Executives
Richard Haddrill – Chief Executive Officer
Gavin Isaacs – Chief Operating Officer
Ramesh Srinivasan – Executive Vice President of Systems
Robert Caller – Chief Financial Officer, Treasurer
Analysts
David Katz - Oppenheimer & Co.
Joseph Greff - J.P. Morgan
Todd Eilers - Roth Capital Partners
William Lerner - Deutsche Bank Securities
Celeste Brown - Morgan Stanley
Steven Kent - Goldman Sachs
Steven Wieczynski - Stifel Nicolaus & Company, Inc.
Bally Technologies, Inc. (BYI) F2Q09 Earnings Call February 3, 2009 4:30 PM ET
Operator
Good day ladies and gentlemen and welcome to the second quarter 2009 Bally Technologies, Incorporated conference call. My name is [Stacy] and I’ll be your coordinator for today’s call. (Operator Instructions) At this time I would like to turn the call over to Richard Haddrill, Chief Executive Officer. Please proceed sir.
Richard Haddrill
Well thank you Stacy and welcome everyone to Bally Technologies second quarter fiscal 2009 earnings call. We are again pleased to report an all-time record for quarterly earnings per share in undoubtedly the most difficult economic environment we have faced in quite some time. Our revenues were also a second quarter record. With me today on the call are Gavin Isaacs, our Chief Operating Officer; Ramesh Srinivasan, Executive Vice President of Systems; and Robert Caller, our Chief Financial Officer and Treasurer.
First Robert will review the safe harbor language and cover our overall financial results. Then Gavin and Ramesh will discuss the highlights of each of the games and systems business units. Finally I will have some overall comments and update our guidance. Then we’ll open it up for questions.
Robert, over to you.
Robert Caller
Thanks Dick. First I will review our safe harbor language. Today’s call in simultaneous webcast contains 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,
February 3, 2009.
Today’s call and webcast may include 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 to the financial results.
Today we reported our financial results for the second quarter of fiscal 2009. Total revenues for the three months ended December 31, 2008 were a second quarter record of $233.3 million, a 1% increase from the comparable prior year period. Revenues from game sales were $101.3 million, a decrease of 6.5% from the prior year and revenues from gaming operations were a second quarter record at $66.4 million, a 22.6% increase in the same period last year.
Systems revenues were $55.9 million and were 1% less than the comparable period last year. This represents the fifth consecutive quarter that systems revenues have exceeded $50 million. So let me highlight the earnings power of our company. First we recorded record quarterly net income and fully diluted earnings per share of $33.6 million or $0.59 per share as compared to net income of $24.4 million or $0.42 per share on a fully diluted basis in the comparable prior year period, increases of 37% and 40% respectively.
Second, adjusted EBITDA for the quarter was $78.3 million, a 23% increase as compared with the same period last year. Thirdly, we also achieved record cash flow from operating activities of
$72.9 million for the six months ended December 31, 2008, a 133% increase over the comparable period of the prior year. Fourth, operating income increased to $59.4 million in the current quarter as compared to $46.8 million in the prior year quarter, a 27% increase. And finally, our operating margin increased to another all-time record of 25.5% in the current quarter as compared to 20.3% in the prior year quarter.
Gaming equipment revenues declined during the quarter as a result of a decrease in the number of games sold. During the quarter we recognized revenue on 6,099 games as compared to 7,144 games in the comparable prior year period, a 14.6% decrease. However, new unit sales to international customers increased 16% to 1,210 units or 20% of our total new unit shipments as compared with the same period last year.
Our average selling price per new unit or ASP for the quarter also set a new record at $14,531. The increase in ASP benefited from better management of discounts and overall mix, including the sale of some premium units. We currently expect ASPs in the second half of fiscal 2009 to be slightly lower than this second quarter record based on anticipated mix.
We are especially pleased with the improvement in our margins on new game sales for the quarter. Margins on game sales were 49%, up over 500 basis points from the September quarter. The margin benefited slightly from the premium sales noted above as well as from our lean manufacturing initiatives; our more efficient inventory procurement and management processes; and better management of discounts. In addition, there were no significant inventory charges during the quarter.
We have been forecasting an increase in the game sale margin for the past several quarters and have communicated our disappointment in the lack of margin and expansion in previous calls. We expect the margin will remain in the high 40’s for the remainder of the fiscal year. On a longer term basis, we believe additional increases into the low 50’s are possible.
Our gaming operations business reported very strong results, with revenues increasing 22.6% from the prior year quarter to a record $66.4 million. Gaming operations revenue declined
$1.4 million from the September quarter. The second quarter has typically been our seasonally weakest quarter for gaming operations. We have experienced flat or declining gaming operations revenues from Q1 to Q2 in each of the last five fiscal years.
The quarter was also negatively affected by the overall weakness in the economy. We currently expect gaming operations revenues to increase in Q3 as compared to Q2. Revenues in gaming operations were significantly higher than in the prior year, due primarily to increases in the install base of rental and daily fee games and the popularity of our premium games. We also experienced higher than forecasted jackpot expense that reduced the margin from the 70% realized in the September quarter to 68% in the current quarter.
We again reported strong revenues from our systems business of $55.9 million or 1% lower than the prior year record quarter. Maintenance revenue continued to increase to a quarterly record of
$12.3 million, a 21% increase as compared to the prior year period. For the full fiscal year 2009, we expect our maintenance revenues will be in the range of $50 to $52 million.
Margins in the systems business this quarter were 77%. The margin was positively affected by a higher mix of software sales as software sales carry a higher margin than hardware sales. As we continue to introduce new software products, it will also increase the professional and technical services engagements we are able to offer. All of these new products will carry higher margins. As such, we now expect systems margins to be higher, typically between 70% and 80% with a target of the mid-70’s. Of course, the margin in any one quarter may vary significantly from the target.
Revenues from the Rainbow Casino in Vicksburg, Mississippi declined 17.9% to $9.6 million when compared to the same period last year. The decline in revenue reflects additional competition from a new casino property that opened in late October and the expansion of a competitor’s property, as well as a 9% decline in gaming revenues reported for Mississippi River counties for the comparable period.
Selling, general and administrative expenses decreased 2.4% to $59.5 million for the quarter as compared to $61 million in the prior year quarter and declined as a percent of revenue to 25.5% from 26.4% last year. The second quarter SG&A included approximately $2.5 million in expenses for the annual G2E show held in Las Vegas in November. During the quarter, we received a $3 million insurance settle from our Golf Coast Katrina claims resulting from the damage sustained in 2005. This settlement was offset against SG&A.
We continue to invest in our future, with research and development expenses increasing 31% to 19.3% for the quarter as compared to 14.7% in the prior year period or 8.3% of revenue as compared to 6.6% last year. The increase reflects the continued investment in our future products.
Our effective income tax rate for the quarter was 35.7% and reflects two offsetting discrete items. First a $2.3 million retroactive R&D tax credit for the calendar year in 2008 as a result of the reenactment of the R&D Tax Credit retroactive to January 1, 2008. This was offset by the resolution of certain tax items associated with the IRS examination for 2003 to 2005. We expect our effective tax rate for the full fiscal year to range between 36 and 37%.
Now to the balance sheet. As of December 31, 2008 we had unrestricted cash of $63.2 million. During the quarter we repurchased approximately 740,000 shares of our common stock for approximately $16 million. Year-to-date we have purchased just over 1 million shares for approximately $27 million. We have $73 million remaining under our authorized share repurchase plan. Since June 30 of 2008 we have also reduced our debt by $23.8 million.
Inventories decreased to $63.8 million as of December 31, 2008 from $80.9 million at
September 30, largely as a result of improved inventory processes from our new warehouse management system. Accounts receivable also declined to $196.8 million from $207 million at September 30. Our DSO’s increased to 92 days during the quarter. The increase was principally a result of increased international and system sales as well as sales to customers with extended payment terms. The percentage of our past due receivables remain consistent with the September quarter.
On September 29, 2008 the company entered into a new $225 million term loan and a new
$75 million revolver. Through March 31, 2009 the loan rate is fixed at LIBOR plus 3.25%, after which it converts to a leveraged based pricing grid ranging between LIBOR plus 2.75% and LIBOR plus 3.25%. We continue to de-lever the company. Our leverage ratio was approximately 4.5 times three years ago and at December 31, 2008 our leverage ratio has been reduced to less than 1.
In December of 2008 the company entered into a floating to fixed rate interest rate swap agreement on the term loan, which fixed LIBOR at 1.89% for the remaining duration of the loan which matures on September 26, 2012. The effective rate on the term loan through March 31, excluding amortization of capitalized debt issuance cost will be 5.14%. Assuming our leverage ratio remains below 1, the pro forma rate after March 31 will be 4.64%. The interest rate on the revolver will continue to float.
Now I’ll turn the call over to Gavin for some more discussion of gaming equipment and gaming operations results.
Gavin Isaacs
Thanks Robert. As Robert discussed in his presentation, we recorded another very solid quarter in revenues from both sale of our gaming devices and from gaming operations. Even though our revenues from the sale of gaming devices decreased 6.5% to $101.3 million as compared to the prior year quarter, gross margin dollars actually increased $2.2 million or 4.6% as a result of more than a 500 basis point improvement in our games sale margin.
While we have been confident that the margins on our game sales would increase over time, we were especially pleased with the progress we made during this difficult quarter. This improvement was the result of several factors. Our average selling price increased 10.5% from the prior year quarter as a result of better pricing and product mix. The sales of higher margin conversion kits and parts also increased during the quarter.
Our continued focus on improving purchasing and manufacturing efficiencies and engineering efforts began to pay us significant dividends. And finally as a result of our improved inventory processes including our recently installed warehouse management system, there were no significant inventory obsolescence charges during the quarter. We expect our margin on game sales for the entire fiscal year to be in the high 40’s.
During the quarter we shipped 4,889 units to customers in North America. The decrease in units shipped to North American customers reflects the challenges of the current economic environment. We estimate that our North American shift share in the quarter was in the low 20’s which is consistent with recent quarters and up significantly from recent years. Year-to-date the split between our mechanical real and video games in North America remains about equal.
We anticipate ongoing improvements in our video game performance. Our first high roller video titles are beginning to be delivered to customers now. This will hopefully assist us to increase our penetration in this [sector] and importantly enable us to grow revenue from sale of conversions.
We were also pleased with the increased results from our international operations. New unit sales to international locations increased to 1,210 units or approximately 20% of our unit sales recognized in the quarter. This represents a 16% increase in unit shipments over the prior year quarter. We continue to invest in our international operations and in turn these teams are beginning to perform well for us.
Our gaming operations results were also very strong with revenues increasing 23% to
$66.4 million as compared to last year. Margins on gaming operations were 68% compared to a 58% margin in the prior year. The increase in margin is attributable to increased rental and participation revenue in the current quarter, with minimal incremental cost of goods sold. Despite this good margin we did experience jackpot expense of $1.4 million in excess of our forecast which lowered our gross margin to 68% from the 70% recorded in the September quarter.
Our rental and daily fee game installed base increased to 12,222 units at December 31, 2008, a 32% increase from December 31, 2007. Rental and daily fee games decreased by 867 units from September 30, 2008. The decrease was attributable to several factors including an additional removal by two customers we disclosed last quarter. But importantly the planned removal of lower performing revenue share units from certain casinos by our team as we seek to better utilize our capital. The majority of the removed games are made up of lower earning products.
It is important to note that in our premium category, which includes the Hot Shot Progressives, Millionaire Sevens, Real Winners and Real Money we increased our unit count during the quarter by over 12% and our revenue per unit in this category increased by approximately 8%.
We are very focused on developments in the economy and the impact this is having on casino operators as we look at the back half of our fiscal 2009 and into fiscal 2010.
We expect the replacement market will remain sluggish throughout calendar year 2009 and are cautiously optimistic that gaming operator results will begin to improve in calendar 2010. If you assume 50,000 replacement units in North America in calendar year 2009, we are on a 16 to 18 year replacement cycle. Our games and the games of our competitors are simply not designed to last that long. The increase in the replacement cycle is a when not an if.
We continue to believe we are under represented on casino floors for both games and by casino operators and for our participation products. We believe the growing acceptance of our products in the market and our relatively small but growing install base will benefit us compared to others. We’re looking forward to getting to market our new games including our top award winning products from the G2E show. These exciting products will support our current games in the field and help us penetrate areas where we have large opportunities to improve.
In particular, we have received positive feedback on our High Roller video range of games, our jumbo platform and our expansion of titles in the Quick Hit and [B32] categories, most of which are or will be released in the short term. Our excellent team continues to work very hard with our customers in these difficult times. Their professionalism and our continuously improving product range will assist us in achieving our objectives.
Now I will turn it over to Ramesh for some additional details on our systems business.
Ramesh Srinivasan
Thank you Gavin. This was another solid quarter for systems with revenues at $55.9 million, representing a small decrease from the corresponding prior year previous revenue of
$56.3 million. This is the fifth consecutive quarter where systems revenue has exceeded the $50 million mark.
Systems gross margin for the quarter was at an all-time record $43 million. In present day terms, this gross margin level of 77% exceeded the higher end of our historically target range of 70 to 75% due to a higher mix of software, services and maintenance versus hardware during the quarter. The revenue generated from software, services and maintenance during the quarter met each at record or near record levels.
Our focused research and development efforts during the past couple of years have given us an increased number of software models that can be sold to both current and prospective customers. These models also give us the opportunity to increase the professional and technical services engagements we are able to offer.
We expect systems gross margin to be in the 70 to 80% range in the future, with variability related to software versus hardware mix. Maintenance revenues during the quarter were at the quarterly record $12.3 million, a 21% increase over the corresponding prior year period. We expect total maintenance revenues for fiscal year 2009 to be between $50 and $52 million. These increases are due to the expanding worldwide footprint of our systems products and the greater proportion of software in our current installs, which command a relatively higher maintenance charge.
During the past three calendar years more than 90,000 games across 128 casino sites worldwide have been added to the Bally systems family, representing additions to our customer base against a loss of less than 6,000 games across 14 sites. Such growing leadership created by defending our market share well while adding new customers now puts us in a good position in spite of the extra challenges the current state of the economy poses.
We have given ourselves a chance to increase our business levels by servicing our current footprint well, while looking to new areas for expansion. For example, a number of casino sites in Mexico went live with our systems products during Q2. Customers are moving to the latest release versions of our products at an increasing rate. This helps us increase customers satisfaction levels since our latest versions are of much higher quality levels and contain new functionality capabilities that help casinos save costs and increase operational efficiencies.
Many of our new software models work better with the newer releases of our core products. We carried out more than 70 significant product portion of great implementations during calendar year 2008, almost double as many as in calendar 2007 and almost 6 times 2006 levels. We also carried out close to 90 installs of new add-on software models during calendar 2008, which was about 3 times more than calendar 2007.
We installed our first ever [Tito] of great in a casino site in France during the quarter. We expect a number of other French casino sites to follow soon. During Q2, the systems client services department provided more than 32,000 hours of billable services for our customers, 15,000 of which were for specialized professional and technical services. All these numbers represent where we held these trends in the systems business in terms of running it in line with world class enterprise software standards.
Of particular significance among the other products installed during the quarter are the couple of business intelligence product implementations. With these two installs we currently have three major casinos representing a total of more than 8,000 games live on our recently released business intelligence product, two on a window sequel consolidated base platform and one using the terra data database platform. These installs have also been across both our open systems and ICD’s base large systems.
This BI product continues to elicit good interest from our customer base as more and more customers are faced with the need for good slot floor performance and patron [inaudible] visibility to insure that all their games purchase related capital expenditures and marketing dollars are spent in the most optimal fashion. We sold more than 4,000 IU’s during the quarter, bringing the total number sold so far to close to 129,000.
We continue to make good progress with the R&D efforts pertaining to the ideal display manager product, learning valuable lessons from the production field trials in place for about four months now. We are the only gaming vendor who has such a product currently running in production. The potential market for this product [inaudible] we expect customers to be in a position to make a choice between the two products later this calendar year with a number of them choosing both the iVIEW and the iVIEW DM.
All our Version 11.0 auto releases are officially complete now, and are in various stages of regulatory approval and are production installs. SDS [inaudible] which represents the first commercially available Bally slot system on Windows for the U.S. and Asia markets is opening a number of doors for us that otherwise would have been closed due to platform reasons.
It is fair to assume that some of the systems wins we will be announcing during the coming months would not have been possible without the state-of-the-art modern technology slots system that will run on both Unix and Windows of one Java core base. We continue to make good progress on other new product developed initiatives which will become available to the market during calendar 2009, including Power Card, the integrated media management solution built on the recently acquired Cool Signs technology, a software based progressive product for the European market and powerful downloading capability using our download configuration manager.
Our systems personal strength grew from close to 750 to about 950 during calendar year 2008, about 35% of that increase happening in the U.S. Most of that increase has been in top quality technical and domain experts who have made us even stronger than an execution unit. We continue to hire very selectively in all of our centers when top talent becomes available.
Among all the details, the one accomplishment in the recent past that I personally believe is the most important is our winning the 2009 International Gaming Award for Best Customer Service and Support. This award was for both games and systems customer service.
Our continuing focus during the past few years on the basics of enterprise software development; delivery; customer support and services discipline; improving core products; providing good or great possibilities for our customers; innovation on additional models that add immense value to customer [inaudible] made with us; increasing customer satisfaction levels based on better service and support have all come together well for us, holding performance consistent and growing, even in these trying economic times.
Now let me turn the call back to Dick.
Richard Haddrill
Thank you Ramesh. In spite of all the negative economic news, Bally’s business model remains sound. We are executing well in this most difficult of economic environments. Our earnings power is strong. Our successful efforts with product innovation continue, and our improved infrastructure is now benefiting our margins. Our recurring revenues, which consist of gaming operations; the Rainbow Casino; and system maintenance and services now represent
$96 million of our quarterly revenue, or 41%.
And we have many other opportunities to succeed, such as continuing to increase our market share; further our international expansion; acquisitions; and additional synergies between our games and systems businesses. We are well positioned to continue to develop our role as the emerging leader in the gaming supply industry.
Our balance sheet is also strong. We are levered at less than one to one. We are using this strong balance sheet to drive further long term share in our value. As Robert discussed earlier, we have locked in a very favorable interest rate on our term debt. Our operating expenses are under control. Our SG&A continues to decline as a percent of revenue. And our gross margins are improving.
Our operating margin in this current quarter exceeded 25%. Now the weaknesses in the economy and the capital challenges from many of our customers have not improved, however, since our last call and we are constantly adjusting to these challenges. So with these factors considered, two very strong quarters under our belt and now well into the third quarter, we have narrowed the range of guidance for estimated fully diluted earnings per share to $2.15 to $2.35.
Now to be clear, this revised guidance takes $0.10 off the top of our previous guidance and we believe this is prudent. And we do expect our Q4 results will be stronger than our Q3 results. We continue to caution investors that our guidance is based on our overall assumptions of our business today and on economic conditions which continue to remain uncertain.
In closing I would like to thank the terrific management team and employees of Bally for their tremendous efforts that produced these record results and have well positioned us to weather the downturn and to lead when the industry improves. And we thank our customers and investors for your confidence and support.
With that, Stacy, we’d like to open it up to any questions.
Question-and-Answer Session
Operator
(Operator Instructions) Your first question comes from David Katz - Oppenheimer & Co.
David Katz - Oppenheimer & Co.
Firstly, Robert I think in your comments you said that you expect game ops to be higher in the back half of the year. Can you elaborate on that a little bit?
Robert Caller
Well, I’ll jump in and Gavin you and [inaudible] as well. We do at this time see growth in Q3 and then again in Q4 in game ops based on scheduled placements. In addition we have seen an improvement in the [Win Per Day] in January compared to December levels. And based on those factors and our own conscious monitoring of capital to make sure that we don’t have units in very low performing venues, we feel confident that gaming operations should grow during the second half of the year. We’ve got a number of new titles coming out as well over the next three months.
David, I should also add that seasonality for gaming operations tends to be the weakest in the December quarter. David, anything else?
Operator
Your next question comes from Joseph Greff - J.P. Morgan.
Joseph Greff - J.P. Morgan
Dick just relative to the guidance change which is probably not too far off or probably better than where recent expectations are, if I look at that $0.10 coming off the top end and sort of imply a revenue number that’s somewhere between $30, $35 million or so, is that basically on the gaming equipment products sale side or is that – how do you kind of look at that sort of maybe that margin this time around versus three months ago?
Richard Haddrill
Yes. And although we don’t give revenue guidance we are seeing the operators be very precious with their capital here over the last 45, 60 days. And makes us believe that game sales is the area where we’re likely to see the softness that caused us to take $0.10 off the top. That said, we continue to feel good about our new products coming out; about international opportunities; about the other areas of the business; but the game sales is the area where we’re seeing the near term softness.
Joseph Greff - J.P. Morgan
Is there broadly a trend for a lot of the multi-casino operators where they’re saying listen we don’t have the capital to buy but our view is that we’re going to move to more of the participation? Or is that still kind of an anecdotal sort of trend?
Richard Haddrill
We haven’t seen any consistent trend in that area. It’s sort of casino by casino and group by group decision making. And we’re seeing a number of casinos we believe are not going to want to go into the summer months without a relatively fresh floor, at least some of the hotter new games. But at the same time being judicious early in the year about how they let their capital here in the first couple of months of the year. That said I don’t mean to imply we’re being overly optimistic about the June quarter either. But we are seeing them have some capital allocation but being very careful how they apply it.
Joseph Greff - J.P. Morgan
The final question on the gaming ops side, are you seeing any unusual or aggressive pricing or strategies from any of your competitors on that front?
Gavin Isaacs
We’re beginning to see some [jumps] that there seems to be a little bit more aggression coming into the market where it strategically makes sense.
Richard Haddrill
Some bundling would you say?
Gavin Isaacs
Yes.
Operator
Your next question comes from Todd Eilers - Roth Capital Partners.
Todd Eilers - Roth Capital Partners
Just a couple of quick questions. Robert in the P&L I think I saw in other income an expense line item about $1.7 million charge. I don’t know if you mentioned that in your remarks, but can you tell us what that is? Is that foreign exchange losses?
Robert Caller
Yes, Todd. A substantial – about $1.5 million of that is foreign exchange due to the strengthening dollar.
Todd Eilers - Roth Capital Partners
Just a follow up on the gaming ops discussion you guys mentioned that you were removing some under performing games and putting those back out into the market I presume under the Class II central determinate area. Was that kind of a one quarter strategy or effort or should we kind of expect that trend to continue? And if so how much of that should we look for going forward?
Richard Haddrill
Well, Todd, we don’t expect to do a lot of it. But we do want to continue to monitor our capital appropriately and I think I’ve talked to investors a number of times in the last year or two where as we continue to get better systems, in particular in the gaming operations area we think we can manage our capital better. And we really began those efforts this quarter to take out under performing units.
And back to Joe’s earlier question too about discounting, our Win Per Day in our premium units was actually up 8% in the quarter, a combination of our good games but also managing the under performing units and managing any competitive pressures effectively. So look for us to continue to do it, but I wouldn’t expect it to be quite as strong as we saw in the second quarter.
Todd Eilers - Roth Capital Partners
And then just one final question. Taking that into consideration, the better management of the games, can you maybe talk a little bit about CapEx going forward? Should we expect that to come down a little bit or just what’s your expectations for the next couple of quarters?
Richard Haddrill
Again I think if you track our CapEx over the last couple of quarters you’ve seen that it hasn’t been as large as it had been in the prior year four quarters for example. And one reason is that when we retooled the cabinets a few years ago to be very modular, we’ve now been able to leverage that as our older games have gotten off the casino floors. Now when we take a product off, we’re able to at a fairly modest cost retrofit it with our Lego-like components and get it back out and manage the capital effectively.
So in that regard, we think we’re being smart about capital and we do expect CapEx for gaming ops to be at a lower level than it was in ’07 and in ’08 despite placing a number of new units.
Todd Eilers - Roth Capital Partners
And then if I might, just one final question on deferred revenue. I think – what’s your current expectations for when we might start to see some of the deferred [inaudible] –
Richard Haddrill
I’m sorry, expect to see some deferred what?
Todd Eilers - Roth Capital Partners
Some of the revenue show up from some of the deferred units you replaced.
Richard Haddrill
Well you know we have cautioned investors for a couple of years now that we think deferred revenues certainly not a very good measure of our health of our business, whether it goes up or down. There are a number of factors that affect it. The bottom line is we record revenue when we should under the accounting rules and we continue to understand those rules better all the time, which allow us to structure our business arrangements in a way that make sense from a matching of revenues and a compliance with the rules.
But the deferred revenue can bounce around quarter-by-quarter based on when we sign contracts, when cash is received, but the bottom line is we think of investors will focus on earnings per share and cash flow to the business. That’s a better measure because deferred revenue has so many variables. Even the margin if you try to compute margin off of the deferred cost of revenue and deferred revenue, it’s not going to be indicative of what we expect our margins to be.
Operator
Your next question comes from William Lerner - Deutsche Bank Securities.
William Lerner - Deutsche Bank Securities
Hey, I guess a couple of questions. One is based on the new range of guidance it looks like you’ll do something like 22% earnings growth plus or minus. That’s I guess an 8.5ish multiple of earnings. And at that level obviously the Street’s assigning a greater level of risk to those earnings for some reason and then some of the comps. And so that said, is there something about geographical exposure or specific customer exposure that people are getting wrong? I guess that’s the first question.
Richard Haddrill
Well, it’s a great question. Some days I wake up and feel I’m running a Beta Max company or a company that’s invested in CMO’s or something. You know I can’t quite figure it out. We’ve now got 40% plus of our revenues, basically recurring revenue. We have still a relatively low percent of our revenues come from international markets although we’ve been expanding that. So it’s a great opportunity for us. Based on recent openings in the last year-and-a-half, we’re under represented on the 900,000 games that are in North America and it’s been helping our shift share.
So we are a little bit puzzled by the PE that seems to imply high risk or shrinking earnings versus the growth we’ve had. And we’re now showing the profit engine that we have in our business model that allows us to be profitable even if economic times remain tough. So I wish I could figure it out, but that’s your job. Help us explain it, Bill.
Operator
Your next question comes from Celeste Brown - Morgan Stanley.
Celeste Brown - Morgan Stanley
First I guess Gavin were you guiding to 50,000 replacements for the industry for the year or were you just giving an example of the implied replacement cycle?
Gavin Isaacs
An example.
Celeste Brown - Morgan Stanley
Care to give any guidance around your expectations for the industry for the year?
Richard Haddrill
You know, Celeste, I think all we’ve said is we do expect at some point that the replacement cycle will improve because over the last couple of years the rate of the replacement cycle in North America seems to be would imply a 15, 18 year replacement cycle which is simply too slow based on the pace of technology today. So after the big Tito replacement cycle in ’03, ’04 it’s been particularly low the last 18 or 24 months. So we do expect it to improve at some point.
We use 50,000 as sort of an anecdote based on a number of analysts estimates and our own kind of intuitive feel. But we don’t have any solid data on that.
Celeste Brown - Morgan Stanley
And then in a bit you did a lot of talk about the ASP being higher. Is that sustainable or is some mix – I mean it should increase as you continue to roll out new products, but was the premier product of the mix the premium product higher than it will be in the quarters going forward?
Richard Haddrill
You know, maybe a little bit. We feel like the premium products help margins a half a percent, so not very much. But we have a number of premium products particularly the jumbo product coming that we expect to sell at a high margin. So that said, it will vary by mix. We would guess or estimate as we said today that the ASP will be slightly lower in the back half of the year than it was in the second quarter. But we still believe that we’re managing our product mix well and managing our pricing well. That should allow us to have a stronger ASP say than we’ve had in the last year-and-a-half.
Celeste Brown - Morgan Stanley
Were there any rental or daily fee games that converted to sale in the quarter like we saw last quarter?
Gavin Isaacs
There was but not a lot.
Celeste Brown - Morgan Stanley
And then finally you showed tremendous growth in the international side over the last 12 months. Is your ability to grow being hindered at all by what’s happening in the economy or is the opportunity to increase your penetration going to help you continue to drive sustainable momentum?
Richard Haddrill
Yes and yes. The economies in Europe, South America, Asia have been impacted at a later stage than the U.S. And so we saw it later in the international market. At the same time, because we’re entering new markets and have products that haven’t been available to many of those customers, we think for example that we’ll have a pretty good near term result in international and hopefully long term.
But in our visibility at least international looks like a bright spot. We had a good Ice Show for example and continue to build our team and enter new markets internationally. Where we still as you noted are under represented, but we do see that as an opportunity for us.
Operator
Your next question comes from Steven Kent - Goldman Sachs.
Steven Kent - Goldman Sachs
Dick maybe you could just talk about the levers because the way I look at this quarter it looks like the international offset some of the weakness in the U.S. And the installed base slowed a little bit on participation but the average revenue increased better. And obviously the margins were much stronger. So as you look out into the next six months and then into the next 12 after that, if you had to press levers or if you had to say where you think you have the greater opportunity on pressing a lever and where you might have the greatest concern, maybe you could explain that.
I think the obvious one is I think you’ve said it already is with the U.S. just flat out equipment sales might be a little bit softer. But then you have all these other levers. So maybe you could talk about those.
Richard Haddrill
It’s a great point and how we look at our business is with the various levers we have to operate and drive long term shareholder value. We did see some weakness in the recent quarter in North America but frankly some of that was just the nature of the openings. You know we’re not particularly strong in the locals market in Las Vegas where there were two major openings, so our shift share was a couple of percentage points less than it has been and we think will be going forward.
That said, international continues to have some good opportunities for us because it’s still only 15%ish of revenue and our competitors are much better there and yet we’ve grown it from 6% of revenue. So as we look at the levers we do believe that smart management of capital in gaming ops will be important to us and we’ve designed the boxes to do that. We have a number of new titles in gaming operations and we believe that the products we’ve produced in gaming operations have pretty good legs to them so that they don’t churn as fast as say some products historically have done in that space.
So we think that’s a good long term positive for Bally as we enter fiscal 2010. We also think that the international growth opportunities, both systems and games are very good for us. And we think that’s a positive lever. On the operating leverage side we think a positive lever is just our ability to continue to drive margin improvement, leverage the SG&A, leverage our development centers in India and now with the lower interest rate get much better interest costs, lower interest costs for us.
I think the area where we feel the most uncertainty is what is the U.S. gaming machine market going to be? We feel like casinos will need to invest. It’s a question of when. We feel many of our customers are directing their attention back to their core gaming operation and less on retail and real estate development. But it’s hard to tell when they’ll make that capital available.
And the anecdote I like to use is if I were put in charge of a completely bankrupt casino, I’m not going to close the doors. But the first thing I’m going to do is secure my core employee base and the second thing I’m going to do is make sure I’m managing my floor and marketing dollars and my customers properly. And that plays into our games and systems business. So it’s a tough market right now. We don’t think it’s going to stay this tough for too long, but we don’t think it’s going to be very positive in North America over the next year either.
So those are the levers that we look at. And we’re of course managing the balance sheet very well so that we can support customers that need capital for us to grow our business and for them to grow their business, and at the same time be positioned for acquisitions and other opportunities.
Steven Kent - Goldman Sachs
And just to finish up on that, when you say support capital and I know a couple of the other manufacturers have talked about this, just to be clear does that mean extending terms a little bit, allowing somebody maybe to take 60 days rather than 30? I just want to be clear that you’re not doing anything much more aggressive than that.
Richard Haddrill
No, but you are right. I mean our DSO’s have gone up from 71 to 92 and it’s been a combination of growth in systems international to percent of revenue which tend to have longer DSO’s. But it’s also been some extended payment term deals, but in most cases they’re not 12 months, occasionally 18 months, but that would be very long. And yet we would consider other investment opportunities, but we’re probably going to defer revenue on those that have any high risk of collect ability or they go out beyond about 18 or 24 months. That said, we have done a very modest amount of that so far.
Operator
Your next question comes from David Katz – Oppenheimer & Co.
David Katz - Oppenheimer & Co.
I apologize if I missed some of this commentary before, but the hardest line item for me is really more on the systems revenue side and obviously not the recurring piece. And there was so much – there is obviously a lot of new products rolling out and a lot of new opportunities for you, but as we look at quarter-in, quarter-out the next couple of quarters I find myself frankly staring at my revenue number and trying to decide what’s fair.
So whatever help you can give me there or a little shorter term focus would really be helpful.
Richard Haddrill
Well, in particular keep in mind that in recent quarters approximately 80% of revenues come from existing customers. And we’re really just hitting the ground with this whole suite of new products. You know, the BI we just sold a couple of but lots of interest in that. iVIEW DM won’t hit the customer base until our calendar Q3 of 2009. The Power Banking suite is just coming on screen. Consulting service is just being built up.
So a lot of the products, the Cool Signs acquisitions, we really haven’t generated any revenue yet from so the whole Media Management suite. So there’s an awful lot of products coming despite the very positive software component in the current quarter, there’s a lot more coming, including more content for iVIEW as well.
So that said, we’ve always said systems revenue can vary quarter-by-quarter based on [goal eyes] and other factors, but we are bullish on the opportunity for the systems business especially as we roll out these 11.0 releases on Windows where we can now more effectively compete in the small to mid-size casinos and more effectively compete where there’s a platform preference for either Konami, Aristocrat or IGT.
David Katz - Oppenheimer & Co.
And do you have a sort of a backlog of orders sort of in hand for a lot of these? Or do you would you call it more positive reaction? You know, hey let me know when it’s ready and I can really have it.
Richard Haddrill
Well, it’s pretty – we have pretty decent visibility on systems. If you’re going to make a system selection you will typically do that anywhere from six to 12 months before you open a new casino. And if it’s an existing casino and you’re going to switch systems, you’re typically going to make that selection three to eight months before you do the implementation. So for major sales like that we have that kind of lead time.
For the add-on products or for iVIEW into existing customers, sometimes that sales cycle is meaningfully slower but we do manage pipelines. We do have historical percentage of closure rates that we can use to do that forecasting. And let me just say that the softening in our – the $0.10 we took off the top end of the range of our guidance did not have to do with systems.
Operator
Your next question comes from Steven Wieczynski - Stifel Nicolaus & Company, Inc.
Steven Wieczynski - Stifel Nicolaus & Company, Inc.
When you look at your cash flow I mean it continues to grow here. Can you just remind us in terms of what your priorities are for that going to be going forward?
Richard Haddrill
Well, certainly it’s the close price today is stock buybacks are definitely on the horizon for us. And we have 73 million left on that authorization from the board so we would look at that. We also see a number of acquisition opportunities, products for sale, international expansion opportunities that we’ll continue to look at. And then as we talked about earlier the opportunity to expand our business with selected customers who are good credit risks we could consider using the capital for that as well.
That said, don’t look for us to have a high de-leveraging balance sheet any time soon. That’s not our plan in these current market conditions.
Robert Caller
And Steve we also have as a part of our new debt agreement a higher amortization schedule than we’ve had in the past so we are amortizing that starting at $25 million this year. So that will use a portion of that free cash flow.
Steven Wieczynski - Stifel Nicolaus & Company, Inc.
Just in terms of the SG&A, Bob, if you add back the $3 million in terms of the insurance proceeds, is that a pretty good run rate going forward? You know, the low 62, 63 or 64 range?
Robert Caller
Well, you know that quarter also had the impact of G2E in it so maybe on a normalized basis it was somewhere close to $60 million for the quarter.
Richard Haddrill
Going forward probably in the very low 60’s.
Robert Caller
Yes, low 60’s.
Richard Haddrill
Thank you and we very much appreciate the attention on the call today and look forward to working hard for our investors as we go forward. Stacy thanks and we’ll say good-bye.
Operator
Thank you for your participation in today’s conference. This does conclude your presentation. You may now disconnect and have a great day.
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