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Executives

Craig Billings – Vice President of Investor Relations

Patti S. Hart – President, Chief Executive Officer & Lead Director

Richard J. Schneider – Executive Vice President Product Strategy

Patrick W. Cavanaugh – Chief Financial Officer & Executive Vice President

Analysts

Steven Wieczynski – Stifel Nicolaus & Company, Inc.

Joseph Greff – JP Morgan

Robin Barley – UBS

Steven Kent – Goldman Sachs

David Katz – Oppenheimer

Todd Eilers – Roth Capital Partners, LLC

Bill Lerner – Union Gaming

Ryan Worst – Brean Murray

Justin Sebastiano – Morgan Joseph & Co., Inc.

Dennis Forst – Keybanc Capital Markets

International Game Technology (IGT) F4Q09 Earnings Call November 5, 2009 5:00 PM ET

Operator

At this time all participants are in a listen only mode. (Operator Instructions) Today’s conference is being recorded. If you have any objections you may disconnect at this time. Now, I will turn today’s meeting over to our host Mr. Craig Billings, Vice President of Investor Relations.

Craig Billings

Welcome to IGT’s fourth quarter and fiscal year 2009 earnings conference call. With me today are Patti Hart, our President and CEO; Rich Schneider, who head our product development efforts; and Pat Cavanaugh our CFO. Before we begin we’d like to remind listeners our discussion reflects managements’ views based on the marketplace environment as of today, November 5, 2009 and will include forward-looking statements including forecasts of future performance and estimates of amounts not yet determinable, the potential for growth of existing and the opening of new markets of our products, play level for our installed base of recurring revenue games as well as our future prospects and proposed new products, services, developments and business strategy.

We do not intend and undertake no obligation to update our forward-looking statements to reflect future events or circumstances. Actual results may differ materially. Additional information about factors that could potentially impact our financial results is included in today’s press release and our filings with the SEC including our most recent annual report on Form 10K and our reports on form 10K filed during fiscal 2009.

During this call we may discuss certain non-GAAP financial measures. In our press release and our filings in the SEC, each of which is posted on our website www.IGT.com you will find additional disclosures regarding any non-GAAP measures including reconciliations of these measures with comparable GAAP measures. With that in mind I’ll pass the call over to Pat who will discuss the current quarter and fiscal year results.

Patrick W. Cavanaugh

This afternoon IGT reported its results for the fourth quarter and fiscal year 2009. Net loss in the fourth quarter totaled $21 million or $0.07 per diluted share inclusive of previously disclosed non-cash items of $77 million after tax or $0.26 per diluted share and restructuring expenses of $5 million before tax or $0.01 per diluted share. This compares to $52 million and $0.18 per diluted share in the prior year quarter.

For the year net income was $149 million or $0.51 per diluted share. Inclusive of the aforementioned fourth quarter items of $0.26 per diluted share and restructuring expenses of $35 million before tax or $0.07 per diluted share. This compares to $343 million or $1.10 per diluted share in the prior fiscal year. As I mentioned the fourth quarter and fiscal year were affected by a number of notable items, the details of which are broken out in our earnings release which went out earlier this afternoon.

Our consolidated revenues for the fourth quarter were $515 million of which 55% were generated by our gaming operations division and 45% were generated by product sales. For the year our revenues were $2.1 billion of which 56% game from our game ops business and the remainder from product sales. Consolidated gross profit was $289 million for the quarter and $1.2 billion for the year.

Gaming operations continues to feel the impact of the challenging marketplace although we are encouraged by relative stabilization and yields. Game ops revenues were $283 million in the fourth quarter which was down 2% sequentially and 14% year-on-year. Gross margins were 60% for the quarter versus 58% in the prior quarter. Margins for this year’s quarter benefited from a larger base of fully depreciated assets.

[Inaudible] average of $50 per unit per day which is within the range and has been relatively consistent over the last four sequential quarters but down from $60 in last year’s fourth quarter. This blended yield of $50 is an average of the various components of our broad and diverse install based comprised of our Mega Jackpots, Temple of [Determination] units, Class II units and lease op units, all of which served a distinct market and have unique yield characteristics with the highest sub segment yielding in excess of $100 per day. Our year-over-year blended yield are the combined result of the decline in industry play levels and the growth of the mix of our lower yielding standalone and lease operations games in our install base.

For the year, gaming operations revenues were $1.2 billion compared to the prior year revenues of $1.3 billion and gross margins remain constant at 58% compared to last year. IGT’s install base ended the fourth quarter at 61,400 units up 900 units over the prior year and 300 units compared to the prior sequential quarter. Install base growth in the international market showed continued strength during the quarter and the domestic unit count was off slightly from the prior sequential quarter.

437 out of the 500 MegaJackpot units from our previously announced agreements announced with Boyd and MGM have been deployed as of the end of the quarter. We expect that our install base should resume growth as the environment stabilizes. Approximately 85% of our install base is comprised of variable fee games that earn a percentage of machine play rather than a fixed daily fee.

Moving on to product sales, product sales revenues totaled $231 million for the quarter compared to $301 million in the prior year. For the fiscal year product sales revenues were $935 million compared to $1.2 billion in the prior year. Worldwide we shipped 15,600 machines during the quarter down from prior shipments of 22,200. In the fiscal year IGT shipped 56,200 machines down from shipments of 74,800 last year.

Non-machine revenues comprised of gaming systems, game system conversions, cables, parts and intellectual property fees came in at $98 million or 42% of total product sales for the quarter compared to $94 million and 31% of total product sales in the prior year. For the year non-machine revenues were $346 million or 37% of total product sales down from $396 million and 33% of product sales in the prior year.

Product sales gross margins were 51% for the quarter down 300 basis points from the prior year and were 50% for the year down 400 basis points from prior year. For a reconciliation of units shipped to the equivalent units recognized please see our earnings release. Now, breaking down product sales domestic versus international. Domestic product sales revenue totaled $127 million on volumes of 6,100 units for the current quarter compared to $118 million and 11,000 units in the prior year quarter.

For the fiscal year domestic product sales revenues of $617 million down from $732 million in the prior year. Units shipped domestically for the fiscal year totaled 26,400 down from 37,100 in the prior year. Domestic replacement units shipped totaled 3,800 up 1,500 units sequentially and down 1,700 units in the prior year quarter. While we continue to have limited visibility around replacement demand, we believe future demand will exceed trough levels experienced earlier this year.

Domestic new and expansion shipments totaled 2,300 units in the quarter down 2,300 sequentially and down 3,300 units from the prior year quarter due to fewer new openings. As we continue to pursue our sales strategy we may experience increase in levels of deferred revenues from multi element contracts including system software and machines bundled together. Units shipped for the current period reflect all units shipped to customers which includes units for which revenues have been deferred. Equivalent units recognized represent units recognized in revenue under generally accepted account principles during the period.

Domestic non-machine revenue totaled $59 million in the quarter down from $70 million in the prior year primarily due to lower systems revenue. For fiscal 2009 domestic non-machine revenues were $241 million down from $299 million in fiscal 2008 primarily due to lower conversion sales and system revenue. Domestic deferred revenue increased approximately $31 million in the quarter for a total of $81 million as of September 30, 2009. This increase is a result of our continued shift towards more multi element contracts.

Domestic average revenue per unit computed on an equivalent unit basis was $30,300 for the fourth quarter compared to $20,600 in the prior year quarter and for the year domestic ARPU was $23,800, up 14% over the prior fiscal year due to increased mix of MLD product. Sales of machines utilizing on AVP technology comprised 84% of total North American machines shipped during the fourth quarter and 86% for the year. A trend we expect to see continue as our legacy for sale products are phased out.

International product sales revenues totaled $104 million on volume of 9,500 units shipped for the current quarter compared to $118 million and 11,200 units shipped in the prior year quarter. For the fiscal year international product sales revenue was $318 million down from $459 million in the prior year while units shipped for the year were 29,800 down from 37,700 units in 2008.

Our international markets continue to feel the effects of the economic slowdown most notably on continental Europe. Revenues were also impacted by less favorable exchange rates particularly against the British Pound and the Australian Dollar. International non-machine sales were $38 million up from $25 million in the prior quarter. Non-machine revenues for the year were $105 million up from $97 million in the prior fiscal year.

The quarter was driven by increases in systems revenues and in part sand conversion sales. International deferred revenue increased $18 million during the quarter for a total balance of $41 million at September 30, 2009. International average revenue per unit computed on an equivalent unit basis in the fourth quarter was $13,200 up 26% over the prior year quarter due to a lower mix of lower price Japanese units while for the year international ARPU was $11,500 down 6% over the prior fiscal year due to a higher mix of lower priced units.

Total product sales gross margins for the quarter were 51% down 300 basis points from the prior year quarter and for the year were 50% down 400 basis points from the prior fiscal year. Both periods were unfavorably impacted by lower volumes spread across fixed manufacturing costs as well as higher costs related to system upgrades and fewer system sales which carry higher margins. Going forward, we expect product sales gross margin to remain in the 50% range bolstered by our cost saving initiatives.

Now, moving on to operating expense, fourth quarter operating expenses totaled $262 million compared to $204 million in the prior year period excluding a non-cash charge of $78 million associated with our investment in Walker Digital, restructuring charges of $5 million and bad debt of $9 million operating expenses would have been $170 million a 16% decrease from the prior quarter. For the full year, operating expenses increased to $830 million compared to $760 million in fiscal 2008 primarily due to the above mentioned non-cash charges, restructuring charges and a higher bad debt provision.

Our cost reduction efforts are beginning to become more evident in a year-over-year operating expense comparison. Now, for an update on our cost reductions; we have previously announced two rounds of $100 million in cost savings efforts. Our initiatives to date have been executed through savings on manufacturing materials, headcount reductions and other operating expense controls. As previously announced, we have completed approximately $135 million in annualized savings when compared to the fourth quarter of 2008, the quarter before we began these initiatives.

Our 2010 plan contemplates the remainder of these initiatives which will occur throughout the fiscal year. It is important to note these efforts will be partially offset by PIC related op ex and normal course inflation. In the near term we would expect our SG&A exclusive of bad debt provision to be approximately $100 million per quarter and R&D to remain in the low $50 million area. We will update you on future earnings calls when a significant portion of such efforts are implemented.

SG&A excluding bad debt, the previously mentioned cost savings, coupled with declines in other items resulted in year-over-year decline in SG&A of $26 million or 22% or $95 million per quarter. For 2009 SG&A excluding bad debt was $391 million a decrease of $58 million or 13% over the prior fiscal year. Bad debt provisions total $9 million for the quarter compared to $4 million in last year’s quarter. For 2009 bad debt provisions totaled $34 million compared to $9 million for the prior fiscal year. The bad debt increase for the quarter and for the year primarily stem from specific reserve related to a number of customers that were affected by the economic downturn.

R&D expense totaled $53 million for the quarter, a decline of $6 million or 10% from the prior year quarter. For the year our investment in R&D was $212 million down 5% over fiscal 2008. Depreciation and amortization within our operating expenses totaled $21 million for the quarter up $1 million from the prior year quarter. 2009 depreciation amortization was $80 million up from $77 million in 2008. Total depreciation and amortization inclusive of SAP included in our game ops machines as recognized in our game ops expense line was $65 million for the quarter down from $76 million in the prior year quarter and $277 million in 2009 down from $286 million in the prior fiscal year.

Other income and expense net in the fourth quarter was a net expense of $35 million down from $47 million in the prior quarter. The decrease was mostly due to reduced investment write downs which included LVGI impairment of $13.3 million in the current quarter and less foreign exchange loss partially offset by increased borrowing costs subsequent to our recent refinances. In 2009 other net expense was $83 million compared to $68 million in the prior year. The increase was primarily driven by additional interest expense partially offset by reduced investment write downs.

Beginning in the first fiscal quarter of 2010 new accounting guidelines will require us to bifurcate our convertible debt instruments in to their debt and equity components. The interest on the debt component will be calculated using a borrowing rate for similar non-convertible bonds resulting in higher recorded interest than the actual coupon rate. We expect the difference between these two amounts to be non-cash interest of approximately $30 million or $0.06 per diluted share for fiscal 2010. We will also be required to restate prior periods using this methodology.

The tax rate was -184% in the first quarter versus 49.5% in the prior quarter. The rate during the quarter was impacted by a number of unfavorable previously announced items including the previously disclosed valuation allowance recorded against deferred tax assets at one of our foreign subsidiaries and a non-deductable charge recorded against our investment in LVGI. These items generated tax expense for the period despite the fact that we incurred a pre-tax loss for the quarter.

Partially offsetting these items was a favorable item of approximately $2.6 million or $0.01 per diluted share. For fiscal 2009 our tax rate was 37.4% compared to 42% in prior fiscal year although the 2009 annual rate was negatively impacted by the non-deductable charge related to LVGI and the foreign valuation allowance, the annual impact was offset by favorable discreet items from earlier quarters. These favorable discreet items resulted from several items including the closure of the 2000 and 2001 IRS exams, the IRS’ approval of a favorable inventory accounting method change and tax adjustments on intercompany profits. Going forward we expect our quarterly tax rate to trend at approximately 39% to 40% excluding discreet items.

Now, moving on to the balance sheet, cash equivalents and short term investments inclusive of restricted amounts totaled $247 million at September 30, 2009 compared to $374 million at September 30, 2008. Debt totaled $2.2 billion at September 30, 2009 compared to $2.3 billion at the end of the previous fiscal year. The available capacity on our $1.8 billion line of credit totaled $1.7 billion as of September 30, 2009.

It’s important to note that the adoption of new accounting rules for convertible debt which I mentioned earlier will decrease our book debt by approximately $141million at December 31 2009 our next reported balance sheet date. This amount is the expected implied value of the equity options in our converts which will now be recorded in equity. Our 2.25% convertible notes and warrants are excluded from diluted shares outstanding for the period ended September 30, 2009 because the conversion price and exercise price exceeded the average market price of our common stock.

The weighted average stock price during the fourth quarter and the period from issuance to September 30, 2009 was $19.62 and $18.18 respectively. Working capital totaled $609 million down from $733 million as of September 30, 2008. Average days sales outstanding excluding receivables from our development financing loans was 58 days down from 62 days in the prior year mainly due to lower volumes and lower receivables.

Inventory turns averaged three times, up from 2.5 times in the prior fiscal year. Third quarter we generated $194 million in cash flow from operations, our highest quarterly level since the fourth fiscal quarter of 2007. Year-to-date we generated $548 million in cash flow from operations up from $487 million in the prior year. Although we have seen a reduction in net income year-over-year, cash flow in the prior year was burdened by additional prepayments for long term licensing rights and the current year has benefited from reductions in our receivables and inventory balances.

Capital expenditures totaled $257 million for the year compared to $298 million in the prior year primarily due to lower investments in Patrick W. Cavanaugh &E following last year’s completion of our Las Vegas campus. Cap ex is expected to trend in the quarterly range of $50 to $75 million although we continue to come in there at the lower end of the range as we more proactively manage our cap ex as part of our efficiency and cost reduction efforts.

That concludes my prepared remarks regarding IGT’s fourth quarter and year end 2009 results. Thanks for your time and attention. I will now turn the call over to Patti for her remarks.

Patti S. Hart

Thank you very much for taking the time to join us as we discuss our fiscal fourth quarter and our future. I’ve consistently said that I will provide increasing clarity on my strategic goals as I identify them and on our tactics to implement those goals as they are put in place. I’m eager to update you on recent changes to our company and our strategic initiatives as well as to discuss our view on fiscal 2010.

But first, I would like to reflect for a few moments on our fiscal fourth quarter. Shortly after I assumed this role we reported a challenging second quarter, a quarter where replacement unit volume indicated a replacement cycle in excess of 40 years and capital spending by our customers seemed that it would be perpetually anemic. While we remain cautious about the overall market environment this quarter, there was continued incremental improvement an operator sentiment.

As 3,800 units shipped, our North American replacement sales more than doubled from our trough second quarter. After a drastic downward adjustment to the cap ex budget at our core casino customers in the early part of the year, this quarter saw operators cautiously reentering the market to meet the demand of their patrons who are increasingly aware of aging slot floors.

Our MLD products continued to perform extremely well providing our customers with flexibility between video slot and 3D reel replication. We shipped over 1,700 MLD units during the quarter and we are excited about the 2.0 version which you will all have the opportunity to see at G2E in a few weeks.

In gaming operations, our yields have continued to hold at near $50 indicating a stabilization of play levels. The install base continues to provide steady and meaningful recurring cash flow and we look forward to capitalizing on its inherent operating leverage as the economy recovers and play levels resume growth.

Rich Schneider’s game studios have been extremely active in preparation for G2E and while only a portion of this year’s product was developed under our new product vertical structure, I believe this year’s product portfolio will provide our customers and investors with a clearer sense of our strategic direction than we have in years past. I would like to briefly turn the call over to Rich to discuss some of the products that we will be featuring at G2E in a few weeks.

Richard J. Schneider

This year IGT is pleased to present a basket of products which we believe showcases the best of IGT’s innovative talents and also provides our casino customers with highly compelling value propositions stemming from high content quality and product flexibility. In game ops we are very excited to present several key titles including Sex in the City multiplay which is themed around the highly popular HBO series and Amazing Race themed after the Emmy Award winning realty game show both of which we believe will have strong appeal to the core slot demographic.

We’re also pleased to show our new center stage MegaJackpot game series, a bank product featuring a 103 inch LCD screen which can be utilized with multiple game themes over time the first of which will be our Wheel of Fortune experience capitalizing on what we believe to be the most popular brand in our industry. We believe this product will be truly one of a kind and will allow us to maximize title velocity through a common hardware platform.

In product sales we will showcase our new dynamics product comprised of an AVP slot machine featuring our pure def MLD technology and incorporating unique game design features which can only be delivered on this platform. The product will utilize multiple came formats and titles to provide the player with an unprecedented game choice and the operator with high value for their cap ex dollars.

We’ll also be presenting products for the upcoming Illinois [DLT] opportunity a package combining what we believe are the most compelling games, a cabinet with a favorable price point and the industry’s best slow route specific system products. As we move forward in our product strategy we will continue to focus on our core content and leverage our talented pool of game design resources and extensive IP portfolio and as we progress through 2010 we expect we will reap the benefits of the more focused vertical product management structure which Patti conveyed to you on our previous earnings call.

With that, I’ll turn it back over to Patti to speak of our broader corporate strategy and preview our expectations for 2010. We look forward to seeing you all at G2E.

Patti S. Hart

Having reviewed our G2E pipeline over the past several weeks, I am really looking forward to the show. As Rich mentioned, we are excited about the initial development stemming from the verticalization of our product development process, a component of my strategy to refocus IGT on what we do so well and to increase our R&D to revenue conversion rate.

During the quarter we moved forward on several other strategic fronts putting in place tactics to achieve previously identified goals. Eric Tom, our Executive Vice President of North American sales has begun to refocus our sales organization around the concept of account management where customers maintain a single relationship within the organization backed by product specific support personnel increasing accountability and simplifying the process of doing business with IGT.

Tony Ciorciari, our Head of Manufacturing and Operations is in the midst of the ease of doing business project, a process also designed to make IGT a simpler and more responsive business partner for our customers. Chris Satchel, our DTO is now integrated in to our business and has formed his preliminary view on our platform capabilities across six [inaudible] and the Internet. Chris has began the first step in the longer term process of mapping out our future platform. Platforms which will consolidate our game delivery base, provide flexibility in game design and allow much faster deployment of content.

In September our board elected Phil Satre as our incoming Chairman beginning December 1, 2009. We are pleased to have Phil’s customer perspective in our Chairman seat and look forward to how his best practices impact on our board. Finally, our HR team rolled out our 2010 compensation plan, a management by objective plan which ties larger portions of compensation for both middle and executive management to specific preestablished goals with the balance tied to specific companywide KPIs. This plan coupled with the recently approved options exchange will allow us to better incentivize our employees while aligning their compensation with our organizational goals.

As a side note, I would like to personally thank our shareholders for their approval of our option exchange program. As the market recovers this program will be fundamental to retaining and motivating our employees. All of the initiatives I mention represent my team’s insatiable drive to make IGT the leanest, most competitive organization it can be. An accountable organization focused on delivering content driven products to our customers. A nimble organization, able to more quickly react to shifts in market dynamics and an organization focused on maximizing the efficiency of capital deployment.

Providing constant improvement at IGT is a short, medium and long term theme for me and my management team. However, it is particularly relevant for 2010. While we are encouraged by the buzz from our customers around slot budgets and by much of the research coming out of Wall Street, we remain cautious in predicting the timing and the scale of the replacement cycle. Thus, 2010 is a year in which IGT will focus on its core.

Strategically that means all of the things I mentioned earlier. Financially, that means pursuing the highest level of operating leverage available when the demand side of the market does improve meaningfully. In our product sales business we intend to leverage our renewed focus on content and in to greater share in the replacement cycle providing operating leverage on our fixed manufacturing costs. In gaming operations where 85% of our install base provides IGT with a variable revenue stream we believe our exciting pipeline of games will position us well when play levels and therefore yields come back.

Finally, we continue our cost cutting efforts with the remainder of our disclosed $200 million in efficiencies included in our 2010 budget. These costs will come out throughout the 2010 year and provide us with a leaner core of fixed manufacturing costs and operating expenses. As we move to the subject of guidance I want to reiterate that we lack the ability to control either the timing or the size of the replacement cycle thus our market view remains conservative and our focus IGT centric.

In addition, there have been significant changes to our capital structure and certain changes in accounting principles that will impact our results relative to prior periods. As a result of these factors our guidance for 2010 is in the range of $0.77 to $0.87 per diluted share. But, please note that this guidance is not directly comparable to our 2009 results as it includes $0.06 of a non-cash interest expense stemming from the previously mentioned change in accounting for our convertible notes which we will implement in 2010. It also assumes no dilution impact from our convertible note.

Thank you very much and we will now open it for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Steven Wieczynski – Stifel Nicolaus & Company, Inc.

Steven Wieczynski – Stifel Nicolaus & Company, Inc.

Pat, could you first of all breakdown the other income line for me?

Patrick W. Cavanaugh

Sure. Interest income was $15.6, interest expense $36.8 and other was $13.6 of expense which was largely the investment write down.

Steven Wieczynski – Stifel Nicolaus & Company, Inc.

You probably said this but I just missed it because there were a lot of numbers thrown out there but, of the units you actually recognized domestically, the 4,200 units, how much of those were replacement?

Patrick W. Cavanaugh

The majority were, I want to say 1,300 plus.

Patti S. Hart

3,800.

Richard J. Schneider

3,800 of 4,200 were replacement units.

Patti S. Hart

Yes.

Steven Wieczynski – Stifel Nicolaus & Company, Inc.

Then I guess for Patti in terms of going to G2E in terms of your conversations you had with your customers, what has been the feedback I guess specifically on the products you’ll be presenting but more specifically on the video platform side?

Patti S. Hart

We’ve been conducting some pre G2E meetings with customers over the last several weeks as I’m sure you’re aware. I would say the feedback generally speaking has been very positive. I think they see us exercising the MLD technology more than they have before. I think the volume of games in general that we’re presenting to the marketplace, the balance between our game op products and our for sale products, a better balance and I think particularly on the video slot side I think just more aggressive play and application of all of the elements of the game, the map, the theme, the art, the sound. I would say we got really high marks on these rounds with customers, now it’s time to place the orders.

Steven Wieczynski – Stifel Nicolaus & Company, Inc.

Last question if I could, just in terms of the guidance, I assume that incorporates no new jurisdiction, is that correct?

Patti S. Hart

That’s exactly right. I think we’re keeping our eye very close as I am sure you all are on a number of places including Illinois, Ohio, the Italian markets. We’ve not assumed revenue from new jurisdictions in our guidance.

Richard J. Schneider

On the replacement side, the bottom end of that guidance assumes a replacement environment relatively consistent with 2009 overall and the upper end assumes a replacement environment relatively consistent solely with our fiscal Q4.

Operator

Your next question comes from Joseph Greff – JP Morgan.

Joseph Greff – JP Morgan

It’s nice to see the domestic replacement units up sequentially from the 2Q levels, I know that’s not a large number, was that spread over several orders or was that concentrated among just a handful of orders?

Patrick W. Cavanaugh

I think it was pretty widely disbursed Joe. I don’t know that there were any one or two real large orders in that.

Patti S. Hart

I think broad based across products Joe as well as customers.

Joseph Greff – JP Morgan

Then, did you sell any in to Japan in the September quarter?

Patrick W. Cavanaugh

In Japan a minimal number of units.

Patti S. Hart

Japan continues to be a challenging environment with a number of the parlors there continuing to decline. We did in 2009 introduce three games in to Japan, all three of them basically performed at market levels which are well below the historical levels in Japans. So, as you know we’ve reacted to that by restructuring and adjusting costs in the Japanese market to support the current business environment.

Richard J. Schneider

7,075 units in Japan.

Joseph Greff – JP Morgan

Just with respect to your fiscal 2010 guidance and how you’re thinking about the gaming operations segment, maybe Craig you can kind of phrase it like you discussed on the product sales, the domestic replacement side of things, are you assuming basically yield stable and then install base growth and net/net you have some growth in fiscal 2010 versus 2009?

Patti S. Hart

Yes, Joe I think that’s exactly the assumption. It makes an assumption of slight improvement in two areas, one is in play levels and so we’re assuming a bit of an increase in the yields and then also a slight increase in the install base, but slight in both cases.

Richard J. Schneider

Joe, that’s consistent with our guidance on replacements as well. So, replacements and play levels are pretty correlated and thus we were agnostic with respect to replacements but we’re also relatively agnostic with respect to play levels.

Operator

Your next question comes from Robin Barley – UBS.

Robin Barley – UBS

I was wondering if you could walk us through a little bit more about some of the agreements where you’re shipping but not recognizing just to get comfortable with the idea with what could happen that could result in the revenue not being recognized there? Just kind of what milestones you have to hit? Also, just to clarify this 3,800 domestic replacement units shipped, those were all shipped and recognized both, right that 3,800? Then, my last question is City Center Florida was talked about for a long time would be the first opening fully server based, it looks like the specifics are the IGT and [inaudible] will be server based but not necessarily all the manufacturers on the floor at City Center? I wonder if you can give us some color on that, is that an issue where the other manufacturers aren’t where they need to be or it was a decision from City Center itself or just kind of give us some color on the floor there?

Patrick W. Cavanaugh

Robin, I’ll take the first two and then I’ll turn it over to my colleague Rich to answer the City Center question. First one, we take the portion of replacements that were recognized, the majority of those were. Then, what leads to the deferrals and whey we’re starting to show you on an equivalent unit basis is as we sell more and more system products simultaneous with boxes, that puts us in to the world of software accounting where you have what they call multi element contracts and so to the extent that we’ve sold machines at the same time that we’ve sold particularly the advantage product, it makes it very difficult for us to bifurcate those two.

However, some good news on that front which will make it a little clearer is we have two new accounting pronouncements that will take effect this quarter. We’ll early adopt so we’ll adopt in Q1 and that just makes it easier for us to make boxes truly hardware to the extent we can have them separate from the contracts who install or enter in to. So, I think the good news is we have pretty good visibility on that deferral and when it turns. The majority of it will turn in fiscal 2010 as I’m sure we’ll have some new added. One in particular is ARIA will be one that we recognize that revenue over a period of time given that the machines are highly dependent on the system obviously

Patti S. Hart

I think Robin just to address the risk, I think what you’re getting at is what is the risk in those that have been deferred. When you look at both Rosario and ARIA have been shipped and installed and have not been recognized so it’s not as if we’re deferring them waiting for installation.

Richard J. Schneider

The only risk would be if for some reason the system didn’t go live.

Patti S. Hart

That’s right.

Richard J. Schneider

Robin, relative to the City Center question I’m happy to give you some color on that. Interoperability is really fundamental to the success of that. We released those product specifications for sbX related to ARIA way back boy in calendar Q4 of 2007 and after a comment period we released the final specs in Q2 of ’08. Those specs were approved by GSA gosh in December of 2008 and since that point we’ve been engaged in interoperability testing with all manufacturers. Initially at our interoperability center in Reno and then over the course of the summer on the floor at Monte Carlo on the Las Vegas strip.

During that time also the regulators, as well as the customers, is always taking the point of view that interoperability testing had to cease at a specific point ahead of opening just to give us all enough time so we could shift our focus entirely to ensure that we had just a smooth running opening. So, that stuff point in time is October and thus when that hit as of now MGM, IGT, our peers and the regulators are really focused on system stability and a flawless opening and then we’ll just look forward to a fully networked floor in the future.

Patti S. Hart

Robin, to add to that the SB system will be deployed at all IGT machines, so every one of our machines and a certain number of WMS machines so it will be an interoperable multivendor floor and then the remaining machines will use in an interim period our next gen devices for communication functionality with a plan then to move the other manufacturers over time once we have a stable opening.

Operator

Your next question comes from Steven Kent – Goldman Sachs.

Steven Kent – Goldman Sachs

Just a couple of questions, first up the $0.77 to $0.87 it sounds like what you’re saying is that forecast implies no states rolling out, no acceleration in replacement, very little same store revenue growth, no additions in participation games in any way or pretty modest. Then, the other thing I just wanted to ask you about is it looks like the average selling price was up pretty big. Can you just give us a little direction on that and thoughts on it for the future?

Patti S. Hart

On the range of guidance Steve, on the low end of the range assumptions are fairly conservative around the expansion of our game ops install base, around the replacement cycle and around yield. At the top end of the range is where we’re expecting more of a reflection of what our q4 number looks like on replacement cycle and a bit of improvement in both install base and yield from game ops. So, you’re right no new jurisdictions so as I said we’re watching everything.

In Illinois just to give you a quick idea of our thinking on Illinois, the implementation there is proceeding. The first installment of temporary regulations has already been issued by the Gaming Control Board last week. The State legislature last week provided the board with supplemental appropriation to pay for the additional expenses associated with implementing a program so what we’re focused on right now with Illinois is just the product functionality, matching our product to the market need. We’re very focused on that.

In Ohio, very excited in Ohio about Issue 3 and what’s going on there. Important to note I think in Ohio that there are still details to be determined by the legislature and we’re really awaiting the creation of a gaming commission and some of the rules and regulations and licensing so there is a bit of political and litigation risk we still feel in Ohio. So there we are also very focused on situation our products to meet the needs of the developing markets in Ohio and Illinois and really positioning us to participate as gaming expands but no giant leaps in 2010 relative to revenue but giant leaps relative to product development.

Patrick W. Cavanaugh

Steve, on the ASPs, we’re up to 16.2 in Q4 that’s up from 14.4in the sequential quarter and that’s up from 12.8 last year. The year-over-year driver has been just the continued ship to AVP, 85% or there abouts of the units shipped in Q4 were AVP which by its nature has a higher price point. Then of those we shipped some, over 1,700 units in the MLD category which is obviously at the highest price point.

Steven Kent – Goldman Sachs

Just to be clear it just almost sounds impossible to have no sequential improvement going in to calendar 2010 just with a slightly stronger economy, casinos loosening their purse strings. I just want to be clear on what even the high end is and it sounds like that is what you are suggesting, even at the high end you’re assuming none of what I just described happens.

Patti S. Hart

I think first of all we can’t control the timing and the size of the replacement cycle and that is as I think if you look at our Q4 and our 2009 improvement in the business and our difference between kind of our projections and where we ended up, the big difference was in product sales in both units and ASPs. So, really a lot of dependence on that replacement cycle which we really can’t predict from a timing. So we have again, at the low end assumed it looks like 2009, at the high end we’ve assumed that the fourth quarter uptick continues.

Patrick W. Cavanaugh

Also, it’s important to note Steve that weighing against that is the fact that we’re not going to have near as many new or expansion units in fiscal ’10. So, when you factor that in what you’re going to realize is we are contemplating decent improvement in replacement and modest improvement in game ops in both yield and install base.

Operator

Your next question comes from David Katz – Oppenheimer.

David Katz – Oppenheimer

If I can just follow up Steve’s question about the ASP and thinking through how we model going forward I think his point is relevant that as you sell more and more MLDs and we’re certainly seeing that out there that ASP should look a lot more like your fourth quarter number than the earlier parts of the year. But, if we could just talk about that in conjunction with the other issue that we’ve discussed before where if as MLD evolves as a product there certainly has been discussion about pricing it in frankly more cheaper ways to increase the distribution of it over time.

How do we sort of balance those two issues? We can come to our own conclusion about how many units we think you’ll sell but the pricing I think is quite a bit more challenging. Then, I just have one other.

Patrick W. Cavanaugh

On the price point issue, we realize it is a much more expensive box but it provides a lot more functionality which delivers real value to the operator and that’s what operators are starting to realize and I think that’s why you’re seeing its penetration rates start to increase. Because, what they realize is they’re able to save on conversion costs particularly if they’re using it to replicate a stepper product because that’s where conversions are the most expensive. But, we are getting creative on how we can better utilize to drive growth of the products that we have, to bundle it with, to give operators an incentive to get more of them on their floor.

I think still a little bit uncertain from our standpoint yet to determine because MLD really is in its infancy, as to just how quickly that penetration rate is going to ramp up and therefore I would feel comfortable saying if I knew how quickly it was going to roll out we obviously could do a better job paving what that ASP might look like. But, I think you’re correct in assuming that ASPs over time are moving up.

David Katz – Oppenheimer

If I can just ask about two other items in the model that candidly aren’t all that easy. One, is non-machine sales which jumps around particularly when looking at the domestic versus the international and secondarily, just the international units shipped. We all get out there and can identify new opportunities and we can come up with assumptions about replacements domestically but the international piece is quite a bit more challenging. How much color can you give us on those two items that’s embedded in your guidance and even longer term than that if you can?

Patrick W. Cavanaugh

First, on the non-box or the non-machine revenues, that’s the one that is most susceptible to deferred revenue, i.e. particularly in the advantage system area and so you will see it be lumpy from quarter-to-quarter depending on when that revenue is recognized and year-to-year. I mean just comparing ’09 to ’08 I think we recognized revenue on half as many systems as we did the previous year. Then, part of the reason driving the ARPU up this quarter is we had a lot of revenue coming back in on systems previously installed. Next quarter it may be something other so that’s a hard one to peg.

International is a difficult market but I think if you look at it, make whatever guess you want for Japan. The UK has been relatively stable market, I think you’ll probably see stability there. The markets that will probably see improvement in 2010 is probably continental Europe given that it was the hardest impacted in fiscal 2009 from the credit crises and the economic meltdown. I think we’re seeing continued improvements in south Latin America and then of course as Mexico starts to evolve, yet to be seen as it evolves in to a Class 3 market how quickly that move to also a for sale market for us.

Operator

Your next question comes from Todd Eilers – Roth Capital Partners, LLC

Todd Eilers – Roth Capital Partners, LLC

A couple of questions, one real quick, you might have given it already so I apologize if I didn’t catch it but on the gaming ops install base can you give the domestic versus international for the end of the quarter?

Patrick W. Cavanaugh

International was 15.8 and domestic was 45.6.

Todd Eilers – Roth Capital Partners, LLC

Then just to go back to some of the deferred units in the quarter that were shipped, I’m assuming on the domestic side maybe that was City Center and then on the international side maybe that was your Argentina shipment. Is that correct and are there any other more notable new projects that maybe made up the difference for those units?

Patrick W. Cavanaugh

Those were the lion’s share of it. The rest were diminuous units here and there. Those were the vast majority, Rosario and City Center.

Todd Eilers – Roth Capital Partners, LLC

Then it sounds like you indicated that we shouldn’t necessarily assume that you’ll book the entire revenue in one quarter for the next quarter for those two casino openings for you guys on the game sales side that you’ll recognize that over a period of time. Can you tell us what that period of time might be? Is that three years, one year, how should we look at that?

Patrick W. Cavanaugh

Rosario will be a Q1 event so we have met all the conditions of revenue recognition there given the casino is open they’re using both the equipment and the systems so everything is done there and delivered. ARIA I believe is a two year revenue recognition cycle and that’s based on the way the contract was structured.

Richard J. Schneider

Then there are some Washington CDS units that are in there which is probably about 1,200 units split between last quarter and this quarter actually that are recognized over a two year period and that’s on a leased system.

Operator

Your next question comes from Bill Lerner – Union Gaming.

Bill Lerner – Union Gaming

What implicit market share are you assuming for your range of guidance? The second part is there any assumption for the exit of non-core businesses in that guidance?

Patrick W. Cavanaugh

The first Bill on market share, ship share going forward blended between new and replacement is 40% to 45% for ’10. Then on the guidance, it does not assume the exit of any non-core businesses.

Bill Lerner – Union Gaming

Then the follow up relates to the accounting for units, just for apples-to-apples and maybe he just said it, how many units were shipped in your last quarter and your fiscal third quarter but booked this quarter?

Craig Billings

No, those are booked ratably over the two year life unless they’re not just from one quarter to the next as is the case with the Rosario deferral and our normal course deferrals. The prior sequential quarter I will have to call you offline with the – 6,900 booked shipped last quarter in North America, 6,700 recognized.

Operator

Your next question comes from Ryan Worst – Brean Murray.

Ryan Worst – Brean Murray

Just a question on the international side you had some good sequential improvement in the fourth quarter, could you provide some color in terms of what geographies drove that?

Patrick W. Cavanaugh

One of the things that drove it sequentially was improvement in non-box, say largely in the systems area. [Inaudible] that we bought here early part of this year are starting to contribute nicely in the international markets.

Patti S. Hart

We actually also launched a new box in Australia and that contributed nicely in the quarter as did the UK from a unit perspective. So units in both Australia and the UK contributed nicely in the quarter.

Ryan Worst – Brean Murray

ASPs in the UK, aren’t they lower usually? I think your ASPs were up nicely in the quarter?

Patrick W. Cavanaugh

They are and the ASP increase internationally is also due to the increase in shift to the newer platform with the higher price point.

Operator

Your next question comes from Justin Sebastiano – Morgan Joseph & Co., Inc.

Justin Sebastiano – Morgan Joseph & Co., Inc.

A lot of my questions has been asked and answered but just so I’m clear, of the 4,200 equivalent units recognized in North America, how many were replacements?

Craig Billings

3,800.

Justin Sebastiano – Morgan Joseph & Co., Inc.

Can you give me the same on international so of the 7,900?

Craig Billings

They’re all replacement.

Operator

Your last question comes from Dennis Forst – Keybanc Capital Markets.

Dennis Forst – Keybanc Capital Markets

I wanted a clarification from Pat on the depreciation number. I think you said that total depreciation and amortization was $64.5 million?

Patrick W. Cavanaugh

That’s correct.

Dennis Forst – Keybanc Capital Markets

And $21.2 of that goes –

Patrick W. Cavanaugh

Is op ex.

Dennis Forst – Keybanc Capital Markets

Then that leaves $43.3 which is part –

[Inaudible] margin and cost of sales for game ops.

Dennis Forst – Keybanc Capital Markets

It’s split between those two? Would it be primarily game ops?

Patrick W. Cavanaugh

No, it’s all in game ops.

Dennis Forst – Keybanc Capital Markets

All in game ops.

Patrick W. Cavanaugh

$43.3 is all in game ops.

Dennis Forst – Keybanc Capital Markets

The other one was about the way the presentation was this quarter versus last quarter or previous quarters, you use to break out the gaming operations between domestic and international both on a revenue basis and on a gross margin basis. Can you do that for us?

Craig Billings

North American game ops this quarter was $239.7.

Dennis Forst – Keybanc Capital Markets

That’s revenues?

Craig Billings

That’s revenue. International was $43.5. Gross margin this quarter North America is 138.7 and international is 31.5.

Dennis Forst – Keybanc Capital Markets

So game up 138.7 is –

Craig Billings

Gross profit North America.

Operator

At this time we have no further questions.

Patti S. Hart

We thank all of you for joining us today and appreciate your continued support and look forward to further dialog. Thanks very much.

Operator

This concludes today’s conference call. At this time everyone may disconnect.

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Source: International Game Technology F4Q09 (QTR End 09/30/09) Earnings Call Transcript
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