Executives
Richard Haddrill - President and CEO
Robert Caller - EVP and CFO
Gavin Isaacs - EVP and COO
Mark Lerner - Sr. VP for Law and Government, Secretary, and General Counsel
Analysts
Steven Kent - Goldman Sachs
David Katz - Oppenheimer
Celeste Brown - Morgan Stanley
Todd Eilers - Roth Capital Partners
Joseph Greff - JPMorgan
Stephen Altebrando - Sidoti & Company
Bally Technologies Inc. (BYI) Q1 FY09 Earnings Call November 6, 2008 4:30 PM ET
Operator
Good day, ladies and gentlemen and welcome to the First Quarter 2009 Bally Technologies Incorporated Conference Call. My name is Amity and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We'll facilitate a question and answer session post at the end of this conference. [Operator Instructions].
I would now like to turn presentation over to your host for today's call, Mr. Richard Haddrill, Chief Executive Officer. Please proceed sir.
Richard Haddrill - President and Chief Executive Officer
Well thank you, Amity, and welcome, everyone, to Bally Technologies first quarter fiscal 2009 earnings call. We are very pleased to report record first quarter revenues and earnings. These results are especially impressive, given the extremely difficult economic environment. We have continued to gain market share in both games and Systems, as a result of our leading products and great team of people.
Today you'll hear from some of them. Robert Caller, our Chief Financial Officer will discuss our overall financial results, Gavin Isaacs, our Chief Operating Officer and Ramesh Srinivasan, our Executive Vice President of Systems will discuss their respective businesses. And Mark Lerner, our Chief Legal Officer will discuss the resolution of some legal matters. Then finally, I'll have some overall business comments before we open it up for questions.
Robert, over to you.
Robert Caller - Executive Vice President and Chief Financial Officer
Okay. Thanks Dick. First, let me review our Safe Harbor language. Today's call and simultaneous webcast contain forward-looking statements about Bally and our future business. These forward-looking statements are based on currently available information. Actual results could differ materially from those anticipated in the forward-looking statements and reported results should not be considered an indication of future performance. More information on factors, risks and uncertainties that may affect our business and financial results or may cause us not to achieve our forecast, are included in our annual report on Form 10-K for the year ended June 30, 2008 and other public filings we have made with the Securities and Exchange Commission. The forward-looking statements made on this call and webcast, the archived version of the webcast and any transcripts of this call speak only as of this date, November 6, 2008. Today's call and webcast will include certain non-GAAP financial measures within the meaning of Regulation G. A reconciliation of all such non-GAAP financial measures to the most directly comparable financial measure calculated and presented in accordance with GAAP can be found in today's press release.
Now on to the financial results. Today we reported record financial results for the three month period ended September 30th, 2008, the first quarter of our fiscal 2009 year. We continue to be the fastest growing major Gaming supply company. Total revenues were $237 million, a 26% increase as compared to the comparable prior year period. Net income was 30.3 million, or $0.52 per share on a fully diluted basis, as compared to net income of 21.3 million or $0.37 per share in the comparable prior year period, an increase of 41%. Operating income was 53.5 million and equaled 23% of revenue as compared to 22% in the prior year quarter.
As Gavin and Ramesh will discuss more detail later in the call, we again recorded record net results in all three of our technology businesses for the first quarter, and Rainbow, while down slightly, is expected to be on our profit plan for fiscal 2009.
We recorded a 33% increase in revenues from our System business to 52 million, as compared to 39 million last year. The increase in our Systems revenue and the backlog in our Systems business continue to be strong. Revenues in the quarter were driven principally by existing customers investing further in our Systems products. In addition, maintenance revenues were 12.2 million for the quarter, an increase of 26% from the same period last year.
Margins in the System business this quarter were at the low end of our target range of 70% to 75%, due to increased mix of hardware versus software sales. Hardware carries a higher cost of goods sold than software.
We also reported record quarter revenues in both our Gaming equipment and Gaming operation lines of business. Gaming equipment revenues increased 27% to $107 million over the prior year period. This increase in Gaming equipment revenues was driven by 28% increased in new games sold to 6,598 units up from 5,151 units in the comparable prior year period.
Of the total units recognized this quarter 5,199 were to customers in the United States and Canada. International unit shipments totaled 1,399 or 21% of the total new units sold during the quarter, an increase of 32% from last year. Our average selling price or ASP for the quarter increased 6% to a record $14,062.
Margins on our Gaming equipment were 44% for the quarter. The game sale margin was negatively impacted by higher inventory obsolescence and other charges, and the sale of 465 million lower margin OEM units during the period. Improving the margin on game sales, remains a key short-term focus of the company and we continue to believe these margins will improve over the next several quarters.
Results from our Gaming Operations business continue to be impressive. Gaming Operations revenue increased 25% to a record for the first quarter of 68 million, as compared to the prior year. The increase in revenue was due primarily to increases in the install base of rental and daily fee games and the continued popularity of premium games. Gaming Operations margins was 70% as compared to 67% in the comparable period of prior year.
During the quarter, approximately half of the games processed through our manufacturing facility for Gaming Operations were refurnished units resulting in a more efficient use of our capital.
Selling, general and administrative expenses increased 12% to 58 million for the quarter as compared 52 million in the prior year quarter, but declined as a percent of revenue to less than 25% from 28% last year. Increases in personnel expenses, related to the continued growth of our business, comprised a significant portion of the increase.
Research and development expenses increased 49% as compared to the prior year and reflects our continued increase investment in our future technologies. R&D as a percentage of revenue was 8% in the current quarter, as compared to 7% last year. We now derive an estimated $40 million annualized benefit from our India centers.
As of September 30th, 2008, our cash and cash equivalents were $57 million. During the quarter, we repurchased approximately 326,000 shares of our common stock for $11 million. Since October 1st, we've repurchased an additional 393,000 shares for $10 million. Since we initiated our share repurchase program in February of 2008, we have repurchased over 1.15 million shares of our stock. As of today, we have approximately $79 million remaining under our board authorized share repurchase plan.
Our inventories decreased to 81 million as of September 30th, 2008, from 94 million at June 30th, 2008, largely due to a $12 million decrease in our finished goods inventory. Current receivables declined to 207 million from 216 million at June 30th. We recently completed a credit review of all of our customers, and we continue to actively monitor our credit exposure in this tough environment. We have no receivables from any single commercial customer in excess of $7 million. Our historical bad debt expense continues to average less than 1% of sales. Our ageing buckets, as a percentage of revenues, remained relatively consistent over the past year and revenues that we generate from Nevada are less than 10% of our consolidated totals.
On September 29th, we completed the refinancing of our debt on very favorable terms. Our ability to complete this financing in such a turbulent market is truly a testament to the strength of our company. The refinancing includes a $225 million senior term loan and a $75 million revolver, of which $25 million is currently undrawn. We also have the ability under certain circumstances to increase the term and/or revolver by an additional $50 million. The interest rate on the loan is GRIP-based [ph], where the first six months the rate is fixed at LIBOR plus 325 points. After March 31, 2009, if our EBITDA leverage ratio is less than one time, the rate will be LIBOR plus 275. From 1 to 1.5 times, the ratio will be LIBOR plus 300, and if our leverage ratio is greater than 1.5 times, our rate will be LIBOR plus 325. At September 30, our EBITDA leverage ratio was 1.0 times, down from 1.17 times at June 30th.
Coupled with our existing cash reserves and expected cash flow, this new credit facility will give us ample liquidity to grow our business and take advantage of the many market opportunities we face. Importantly, we do not see a need to be back in these turbulent capital markets until the maturity of the credit facility in 2012.
The R&D credit was recently reinstated by congress, recollect at [ph] January 1st, 2008. We expect that we will record approximately a $1.4 million benefit in Q2 of fiscal '09 for the benefit related to the January through September 2008 time period. Including this discreet item, we continue to expect an effective rate for the year of approximately 37%.
Now I will turn the call over to Gavin for some more discussion on Gaming equipments and Gaming Operations results.
Gavin Isaacs - Executive Vice President and Chief Operating Officer
Thanks Robert. We are very proud at the record first quarter revenues we recorded from sale of our Gaming devices, particularly given the low number of new openings in Q1, and from our Gaming Operations during the quarter.
As Robert discussed, revenues from the sale of Gaming devices increased 27% to 107 million during the quarter compared to one year ago. In addition, we recognized revenue on the shipment of 6,598 units, a 28% increase over the prior year period. These are truly remarkable results in this typical economic environment, and speaks to the quality of our game, and also to our outstanding change.
As previously mentioned, the increased in revenue was not significantly impacted by the weakness in the Nevada market, as historically, our Gaming revenues in Nevada are less than 10% of that total Gaming revenues. The average selling price on our new units increased to a record $14,062, a 6% increase from last year, and is a strong indication that the quality of our Gaming devices can overcome more deeply discounted products.
After considering the reported results of our competitors, we estimate that our North American ship share in the quarter was approximately 24%. Again, demonstrating the increasing market share we've been able to garner, during this very sluggish replacement cycle.
We continue to believe that Bally products are underrepresented on the floors of Northern American casinos today. When you consider the distance between our current North American shift share in recent quarters, which was in the mid 20s, and our install based in North America, which we estimate to be between 12% and 13%, we believe our current ship share percentages are sustainable even in this constrained market.
Further, given our modular cabinets, a stable Alpha platform, and continuing improvements in an innovation to our game library. We represent a very safe bid for our customers in an uncertain time such as this. The split between our mechanical reel and video game shipped in North America, continues to be about 50-50.
We will have our largest ever showing at G2E this year. We've worked very hard on focusing our products to the live players and meet the needs of all our customers. We will showcase a new range of high volatile [ph] video game, from all leading sector titles in all categories, especially five real lower denom games and higher denomination games. As well as games of central determination, lottery, and Class II customers. We will also show-off our continuing innovation with products like Dual Vision [ph] and our vision real series, and unique offerings like the jumbo cabinets, game makers with both progresses and the scheduler and a range of new games for our highly successful V32 ALPHA [inaudible].
We were also particularly pleased with the increased results from our international operations. New unit sales to international locations increased to 1,399 units or approximately 21% of our new unit sales recognized in the quarter. This represents a 32% increase in international shipments over the prior year.
The 44% margin on game sales in the quarter was below our expectations. Discounting was not an issue, as our average selling price was a record $14,062. Once again, inventory obsolescence charges were higher than expected. We updated warehouse internationally, which contributed 1 million for the obsolescence. In addition, we sold 465 lower margin OEM units during the quarter.
Margin improvement in game sales remains significant opportunity for the company. We continue to focus on improved purchasing and manufacturing efficiencies and effective use of our new warehouse management system.
As we can see continuing improvement to our video library, we anticipate being able to derive additional higher margin revenues from the sale of conversions. Given that we expect our margin for the full fiscal year to be in excess of 45%.
Gaming operation results were also very strong with revenues increasing in the quarter by 25% to $68 million as compared to the prior year period. Our margin on Gaming Operations during the quarter was 70%. Our Gaming operation strength continues to be driven by the strong performance of our premium games, such as Hot Shot Progressive, Reel Winners, Real Money and Millionaire 7s. In fact, we actually grew our install base of these premium games in Q1, by 365 games.
We did see reduction in our centrally determined category due to three unusual transactions. These relate to fee per day units which generate far less revenue than our premium game. Based on orders to date, we expect solid revenue growth in Q2 in Gaming operation and not satisfied with the continuing strength in that part of our business.
Our experienced team is also managing the Gaming Operations business better through improved asset management, conversion of weaker performing title, and targeted selling. This should ensure that we continue to grow in this sector and achieve our goal.
During the quarter, we were able to utilize our capital more efficiently as approximately one half of the games processed through the manufacturing, the game operations were refurbished units.
We are obviously keeping our eye on developments in the economy and the impact it is having on casino operators. We expect the replacement market will remain sluggish through the remainder of our fiscal 2009, but are optimistic to the growing acceptance of our products in the market, and our relatively small, but growing installed base of daily fee games will benefit us as we continue to gain share.
Now, I will turn over to Ramesh for some additional detail on our Systems business.
Ramesh Srinivasan - Executive Vice President, Systems Division
Thank you, Gavin. We recorded another excellent quarter with Systems revenue at $52 million, our fourth consecutive 50 million plus quarter. Our stable and talented Systems management team continues to lead quality innovation and execution on all fronts. We are attracting top engineering and management talent across all levels of the organization.
More than the actual results themselves, what is exciting to us are the growth of the organization and our increasing capacity to carry the Gaming industry, into an era of innovation, based on world class robust technology that actually works.
The backlog and pipeline for Systems continues to be strong. The Gaming industry's recent shift towards being relatively more focused on operational efficiencies, seems to be creating a greater need for and better use of Systems products.
The gross margins for the quarter was at 70%, which is at the low end of our target range, and reflects a higher mix of hardware compared to software. This quarter results were principally driven by existing customers, investing further with Bally Systems. During this quarter, we recorded over 45 significant implementation [inaudible], including new installations, upgrades and add-on products, a pace of more than three significant successful implementations per week.
Maintenance revenue increased by 26%, compared to the prior year quarter and we expect our annual maintenance revenue to be in the range of $46 million to $48 million. We continue to be arguably the only Systems company in the industry that provides significant protection and value on past investments our customers have made with us.
Amidst the cacophony of unfilled grandiose future technology promises, and eye in the sky white papers, that seem to engulf the Gaming industry everywhere you look. We continue to increase our lead as the Systems leader, who actually delivers on improvements day in and day out. As just one example, the Bally integration gateway module. brings the easy talks but hard work of intraoperability closer to reality. This product makes integration of both Bally and non-Bally application Systems, much easier than before, and it is now a standard part of all our recent version releases.
We remain strong believers that innovation in the Business Systems world must be both about code innovation and cool innovation. Cool innovation ideas can only work on a good foundation of a solid set of core products, which work at a high level of quality and predictability. One without the other will not be long lasting nor sustainable.
Bally Systems products currently operate on high speed floor networks, in more than 80 casinos today, running over 50,000 Class III Gaming devices all over the world. This is an addition to the 40,000 plus Class II Gaming devices already connected to our central determinant Systems products, running on high speed networks. These statistics alone are clear evidence of our very sizable lead in the server Gaming network floor of the future race.
The cumulative number of iVIEW player communication devices purchased and are committed to be purchased as of September 30th, is approximately 125,000 units and continues to validate our evolutionary server Gaming network floor of the future strategy. And our iVIEW display manager which allows for player communication through a portion of game windows across the Gaming floor, regardless of game manufacturer, is now successfully live in a production floor field trial. This iVIEW DM product is a natural evolution of our iVIEW technology and Bally's strategy to provide more easily adaptable technologies through a single system base CPU. This product brings the benefit of added player communication through the game window, without requiring costly changes to the game operating system from multiple game manufacturers, and seriously complicating future regulatory approval processes.
This product is now already integrated with the Gaming machines of four leading game manufacturers, with no modification whatsoever to their respective game CPUs or game software. Certain regulatory bodies have told us of their intentions to treat this product as associated equipment, thereby enabling relatively quicker approval.
The fact this technology is already on a production floor field trial, demonstrates our continuously increasing ability to bring our innovations to actually commercial use, faster and more efficiently than ever before.
Customers playing on the games fitted with the iVIEW DM have reported good value in having certain pieces of marketing content being persistent on the iVIEW screen, and certain others, being more visible on a portion of the game screen.
The Download Configuration Manager product is now in full production use at multiple casinos enabling download of marketing content to all iVIEWs across the floor in minutes, which used to days and weeks to accomplish, before using more manual methods. This DCM product has also been used in a technology field trial, downloading game content and game configurations, facilitating much greater control over slot machines from a central server.
The 11.0 version release of the various products in our portfolio is now a reality. The version 11.0 releases involve serious industry changing reengineering efforts, providing the Gaming industry with the kind of horizontal and vertical scalability, internationalization, openness, and modern state-of-the-art technologies not seen before. Of particular mention is the version 11.0 release of the industry's leading slot system, SDS. With this release, SDS can now run on both UNIX and Windows platforms, supporting both SQL Server and VB2 databases off a single code base.
SDS on Windows will now compete effectively in small-to-medium sized casino markets, where Bally's penetration has been limited in the past. We estimate that there are approximately 600 casino sites worldwide, with about 200 to 1500 slots per casino. That's a total market of approximately over 3,600 machines and represents a significant opportunity for revenue generation.
Bally's new integrated Business Intelligence Solutions, offering traditional data analysis and data visualization off a single version of data is now live and production use in a couple of prestigious, high volume casino sites. Our third casino site is expected to go live in December.
Other products we will be showcasing in the upcoming G2E Gaming show, will include our Command and Control Centre, power funding and banking application suite [ph], Media Management Solution and a number of cutting-edge solutions based on biometric, and proximity sensing innovations.
Now I will turn the call over to Mark Lerner, our Chief Legal Officer, for an update on our legal matters.
Mark Lerner - Senior Vice President for Law and Government, Secretary, and General Counsel
Thank you, Ramesh. On October 16, in the IGT versus Bally case pending in Las Vegas, Nevada, the federal judge ruled that IGT's asserted real game patents, and an IGT patent regarding touch screen player tracking units are invalid. In addition, the court ruled that even if the patents were valid, Bally's slot machines do not infringe any of IGT's asserted patents. The court also found that Bally's ACSE and STS iVIEW player tracking units do not infringe IGT's second asserted player tracking patent. This is a huge win for Bally.
IGT has said it will appeal these rulings to the Federal Circuit Court of Appeals and has even described the judge's rulings as tentative. The rulings are hardly tentative.
First, the judge rendered these sweeping decisions in summary judgment, determining that a trial was not needed. Second, the rulings totaled over a 110 pages and the judge has expressed his own confidence in their correctness. Third, the court declared IGT's patents invalid for multiple alternative reasons, based on numerous different prior art devices. The court also found multiple alternative reasons, why Bally doesn't infringe those patents. The appeals court only has to agree with the district court, and any one of those grounds, for the decision to be upheld.
Since the Supreme Court's ruling in the KSR case in 2007, several appeals have been made in cases where, as here, the district court rule in a patent was invalid due to obviousness. In a 100% of those cases, the Federal Circuit has upheld the district courts invalidity ruling. So we believe that the profitability of these judgments being overturned on our appeal is their luck [ph]. And in the very unlikely event that the rulings on both invalidity and non-infringement were overturned, it wouldn't mean that IGT wins, but probably only that the issues would be remanded back to the district court for trial. Since the judge found more than enough to rule in our favor, we are highly confident that the jury will too.
Now, this antitrust counterclaims against IGT are still pending and will be tried regardless the outcome of any appeal. We continue to believe that we have a very strong case here as well. In denying, IGTs repeated motions to dismiss, the court found that Bally has presented substantial evidence that IGT knew their patents were invalid, knowingly withheld material information from the patent office when perusing those patents and sued Bally anyway. Damages and antitrust cases can be substantial and are troubled.
In another recent major development on September 24th, the SEC approved the settlement with a company concerning the SECs investigations of Bally's historical revenue account. The SEC made no allegations or fraud against the company, and levied no crimes, no civil penalties and no monetary sanctions against the company. We are very glad to put this matter behind us.
Now, I'll turn it back over to Dick for some final comments.
Richard Haddrill - President and Chief Executive Officer
Well, thank you Mark. Bally is off to a great start for fiscal 2009. These record results were driven by growth in all three of our principal technology businesses. And this is the first time that I can refer to you as the CEO of Bally, that all of the overhangs of the past are behind us. Our acquisitions are integrated, our financial statements are current, our SEC investigation is resolved and the inaccurate miff over litigation in server based Gaming are gone.
While these certainly are challenging economic times, we do see an unparalleled opportunity for Bally to emerge as the leader in the Gaming supply industry. Our growth is allowing us to continue investing in technology, and more importantly, our people. Indeed, we have seen lots of really great talent seeking out opportunities here at Bally.
Now turning to financial guidance. The changes in the economic environment have caused us to take a very critical look at our fiscal 2009 forecast. Since we developed our initial '09 profit plan in May of this year, the economy has further weakened, and the capital challenges for some of our customers have increased. We've seen some casino opening slip, and we are now more conservatively forecasting certain revenues.
However, the bad news is balanced with good news. We've improved our financial infrastructure, and have much better data to run our business more efficiently. Our new products look great, and we received positive buying interest from our customers, who have previewed our G2E products. We've also seen solid growth in our Gaming Operations business since September 30th, and we do forecast these revenues to be up nicely in Q2 over Q1. And finally, we are in a strong competitive position and continue to execute well as a team.
So with all those factors considered, with one strong quarter under our belts and half way through the second quarter, we've now narrowed the range of our fiscal 2009 guidance for estimated fully diluted earnings per share to the range of $2.15 to $2.45 per share. So this range of 2.15 to 2.45 per share compares to our prior guidance of $2.10 to $2.50 per share. And we continue to caution investors, that our guidance for fiscal '09 is based on our overall assumptions of business today on economic conditions, which still remain uncertain. And we do expect normal seasonality in the operating results for fiscal 2009, with the first half of the year having somewhat less earnings power than the second half.
In closing, I would like to truly thank the management team and employees at Bally for their tremendous efforts that continue to propel our emerging industry leadership. And we thank our customers and investors for your continued confidence and support.
With that, I'd like Amity to open it up for questions.
Question and Answer
Operator
[Operator Instructions]. Your first question comes from the line of Steve Kent with Goldman Sachs. Please proceed.
Steven Kent - Goldman Sachs
Hi Dick. Could you just talk a little bit about on your current guidance how much of the results were or what you're expecting is essentially in backlog? You said on the Systems business, you gave some color, but one of your competitor… WMS gave almost… gave a harder number as to what their backlog was? I just wanted to get a sense for that if could provide that?
Richard Haddrill - President and Chief Executive Officer
Sure Steve. Thanks for question. We don't disclose backlog. We do have, we believe adequate visibility into the future of our business and have been appropriately conservative. We only internally look at orders once they are placed. The backlog number I've seen from WMS I think over 12,000 units, which would be pretty significant number. So, we certainly wouldn't measure backlog in that fashion. But we don't disclose it, but feel pretty confident about our forecast range that we've given.
Steven Kent - Goldman Sachs
And Dick, just on the Systems business. You know you've mentioned a couple of times that you continue to sell, more to them, at what point… you have been able to find more and more things to sell to them, but at what point do you really need to get more new customers to sign on conversions essentially, in order to meet some of your target growth goals?
Richard Haddrill - President and Chief Executive Officer
Steve, we are doing a great job getting new business as well. But clearly, in the Systems business, our strategy has always been to continue to develop innovation that will drive return on investment for those customers. We see no end in sight. As we've all discussed, and you've written about it of course, there will be a conversion to Systems and games, and therefore we should see an increasing volume of products coming through our Systems business, that compliments game products, and really never ends. Many of the new products we've talked about, business intelligence for example, iVIEW DM, we haven't generated a dollar of revenue from those products yet, and there is plenty more in the pipeline. Even our tournaments game has generated very little revenue so far. Power Winner is just really catching stride now. So really a long list of products coming in Systems.
Steven Kent - Goldman Sachs
Okay, thanks.
Operator
Your next question comes from the line of David Katz with Oppenheimer. Please proceed.
David Katz - Oppenheimer
Hi. Afternoon.
Richard Haddrill - President and Chief Executive Officer
Hello David.
David Katz - Oppenheimer
Hi. A couple of questions. Firstly, OEM we haven't had much of that lately, but can you just let us know what the margin and/or sale price is on those specifically?
Richard Haddrill - President and Chief Executive Officer
I think you could assume the OEM sales in the quarter might have dinged our gross margin by a point, if that's where you are ending? But for competitive reasons, we are not going to give it in writing [ph].
David Katz - Oppenheimer
Probably fair. If we look at your Systems business, and particularly the recurring piece, there are certainly quite a bit of concern out there about a number of casino operators and their liquidity, and their viability, particularly today. Can you sort of talk about some of the exposure that you might have in that recurring maintenance fee bucket, how do I ask this without naming names? What is the level exposure to any individual customers that you might have in that $12 million?
Richard Haddrill - President and Chief Executive Officer
In that bucket, in particular, any casino operator we've seen in the past that has entered bankruptcy and they have been a handful in the last four, five years, has continued with maintenance. So we've not seen any impact on that bucket. On a related matter, we have reviewed over the last 30 days, the exposures to all of our customers. We have no single receivable exposure to any commercial customer that is in excess of $7 million. And considering even the developments of today, we are confident with our forecast for the balance of the year.
David Katz - Oppenheimer
Did you say your largest exposure to any one customer is 7 million?
Richard Haddrill - President and Chief Executive Officer
That's correct. That is correct.
David Katz - Oppenheimer
Okay. And then just lastly, I hear the outlook, I hear the guidance, and from what we're seeing here and read from your customer base on a daily basis. It seems, I know that the replacement market Gavin referred to as sluggish, but it seems counterintuitive that it wouldn't get worse, rather than staying the same. If we could just circle back on that issue and talk about what you're and hearing from your customers in the direst of situations in terms of what they expect to replace?
Richard Haddrill - President and Chief Executive Officer
A couple of thoughts, we have a very diversified business. We have a lot of revenue from Class II, that some of our competitors don't. In certain markets that some our competitors don't. We have broad range products in both [inaudible] video and the Systems business. And we are expanding internationally, which still is a relatively small part of our business. I clearly don't want sound overconfident in what is very difficult economic environment. But I think that we just are in a different position from diversity of our business alone.
In addition that, we are underrepresented on casino floors today, even in North America. As Gavin pointed, our ship share over the last year has been approximately doubled from what our current floor percentage is, and there are some similar dynamics in Gaming Operations as well. So there is just… even when casinos are spending relatively little money, there is a strong desire for them spend that money with Bally. And the new products we have come out look very strong. Casinos, even in a slow economy, will have customers, will need to pay attention to their floors, or they will simply lose those customers.
Some have argued that over the last couple of years casino operators have spent more time on real estate and retail, and on new development than they have on taking care of basic floor and customers, and although we are not projecting strong replacement growth by any means, we do see reasonable level of purchasing coming from our customer base.
David Katz - Oppenheimer
And now, are you forecasting replacement business in general to be flat, up or down year-over-year? Is that too… did I go too far, or can we talk about that?
Gavin Isaacs - Executive Vice President and Chief Operating Officer
This is Gavin here, David. Relatively flat I would say year-on-year. Okay. That's why we are putting that.
David Katz - Oppenheimer
One last one and then I'll give someone else a chance, and maybe this is a question for Mark. What's the next benchmark event data point that we should look out for with respect to the suits, the patent suits and the appeal? And when should we be looking out for, and what are the sort of range of outcomes at that point?
Richard Haddrill - President and Chief Executive Officer
Well, David I would be happy let Mark Lerner address that, but I can't imagine what you should be looking for. This issue is substantially resolved. But again, you heard Mark's comments earlier, Mark didn't have anything further to add in terms of any timing that somebody wants to track the remoteness of this, is there any particular date coming up in which this appeal… long shot that it might be, would be… have a date of some sort?
Mark Lerner - Senior Vice President for Law and Government, Secretary, and General Counsel
No, the future is, it's a year out. We are moving away before anything meaningful happens in this particular case.
David Katz - Oppenheimer
About a year?
Richard Haddrill - President and Chief Executive Officer
In terms of hearing that remote appeal, that's correct.
Mark Lerner - Senior Vice President for Law and Government, Secretary, and General Counsel
You know, that's what we filed. There's a briefing scheduled, and there's oral argument schedule and it can take a year.
David Katz - Oppenheimer
Got it. Perfect. Thank you very much.
Operator
Your next question comes from the line of Celeste Brown with Morgan Stanley. Please proceed.
Celeste Brown - Morgan Stanley
Hi guys. Good afternoon.
Richard Haddrill - President and Chief Executive Officer
Hello Celeste.
Gavin Isaacs - Executive Vice President and Chief Operating Officer
Hi.
Celeste Brown - Morgan Stanley
Could you guys recognize any of the deferred Oregon units or the deferred Florida revenue in game ops this quarter? Oregon units, obviously in game sales?
Gavin Isaacs - Executive Vice President and Chief Operating Officer
No, neither of those.
Celeste Brown - Morgan Stanley
And are you still anticipating in the second half of the fiscal year for recognizing those types of the revenue.
Richard Haddrill - President and Chief Executive Officer
We expect to begin recognizing each of those in… before December 31.
Celeste Brown - Morgan Stanley
Okay. And then there is a pretty big increase in R&D sequentially, is that sustainable, was that one-off, can you talk about that a little bit more?
Richard Haddrill - President and Chief Executive Officer
Well, we do continue to increase our R&D investment, it's still had a very manageable percent of revenue. We are continuing to hire people. If you are talking about the percent of revenue being around that, close to 9% range, we do believe that's a reasonable percent of revenue going forward.
Celeste Brown - Morgan Stanley
Okay. And then did… were your margins in the game sales business impacted by a slowdown in non-box sales at all. Was the mix at all a part of that?
Richard Haddrill - President and Chief Executive Officer
Not significantly. May be 100 bucks a box but something like that. And I've Gavin shaking his head saying not even that much. But there was a slightly lower volume of boxes produced in the September quarter versus the June quarter, which makes the allocation what we had, just a slightly bit higher.
Celeste Brown - Morgan Stanley
Which should make sense for your seasonality. But there has been no big change in demand, positively or negatively. And then on the non-box side then?
Richard Haddrill - President and Chief Executive Officer
No, our manufacturing team has done a good job of managing those overhead costs as well.
Celeste Brown - Morgan Stanley
Okay. Thank you.
Operator
Your next question comes from the line of Todd Eilers with Roth Capital Partners. Please proceed
Todd Eilers - Roth Capital Partners
Hi guys. Thanks for taking my call. First just wanted to say congrats on an excellent quarter guys, in a really tough macroenvironment. You guys should be commended on that execution there. So just wanted to start off with that.
Richard Haddrill - President and Chief Executive Officer
Thank you, Todd.
Todd Eilers - Roth Capital Partners
I guess my… on the Systems side, Dick, you guys have mentioned a long list of new products coming online or that recently got… have gotten installed and are going live. Can you maybe highlight one or two of those that you're most excited about, and that might contribute the majority here in the near-term, and maybe how much of these new products are you factoring into your guidance for '09?
Richard Haddrill - President and Chief Executive Officer
Well. We've been relatively prudent in our guidance for '09. But the business intelligence which is now kind of more broadly approved. And it has gotten a lot of an enthusiasm from customers, and this is the whole better management of data to run your casino, whether it's the player data or the machine data.
The iVIEW DM has also got a lot of interest in customers, on the banks of iVIEW and many customers looking at ways to use iVIEW DM and iVIEW to effectively communicate with their customer based and their player base, during challenging economic times, and create that unique experience with the customers.
I would say that those two are the ones that excite be the most about revenue opportunities and have some pretty near-term potential. There is plenty of other things in the pipeline we haven't discussed. But obviously the tournaments products, the medium management stuff we are doing, the few customers we've talked to about our power banking suite, very excited about that. So, kind of how to tell how it will evolve a year from now, but over the next six to nine months, I think the two mentioned, the business intelligent and iVIEW DM, would be the leading products of revenue generation.
Ramesh Srinivasan - Executive Vice President, Systems Division
And the newer versions of the products, give us a huge competitive edge with our core products, which is our core revenue. It makes us competitively a lot more dominant with the technology that is modern, state of the art and really appeals to customers.
Richard Haddrill - President and Chief Executive Officer
And just to add to that the SDS on Windows, as Ramesh made a point in this comments, really allows us to get a lot of new customers that may switch to Bally.
Todd Eilers - Roth Capital Partners
Okay, great. How about with respect to the existing iVIEW product. You mentioned, I think, 125,000 under contract, can you maybe tell us how many were installed on the quarter?
Richard Haddrill - President and Chief Executive Officer
We don't have that data, but there still is a backlog obviously of iVIEW products that have not yet been installed. Of course the install date doesn't always correlate with the revenue recognition date anyway, which is one reason we've quit trying to slice a dice of that too much.
Todd Eilers - Roth Capital Partners
Okay. How about with respect to the OEM units in the quarter, should we expect you guys to do some more of that going forward?
Gavin Isaacs - Executive Vice President and Chief Operating Officer
Only sporadically, when there is a good opportunity and it makes sense for us to do that, we'd look at it. But its not a major focus for our business.
Todd Eilers - Roth Capital Partners
Okay. And then lastly on the Gaming ops. There is a lot of I guess, worries over what everyone's exposure is on the Gaming ops side. Can you maybe highlight or review for us what your exposure is, how much is variable versus fixed contracts and then even how many of those contracts, I guess… what's the average life? Is it a month-to-month, is it six months, just a little bit more detail there?
Richard Haddrill - President and Chief Executive Officer
We estimate that about half of our revenue from Gaming ops is variable versus fixed. We did have a bit of an unusual occurrence, and I say that because we haven't seen any sense, but about the middle of the first quarter, in August, we had three customers, one that had a contract provision to negotiate out of some recurring revenue rental units into a purchase agreement, and two others that were tweaking their floors. So if you look at Q1 numbers you will see that Gaming ops units overall declined a little bit and revenues declined a little bit, even though the premium unit, as Gavin said, were up well over 350, and our revenue per unit was actually pretty good for the quarter.
That said, we are confident that our Gaming ops business is growing from that Q1 base that we just disclosed, and we actually have forecasted just for conservatism, some decline in the win per unit, just to be conservative in this economy, for those variable units, even though our totals for the month, for the quarter ended September 30th, wouldn't necessarily testify that. But we did we put that into our forecast.
Todd Eilers - Roth Capital Partners
Okay. Great. Thanks guys.
Operator
Your next question is a follow-up from the line of Joseph Greff - JPMorgan.
Joseph Greff - JPMorgan
Hey guys.
Richard Haddrill - President and Chief Executive Officer
Hey Joe.
Joseph Greff - JPMorgan
Gavin, you touched upon domestic or North American ship share at 24%. I was hoping maybe you can walk us through how you calculate that, if I hear you, WMS and IGT, and look at the domestic share for the 3Q, for the September quarter, getting worth of 100%. So maybe you can kind a help us walk through how you calculate that?
Gavin Isaacs - Executive Vice President and Chief Operating Officer
That's the same calculations that we had too, Joe. I think it's now public knowledge with IG, ourselves, and WMS had. And then we put in a fairly good, an accurate estimate for all the other companies to come up with that 24%.
Joseph Greff - JPMorgan
Okay. So you do include the others. Okay. That was my question.
Gavin Isaacs - Executive Vice President and Chief Operating Officer
We do include the others, and for modeling purposes, you could equate them to, say, a little bit north than what WMS did?
Joseph Greff - JPMorgan
Got you. And then, Dick, if I go back and I look at your guidance, and you kind of look at the three major buckets of sorts of the revenues. Is it fair to say, it's the product sales that you sort of refined in that Gaming ops and the Systems business is basically intact, relative to where you were three months ago?
Richard Haddrill - President and Chief Executive Officer
Well, we certainly built some conservatism into the unit shipments, and studying casino openings etcetera. But we also took some conservatism on the win per unit in the Gaming ops, just in case some of the sound bites we heard in the month of September panned out. So that's in our forecast. That's it, we don't have absolute visibility in the last half of the year. But we do have… we are halfway into Q2 now. We do have a number of things we do know in our Systems business, and we've had pretty good indications from customers that have come through to preview our products pre-G2E about some possible spending. But the short answer to your question is, yes, I would say that if you looked at how we modified our forecast from the last one on the revenue side, it would have been declining unit sales, at the same time, some cost benefits and margin benefits. That would probably be the major ups and downs of our forecast of a couple of months ago.
Joseph Greff - JPMorgan
Great. and just one final question as you've had discussions with your customers during these pre-G2E sessions. The multi-casino owners, do you have a good sense for what their slot budgets are, looking out for next year, I think we can directionally maybe, take a guess there. But do you have a sense of how budgets are shaping up for slot expenditures in calendar 2009?
Richard Haddrill - President and Chief Executive Officer
It's a little early to tall that. We have a couple that have told us, many don't make those determinations till the December-January timeframe. So we do have some assumptions about that. They are not aggressive assumptions, as you can imagine in this economy in this capital market. But we have a much better feel for that in our next call and after G2E.
Joseph Greff - JPMorgan
Okay, great. Thanks guys.
Richard Haddrill - President and Chief Executive Officer
Thank you.
Operator
The next question comes from the line of Steve Altebrando with Sidoti & Company. Please proceed.
Stephen Altebrando - Sidoti & Company
Hi guys.
Richard Haddrill - President and Chief Executive Officer
Hello Steve.
Robert Caller - Executive Vice President and Chief Financial Officer
Hey Steve.
Stephen Altebrando - Sidoti & Company
The other expense item is that inventory?
Robert Caller - Executive Vice President and Chief Financial Officer
No its mostly foreign exchange.
Stephen Altebrando - Sidoti & Company
Okay.
Robert Caller - Executive Vice President and Chief Financial Officer
That's what comprises the other expense line.
Stephen Altebrando - Sidoti & Company
Okay. And its looks like the ASP was up pretty nicely. Is there… could you give a little color behind that, whether it's mix?
Robert Caller - Executive Vice President and Chief Financial Officer
No. It's primarily a mixture of things. Obviously, there is impact of discounting substantially as it would otherwise do. There is obviously a little bit of mix in there. But it primarily has been better, managing the business.
Stephen Altebrando - Sidoti & Company
Okay. And then I guess directionally, are you seeing anything from your customers, there is obviously a lot of investor concern about this towards pushing away from the Gaming ops model or participation model, or are you seeing it the other way, because of customers looking to conserve capital. Any type of color on that segment?
Gavin Isaacs - Executive Vice President and Chief Operating Officer
We are seeing both ways. It really depends on the customer and depends on the situation they are in. Some are reducing their floors, others floor… percentage participation units. Others are actively seeking them, and some are doing a hybrid.
Stephen Altebrando - Sidoti & Company
Okay. So the sequential change that we shouldn't read too much into it, for the sequential change in the install base?
Gavin Isaacs - Executive Vice President and Chief Operating Officer
I don't believe that.
Stephen Altebrando - Sidoti & Company
Okay. Thanks guys.
Richard Haddrill - President and Chief Executive Officer
Thank you, Steve.
Operator
[Operator Instructions]. Your next question is a follow-up from the line of David Katz with Oppenheimer. Please proceed.
David Katz - Oppenheimer
Hi. I just wanted to follow-up one of the earlier questions about upcoming G2E, in terms of new slot products. Right. Either for sale or participation. Can you sort of give us any feedback you've gotten so far? Perhaps on the video side and then more in the… your slot product?
Gavin Isaacs - Executive Vice President and Chief Operating Officer
Yeah absolutely. We've shown nearly 50 different showing of the product range and parts of the range that we're going to be showing at G2E. Feedback overall has been very positive, and many customers are delighted and they are continuing to bring out products in the areas in which we are strong, with supporting our titles in those tougher areas, obviously which is our main strength. But just as delighted to see that we've got a approach to our video, and that seems to be extremely well received.
We have continued to show something that Bally has always been great at, which is the innovation. With a new range of some cabinets in unique spots, such as the double vision, the Jewel Vision and other games such as we brought back the big jumbo slots. We have a new slot. One of the impressive feedback products that we've had is the Blazing 7 multiple game reel slot, which is three-in-one games in the slot. We have the new Playboy title. We have a new Cash Wheel progressive slot, take that products with a new [ph] dimension. And we're going to have more games than we've ever had before G2E and we really have focused on making very-very much of all the lines of what's needed in the customers.
David Katz - Oppenheimer
And just follow that up quickly, what percentage of those the things we'll be seeing, will commercially viable in the next three quarters or so?
Gavin Isaacs - Executive Vice President and Chief Operating Officer
In the next three quarters, 90 plus percent. We always try to get within the next six months. So that's 75% plus out on [inaudible].
David Katz - Oppenheimer
Okay. Perfect. Thanks.
Richard Haddrill - President and Chief Executive Officer
Amity, I think we'll wrap up the call at this point. We do want to thank you and our investors for your interest. Bally is very excited about our future. We recognize the difficult economic times but with our diversity and good execution, great team, we're making good progress. Thank you for your interest.
Operator
Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.
Gavin Isaacs - Executive Vice President and Chief Operating Officer
Thanks Amity.
Operator
You are very welcome, sir. Have a great night.
Gavin Isaacs - Executive Vice President and Chief Operating Officer
You too. Bye. .
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