you are factoring in nothing more than $100 million a quarter of buybacks? Is that fair to say that?

I think that our buyback strategy has been articulated in that we are going to try to exhaust the existing authorization by March 2010. To do so, I think initially required around $175 million a quarter which was in excess of our stated goal run rate of $100 million.

I think that stated goal rate of $100 million is still a good one to use for assumption purposes, but we remain opportunistic and if you see share prices decline as they have in anticipation of these results and the overall economic impact on the industry I think that there is an opportunity for us to assess whether or not we should exceed that level.

Great. Then you talked earlier about the timing with respect to the CityCenter MOU. When do you anticipate that to be a finalized signed formal contract?

The MOU is largely binding upon the parties. So for us we have the formal execution of the sales documents that are going to follow this tentative agreement. But I would say that the MOU for most respects represents a final agreement between the parties.

Great. Thanks, guys.

Thank you.

Our next question comes from Steve Wieczynski with Stifel Nicolaus.

Good morning, guys.

Good morning, Steve.

Hey, Pat, first question for you. Can you just quickly break out the interest expense versus income?

Sure. Interest income was $17 million and interest expense was $25.1 million and other was an expense of $800,000.

Okay. Great. Going back to the CityCenter deal. Can you, I assume you have been in discussions with them about the economics of how the deal will work. Can you give us some color in terms of that?

The deal for SB, I think, as we remarked in the past, in some respects remains to be determined. But the underlying business relationship providing advantage and other systems products remains the same.

The idea that we sell boxes, in this case and the AVP platform all in the new cabinets with those LCD top boxes. It is a one-time sale of hardware.

We will start having an opportunity to package game content both with the initial sale of boxes, but subsequently delivered on a floor-wide basis across the floor and that is probably going to be a one-time charge based on number of seats that the product is made available to.

We're going to try to introduce new applications and those applications will have probably some up front charges as well as some recurring revenue charges for supporting those applications, keeping them fresh ongoing development in the matter.

We're going to have some IP charges especially as it relates to certain of our technologies and inventions being made available to other vendors as they try to bring product to the casino floor. So all of those elements are at play here.

We have, as you would imagine, some incentives given to early adopters and certainly the MGM organization as a whole, and CityCenter here specifically have really been terrific in that they have often times been early adopters of the technologies that we are trying to bring to the industry and we very much appreciate that partnership.

But I don't think that the deviation is so great that the elements that we've previously identified, those six categories or so of areas that we might be deriving revenues as we deploy SB, I think, are all intact here and all present opportunities as it relates to the CityCenter deal.

Okay, great. Do you expect further announcements from other operators throughout the year?

I sure hope so. I mean that is our job here is to go and try to figure out ways that we can expand our customer opportunities. We are not much for making press releases, as you know, as it relates to securing new business because we think that is something we do in the ordinary course. So every systems deal we get, we don't announce.

Every time we get a machine order we don't make any particular celebratory noise about it. That's what we do.

And in the case of SB, I think that these early adopters of Harrah's and MGM are very important to make known. I think there is probably a couple more that we are working on especially within our existing customer base for Advantage that are obvious efforts for us to deploy SB and I think if we make meaningful progress there we will probably go ahead and make sure that we let the market know. But over time, we expect to be selling an awful lot of SB systems and probably not announcing every one.

Okay, great. And then lastly, can we get an update on the CFO search? It has kind of been dragging on now for awhile?

It has been. And unfortunately I think it has been mostly a product of me in that I have been particularly picky on behalf of IGT.

I think that we really want to make sure when we get a person in that position that they can immediately help us with our global expansion, the transitional activity that we've got going on on an ongoing basis, help us address capital deployment and including capital structure items. And that they are the right personality fit for this organization in a way in which they can represent us to a variety of external communities.

And so being that particular has meant we have gone down the path here and there with a couple of different folks but have yet to really figure out just that right fit. So, it is an ongoing effort and unfortunately at this point, I would say, with no imminent announcements.

Okay, great. Thanks, guys.

Thank you.

Our next question comes from Celeste Brown with Morgan Stanley.

Hi, guys, good morning.

Good morning, Celeste.

T.J., I'm sorry, could you, I couldn't tell if you were saying you might see a break out of the $0.35 to $0.40 range in the back half of this year or you'll see it in the back half of next year?

Well, what we said is we think there is still, as we mentioned on the last call, there is still an opportunity for us to exceed the range in one or both of the quarters in the back half of '08. Just because we do have such good visibility to machine demand.

The thing that can get in the way of that is deferrals of that purchase activity either due to our inability to get approvals or due to either projects being delayed and/or customers just deferring decisions to future periods. So there are some risks to that visibility. There is a natural uptick that we expect in game ops due to the seasonality for these next six months or the best six months of the year for game play levels.

We think international kind of rebounds to more normalized levels and so there's reasons for us to feel good about that range, including maybe being on the high end or exceeding the range for the next couple of quarters. You see us go back into '09 in a way in which we're back to this kind of first half of the year where there are seasonal impacts. There is still us being somewhat dependent on new properties which we don't control and replacement demand still weighing a little bit in anticipation of truly new technologies being deployed.

Going into that second half of '09, however, you can identify a lot of new and expansion opportunities for us to sell product and by then, we expect that we really are starting to stimulate replacement sales here at IGT in advance of active SB decisions being made by our customers. We don't have any guidance yet for the back half of '09, but feel very good that there is a real opportunity for that to be the strength of that fiscal year.

Okay, T.J., it sounds like you are accelerating your expected delivery of SB 4.0. I thought CityCenter would get 3.2. Is that going to be a challenge in terms of personnel?

No, it is not. Not on the personnel side. The challenge, of course, is that we are developing a very broad system from scratch, and so just maintaining proper product definition and meeting those internal timelines is really the challenge.

And, of course, along the way we've changed specifications somewhat of the underlying technologies. We have redefined some of the applications we have as priorities and still are working with customers to make sure that we kind of meet their initial requirements for the product. So, there is some movement of parts as far as that is concerned, but I think we feel comfortable that we have the resources necessary for timely delivery.

4.0 is due right around that CityCenter opening and so where we are hoping that is deployed, it is 3.2, as we previously said, that we will for sure have deployed in that property. And so if everything goes well we have perhaps 4.0 in advance of that opening or maybe shortly thereafter.

And then you talked maybe about an interim step. Is that 3.1 and what led to the decision to have the interim step in terms of your versions?

We have the opportunity for us to secure some gaming approvals and customer acceptance of what really people have originally defined server-based gaming as in the way of downloading game [config.] And we we wanted to go and get that done, have the proof of the technology that we could have kind of this broadband delivery of various applications.

As you know, in our minds what distinguishes this product from previous interaction with the player is that we moved the customer interface to the primary game screen, and so deploying an SB window is also in our minds is extraordinarily important to being core functionality and that's why it is still in that Generation 3 effort. And so 3.1 and 3.2 are just perfection of delivering that SB window.

That's the reason it is being phased. For us to secure timely gaming approvals.

Okay. Thank you.

Thank you.

Our next question comes from Bill Lerner with Deutsche Bank. Your line is open.

Hey, guys.

Good morning, Bill.

Couple questions for you. One, when you look at SG&A this quarter, I think it was about 28% higher than last year. Of course, revenue was down, mid-single-digit, I think, 6%. How do you reconcile that? I would suspect it is function of what you are seeing in demand in the pipeline and then I have a follow-up.

Sure. If you take a look at SG&A with all the noise removed to both last quarter's hurricane proceeds and the sale of aircraft and this quarter's kind of one-time items associated with a few internal decisions relative to kind of the economic environment in which we're operating the SG&A year-over-year is actually reasonably flat and comparable figures.

R&D is up and depreciation is up because of the growth in the install base. And so, there is some growth in operating expenses in total. And hopefully that reflects either previous growth or ambition for growing the Company prospectively. SG&A needs to be sized right. All operating expenses need to be sized right relative to the overall size of the business.

So that we have goals, as you know, of bringing at least 30% of our overall revenues to the operating income line. We have been historically able to do that by realizing margins, let's say, in the neighborhood of 50% to 55% and then the rest of that is captured within operating expenses. So we forecast operating expenses at 26% to 28% in the back half of the year.

And that is a good run rate for us going to '09. If for any reason we ever felt like revenues weren't going to trend up to properly support these expense levels, we would go back and revisit our spending. And you know, cut if necessary.

Thanks, T.J. And then the follow-up is just a little bit of color, if you can provide on MGM or CityCenter. What sort of couple applications gotten them so jazzed up they want to essentially allow you guys to announce this early and also what is Harrah's seeing about an interim solution with NextGen that they want to deploy the way they are?

Sure. I think the biggest thing people really believe in is that SB window. The idea that we're going to have a much better customer interface than we've ever had in times past. And we've talked about this a little bit. And if you look at the original player tracking systems, up until just seven years ago those were two line dot matrix displays for messages to the player.

NextGen was revolutionary in that we had the ability to articulate a much more robust message and as a result support bonusing. And the bonusing that has really made a difference, of course, is Lucky Coin which is branded differently at a couple of different places with the idea that you have floor-wide mystery jackpot and extra credit, which is the idea that you automate some of the player tracking comp conversion to play activity at the machine.

The idea that you can expand on that and have things like tournaments or a more robust Luck Coin promotion that is better articulated to the player or that a player can access their activity more readily through the SB window as opposed to some form of look-up window that we can direct market various customer messages to them to try to impact their overall behavior across the floor.

A place like CityCenter, for instance, as you know, really only anticipates maybe 40% or even less of their overall revenues being driven on the gaming floor and they are trying to anticipate ways that they can drive revenues while they have a captive audience by getting messages to the players at the gaming devices.

And so SB window, I think, is really been the decisive rationale for Harrah's and MGM to make the SB commitment. But in the case of MGM and CityCenter, it is also an expansion of what has been a longstanding systems relationship and for them we really appreciate the support that they are big believers in Advantage. And the things we have already done with floor-wide efforts and they see us continuing to be able to offer more under this new delivery mechanism.

Thanks, and, T.J.,I am just noticing as you are saying this. Your stock is down 11% on the back of lots of weakness in the last several weeks, or what have you. Does that make any sense to you based on what you know about the outlook? I understand the quarter was weak but just wanted to get your view on that?

I think there was some headline risk to today's press release in that people are going -- people who aren't necessarily trying to be long-term investors might make decisions based on the first couple of sentences in the press release.

I think that folks that have made long-term commitments are obviously following the progress that we are making on delivering SB and being able to stimulate replacement, being able to follow the ongoing growth of our game ops install base and the reliability of that business and although play level is somewhat affected by economic factors this last quarter, the fact is still an upward trend is alive and well there.

Nonbox sales demonstrate diversity away from this core need to ship boxes. I think all of the things that have made us an interesting Company for long-term investors very much remain intact. And the fact we can be on a call and remark on visibility to a much improved environment for the back half of '08 and reasons to share optimism about '09 and really know that SB will delivered and impacting our 2010.

None of those things have changes and so the day-to-day changes in the overall valuation of the Company don't always make sense in terms of really reflecting what is, I think, people that are close to our efforts, the underlying strategies.

Thanks, T.J.

Thank you, Bill.

Our next question comes from Robin Farley, UBS.

Great, thanks. Can you quantify how many of the game operations units that were removed sequentially, how many of those turned into product sales?

Most of them did, Robin. When you saw Class III approved in Florida for the Seminoles, that led to a number of removals there of our previous Class II product. And in California, the same thing with the compact amendments being approved you saw a number of our Class II devices again removed in favor of product sales. But that was pretty much a one-to-one swap out.

So in other words, there is like all 800 casino removals, so it was 800 removals and no additions?

Well, we had some other ongoing additions, but nothing of any significance.

Okay. Thank you.

Thank you, Robin.

Our final question comes from Amir Markowitz with JPMorgan. Your line is open.

Hey, good morning. Just a question about your game ops margins. You commented on, I think it was, 57% to 60%. Kind of outlook going forward. Now what kind of interest rate are you guys assuming? Say LIBOR continues to decline. Do you have that factored in?

We do. What we're currently looking at, we use the Fed funds futures, Amir. And what we are seeing in that is another 50 basis points, I believe, in the June quarter. And then nothing after that so far.

Okay. Thank you. Then the other thing about the server-based gaming and the MGM deal, when you talk to MGM, do they give you a sense of if things kind of go well at CityCenter if they would roll it out similar solution to their other properties?.

Well, I think that's the goal we have. We can demonstrate into new properties and on a discreet basis on a couple of trial floors in advance of that. The opportunity for us to really grow revenues as well as maybe help capture some managed expenses.

If we can do those things, we think we will have a compelling enough ROI presentation for us to be able to present to our customers a rationale for them replacing or upgrading existing floors. If you take a look at the trial location that we have for 3.0 t is another of the MGM properties, and so that does demonstrate that corporatewide they have been big supporters of these efforts.

Thank you.

Thank you. Given that that was the last question of the call, I very much appreciate everyone's attention this morning and look forward to remarking on what will be a much better quarter on our next conference call. Thank you.