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Executives

Neil P. Davidson - Chief Financial Officer, Chief Accounting Officer, Senior Vice President and Corporate Treasurer

Ramesh Srinivasan - Chief Executive Officer, President and Director

Analysts

Joseph Greff - JP Morgan Chase & Co, Research Division

Steven M. Wieczynski - Stifel, Nicolaus & Co., Inc., Research Division

David Bain - Sterne Agee & Leach Inc., Research Division

Carlo Santarelli - Deutsche Bank AG, Research Division

Steven E. Kent - Goldman Sachs Group Inc., Research Division

Todd Eilers - Eilers Research, LLC

Bally Technologies (BYI) Q1 2014 Earnings Call October 30, 2013 4:30 PM ET

Operator

Good day, ladies and gentlemen, and welcome to the First Quarter Fiscal Year 2014 Bally Technologies Conference Call. My name is Denise, and I'll be your coordinator for today's call. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. At this time, I would like to turn the call over to the Chief Financial Officer, Neil Davidson. Please proceed, sir.

Neil P. Davidson

Great. Thank you, Denise, and welcome, everyone, to the Bally Technologies First Quarter Fiscal Year 2014 Earnings Call. For today's call, I will cover our overall financial results, and then I will hand the call over to our President and CEO, Ramesh Srinivasan, who will add some further commentary on the business, before we open it up for questions.

First, let me review our Safe Harbor language. Today's call and simultaneous webcast contain forward-looking statements that involve certain risks, uncertainties and assumptions regarding Bally, our planned acquisition of SHFL entertainment 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. We do not intend and undertake no obligation to update our forward-looking statements, including those related to forecasts of future performance, the potential for growth of existing markets or the opening of new markets for our products, future prospects and proposed new products and our planned acquisition of SHFL entertainment.

More information on many of the various risks and uncertainties that may affect our business and financial results or may cause us not to achieve our forecasts are included in our annual report on Form 10-K for the year ended June 30, 2013, and other public filings we make 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 only speak to this date, October 30, 2013.

Today's call and webcast may include certain non-GAAP financial measures within the meaning of Regulation G. A reconciliation of all such non-GAAP financial measures to the most directly comparable financial measure, calculated and presented in accordance with GAAP, can be found in today's earnings release.

Today, we reported record financial results for the first quarter ended September 30, 2013, marking our ninth consecutive quarter of year-over-year earnings per share growth. Revenues set a first quarter record of $249 million, up 6% over last year, driven by all-time quarterly record Systems revenues of $76.1 million, up 48% over last year, which helped drive revenues from recurring sources to an all-time high, and which represented 57% of total revenues.

Earnings per share also set an all-time quarterly record of $0.97, up 26% over last year. Earnings per share, when adjusted for unusual items, was $0.96 per share.

On the game sales. Revenues from game sales were $71.3 million for the quarter, down 14% from $82.7 million in the prior year, primarily driven by the absence of Canadian VLT sales, which amounted to 670 units in the first quarter of last year. We sold 3,995 new units during the quarter, including 3,213 units in North America, of which 2,182 were replacement units and 456 were Illinois VGT units.

International units in revenue were down largely as a result of continued importation restrictions in Argentina, which were partially offset by increased sales into Mexico. While international game sales improved by 5% to 782 units versus last year, they did not meet our internal expectations.

Average selling price or ASP for the quarter was $16,307, up slightly from last quarter. Our ASP continued to be impacted by shipments of lower ASP Illinois VGT units and the mix of international sales during the quarter to lower ASP jurisdictions such as Mexico.

Our domestic ASP, excluding Illinois VGT units, was up 2% versus last quarter.

Gaming Equipment margins increased to 50% versus 47% last year, driven by benefits from ongoing supply chain initiatives in our Pro Series line of cabinets and product mix.

Revenues from our Gaming Operations set a first quarter record of $101.9 million, up slightly from $101.2 million in the comparable period last year, principally as a result of a first quarter record for WAP revenue and continuing strong results from lottery systems, driven by the New York Lottery market.

Our Cash Connection link ended the quarter with 1,769 units, up 91 units from last quarter. Centrally determined system unit count declined by 1,573 units, driven primarily by the removal of certain license fees in Mexico.

The margin on Gaming Operations was 70%, up from 69% in the comparable period last year and within our expected range at 68% to 73%.

Onto Systems. Systems revenue set a third consecutive all-time quarterly record of $76.1 million, up 48% from $51.3 million in the comparable period last year and slightly ahead of our expectations. Maintenance revenues for the quarter were a record $25.1 million, up 21% from $20.7 million in the comparable period last year, which puts maintenance revenues on an annualized run rate at over $100 million.

The margin on Systems revenue was 75% for the quarter, down from 77% last year, driven primarily by a higher mix of hardware revenues generated during the quarter. Given the continued growth of maintenance revenues, we now expect annual Systems gross margin will approximate 75% for the full year.

The effective income tax rate for the quarter was 30%, which reflects a onetime benefit of $3.6 million or $0.09 per diluted share, resulting from settlement with the IRS regarding an audit of our federal tax returns for fiscal years 2006 through 2009.

Free cash flow, defined as operating cash flows less capital expenditures, was $49.3 million this quarter as compared with $33.5 million in the prior comparable period.

Our DSOs remained at 106 days, unchanged from last year, continuing to reflect our prudent use of financing terms.

During the quarter, we incurred $5.2 million of costs associated with the planned acquisition of SHFL entertainment. Excluding these acquisition-related costs, our operating margin was 25%, marking the highest quarterly level in over 3 years.

In preparation for the planned acquisition of SHFL entertainment, we successfully amended our existing credit facility, and we syndicated a $1.1 billion new Term Loan B with an all-in yield of 4 3/8%. Proceeds from the new Term Loan B and excess capacity on our $700 million revolving credit facility will be used to fund the planned acquisition. As of September 30, 2013, we had $195 million drawn on our revolving credit facility.

Finally, we completed the accelerated share repurchase program, announced on April 24, in late September, and received an additional 27,344 shares as final settlement.

Now with that, I'll turn the call over to Ramesh for some further commentary on our business and details on the quarter. Ramesh?

Ramesh Srinivasan

Thank you, Neil. The first quarter of fiscal 2014 was another record quarter for Bally in several different ways, driven by strong performance across all our business areas, particularly Systems and Gaming Operations. We've been working hard as always, making very good progress on our operational goals and with our integration planning efforts for the planned SHFL entertainment acquisition, all while having a very successful and well-received G2E show.

We had yet another strong quarter in Gaming Operations, driven by a first quarter record for WAP revenues and continued strong results from the New York Lottery. What remains a strategic priority for us as we showcased 7 new WAP titles at the recent G2E show versus 3 new WAP titles at last year's G2E. Two of our new titles from the show, Michael Jackson Wanna Be Startin' Somethin' and Jackpot Empire, were released during the first quarter. Two of our new marquee brands showcased at G2E, James Cameron's TITANIC and The Magic of David Copperfield, as well as the sequel Grease Pink Ladies, will be released starting in the spring of 2014.

Based on our current release schedule, we do not anticipate our WAP footprint to grow during the second quarter. However, we do expect the growth in our WAP install base to pick up again during the second half of this fiscal year. We received very positive feedback from our customers at G2E on our new WAP brands, as well as several of our premium rental and daily fee brands, including ZZ Top Live from Texas, Roll the Bones, Quick Hit Cash Wheel, and Monte Carlo.

With this tick of game equipment sales, we showcased over 100 new titles, featuring over 10 new play mechanics at G2E 2013. Clearly, the most excitement at G2E this year around game sales was about the new Pro Wave cabinet. The Pro Wave cabinet, which will begin shipping in early calendar 2014, features an industry-first concave, 40-inch touch screen display, that can support virtually all of our existing ALPHA 2 Pro V32 and Pro V22/22 game content.

Apart from being one more industry-first innovation masterpiece, along the lines of iDeck, Pro Curve and iVIEW DM, the fact that such a groundbreaking cabinet also comes with such an array of successful game content on day 1 may also be an industry first.

For the third consecutive quarter, Systems revenue and gross margin both set quarterly records, driven in part by record maintenance and services revenue levels. We continue to expect to establish a new annual revenue record for Systems in fiscal 2014, with revenue expected to grow by at least 10% over fiscal 2013, which was itself a record year.

One of the most exciting customer interest stories around Systems from this year's G2E was the introduction of the Super Slotline product. This technology, which is currently in free trials on casino floors, drastically reduces the cost of upgrading to a modern, high-speed floor, thereby enabling existing lower-speed floors to better utilize certain of our Elite Bonusing Suite marketing tools through iVIEW and iVIEW DM.

Please note that several of our floor-wide Elite Bonusing Suite marketing tools do work well even on the older serial floors. But some of them, like Virtual Racing and DM Tournaments, do require high-speed floors. The Super Slotline innovative technology enables such tools to run on the older floors as well.

On the interactive front, we continue to expand our presence on wager-based portals in Europe and have improved our remote gaming server technology by leaps and bounds since our initial launch a few months ago. Both as a content provider and as a technology provider, we are very well positioned to capitalize on online opportunities in the U.S. and look forward to our first wager-based customers going live, utilizing our iGaming platform in the U.S., in New Jersey and Nevada, later this fiscal year.

We continue to make very good progress with the integration of our iGaming and mobile platforms, with our back-end core systems, getting ourselves ready for the future, where a single view of the player across all channels is going to be a crucial differentiating factor for many of our customers.

We are making significant progress towards completing the planned acquisition of SHFL entertainment. In August, we successfully syndicated a new Term Loan B to fund the acquisition. And on October 16, SHFL filed a definitive proxy with the SEC, setting a November 19 shareholder meeting. At the time of that filing, we have obtained gaming approval in 14 of the approximately 20 key gaming jurisdictions required for closing. With all the hard work undertaken during the quarter by both companies and the cooperation of all the gaming regulatory authorities involved, we now anticipate closing the transaction before the end of calendar year 2013. Of course, this is subject to the approval by SHFL shareholders and gaming regulatory authorities, as well as other customary closing conditions.

From an integration planning standpoint, we've made significant progress since our last earnings call. Members from all departments at both companies across the globe are meeting on a regular basis to determine best integration approaches and a comprehensive integration plan, which will help us hit the ground running immediately upon closing. This will enable us to continue to effectively service all of our customers and more products and processes forward without skipping a beat.

On Monday, we announced that Kevin Verner, our Lead Independent Director and former Chairman, stepped off the Board to assume the day-to-day leadership of this important integration process. Kevin playing this important integration leadership role also frees up both of the current executive teams to continue their focus on our core businesses.

I'd like to personally thank all the hard-working professionals at both SHFL and Bally who are tirelessly dedicating a significant amount of extra time towards ensuring the successful integration of our 2 innovative and growing companies.

Our first quarter results came in slightly ahead of our expectations, largely as a result of Systems gross margin contributions. As a result, we now expect that quarterly diluted EPS will be more equally weighted for the remainder of fiscal 2014. We are raising the bottom end of our guidance by $0.10, and the top end by $0.05, for an overall diluted EPS range for fiscal 2014 of $3.80 -- 8-0 -- $3.80 to $4.10. As a reminder, this guidance is for Bally only and does not include or reflect any impact of the pending acquisition of SHFL entertainment, or any acquisition-related costs or savings, and does not include the $0.09 related to the favorable tax settlement with the IRS during the first quarter of fiscal 2014.

Now having said all that, let me quickly summarize our current business status before we hand the call back over for questions. One, we are very pleased with our strong first quarter results and the current state of the company on both absolute strength and on a relative competitive strength basis. Establishing all time quarterly records during our first fiscal quarter, which has traditionally been our seasonally weakest quarter, shows our increasing broad-based product strength. This will only become even better with the upcoming SHFL acquisition.

Two, our teams continue to manage cost effectively without sacrificing growth and innovation. Excluding acquisition-related costs, our operating margin during the quarter exceeded 25% for the first time in over 3 years.

Three, our Systems competitive strength continues to increase with every passing quarter, with what we believe is more than half the Systems revenue share every quarter this calendar year, meaning our current Systems revenue levels are more than our major competitors combined. This created a virtual cycle of an increasing customer base and maintenance revenues, corresponding consistent increases in R&D spend and investments in services and support personnel and technology, thereby, increasing that competitive gap even further at a steady rate.

Four, with more new products coming to market based on brands, which are fit for our target demographics, and utilizing proven math models, we are confident that our Gaming Operations business is well positioned to see meaningful growth resume before the end of FY '14.

Five, the new Pro Wave hardware cabinet reinforces our position as a thought and innovation leader and provides a promising catalyst for game sales. Our focus will continue to be on both hardware and software innovation, including game mechanics and game math, driven by a growing diversity of game studios' talent all across the world.

Six, we continue to measure customer satisfaction levels consistently, and they remain at very high levels on both the Game Services and Systems Services fronts. Great products backed by world-class service, driven by our hard-working winning teams, will continue to keep us in the discussion as the top technology provider in the gaming industry.

And last but not the least, seven, the SHFL acquisition integration planning process continues to make terrific progress. The Bally and SHFL management teams are working closely together with the shared mission of excellent integration of 2 dynamic industry leaders. We are confident this merger will meet and exceed all our 3 defined success factors.

On behalf of the entire Bally team, I thank all of you and our customers and partners for the continued support and guidance.

Now Denise, let's please open up the line for some questions.

Question-and-Answer Session

Operator

[Operator Instructions] The first question will come from Joe Greff of JPMorgan.

Joseph Greff - JP Morgan Chase & Co, Research Division

Ramesh, I have a question first on the Pro Wave product. Obviously, the feedback we've been hearing from your customers has been positive on the product. Can you talk about a little bit about the feedback on your ASP? And given where you think ASPs will be for this product, can you talk about how that might have an impact on gross margins, i.e. can the impact of Pro Wave on gross margins be neutral or will it take a while to kind of ramp up to be neutral or accretive to gross margins on Gaming Equipment?

Ramesh Srinivasan

Thank you for joining the call. Yes, Joe, the customer feedback for the Pro Wave product has been very encouraging. And starting from Q3, that is the March quarter, we should see a significant game sales of this Pro Wave product. This product does involve much more sophisticated technology than the other hardware cabinets we have, and therefore, does command a higher price. But I don't foresee this product having a major impact on the average ASP across games, across the domestic and international, to affect any of our models in a great way. This Pro Wave will help keep the ASP at current levels and probably slightly higher, but I wouldn't think of that as a big contributing factor to ASP of game sales.

Neil P. Davidson

On margins, I'd say, Joe, if you remember when we introduced the Pro Curve a while back, it initially took a slight hit on our margins. We don't actually expect that with the Pro Wave, but I don't think it's going to be accretive, probably, for at least the first 12 months. The 40-inch concave screen is an industry first. Sometimes that innovation comes at a little bit of a cost. But again, customers have a high interest in it, and it will come at a little higher ASP.

Joseph Greff - JP Morgan Chase & Co, Research Division

Got you. And just to clarify a comment you made earlier, Ramesh, about the wide area, progressive install base and not having growth in the fiscal 2Q, do you mean flat or do you mean it will go down sequentially before picking up in the second half? And that's all for me.

Ramesh Srinivasan

Yes, I mean flat to slow growth, Joe. I don't mean a decline at all. I think it will remain -- and it's an actual progression. We had terrific success with Michael Jackson and Grease a couple of quarters back. The numbers were really growing up. And now, we are kind of retooling, and the next wave of WAP releases are getting ready. So I would expect it to be a bit flat, but not go down, and then pick up again in the subsequent quarters.

Operator

Our next question will come from Steve Wieczynski of Stifel.

Steven M. Wieczynski - Stifel, Nicolaus & Co., Inc., Research Division

So on the international side in terms of game sales, I think, Neil -- it's either Neil or Ramesh -- you said that the international component didn't meet your expectations. I guess, maybe could you go into a little bit more detail in terms of that commentary? And what's the plan of attack at this point to try to improve that?

Ramesh Srinivasan

Steve, international game sales, even though it was -- year-over-year on a quarterly basis, it was higher. It's still not where we want it to be. And over the last year, 1.5 years or so, we've been working very hard in terms of broad-basing our game content, making sure that we produce the kind of content that works well in certain specific international areas and also work well globally. And that effort that has been going on for some time now is beginning to bear fruit. We are hearing more and more anecdotal instances of our games performing better in various international jurisdictions that we have not had before, and that is very encouraging. But we are not yet there. At the moment, it is not fulfilling our expectations. But the content is getting better and better, better suited to international locations, and we are on our way -- we are well on our way towards improving our international numbers.

Neil P. Davidson

Yes, I would say we have to import a few additional games into Argentina during the quarter to get a few more sales there, so that hasn't transpired like we had hoped for. So overall, we're working on international. And don't forget, we've got an acquisition coming up here that part of -- one of our heavy interests with respect to that was the international footprint.

Steven M. Wieczynski - Stifel, Nicolaus & Co., Inc., Research Division

Yes, okay. And then the second question, I'm not sure you're going to answer this, but in terms of Shuffle Master and the deal being within now 2 months of closing, any updated thoughts on your synergy guidance that's currently out there?

Neil P. Davidson

Well, I mean, so first, you probably saw the news that we're expecting to close before calendar year end, really excited about that. And more importantly, that saves us -- compared to closing at June 30, that saves us about $18 million in ticking fees related to our debt. So that's pretty exciting. We still expect to see accretion within the first 12 months at close.

Ramesh Srinivasan

And, Steve, the integration planning, of course, are going extraordinarily well. Both the teams are working through the planning process extremely well. In terms of synergies, like we said before, at least $30 million, and there's -- what we have seen so far is very encouraging, and I think this acquisition is going to work out very, very well for both sets of employees and both companies as well. So, so far, all indications are very encouraging, Steve, in terms of how well this acquisition is going to work out. We are getting ourselves really ready to hit the ground running as soon as the closing happens.

Steven M. Wieczynski - Stifel, Nicolaus & Co., Inc., Research Division

So it sounds like the $30 million is extremely, extremely conservative, if I hear you right?

Neil P. Davidson

I would say, day 1, we said at least $30 million, and we continue to expect at least $30 million.

Operator

Our next question will come from David Bain of Sterne Agee.

David Bain - Sterne Agee & Leach Inc., Research Division

Just first, a follow-up on Joe's question on the 2Q WAP install comment. What about yield, as Grease is slightly turning ASPS for a higher yield? MJ, too. I had a Grease, too, Copperfield, TITANIC. Any comments on what we should look for in terms of yield?

Ramesh Srinivasan

I think, David -- well, thanks for joining the call. I think yield will continue to improve the last 2 WAP releases we have out there. The latest Michael Jackson and Jackpot Empire are definitely doing very well. So we are positive as far as the yield improvements in the future go.

David Bain - Sterne Agee & Leach Inc., Research Division

Okay. And then, kind of a follow-up on Steve's question, I guess, on the SHFL acquisition. I suppose you'll be providing maybe some more detail or guidance in the December quarter, just given the early close date. And any comments off of the synergies, so maybe more towards SHFL as you look at consensus maybe? Or how they're positioned relative to what you've learned and maybe even looking at the major openings in 2015 in Asia and beyond? How that positions you when you include SHFL into the Bally team?

Ramesh Srinivasan

You should stay a little bit patient, David. During our December quarter earnings, sometime early February, we'll give you a lot more details about how we think about the joint company, SHFL and Bally together. We will whet your appetite completely during that earnings call. Sometime, early February, we should know a lot more by then.

David Bain - Sterne Agee & Leach Inc., Research Division

I'm going to break the rule one more. Big picture, you mentioned G2E in your intro a few more times. Did you see anything at G2E that caused you to pivot or change your thought process for the strategy for the next few years, or from competitors or from customers, either their preview for the show or during the show?

Ramesh Srinivasan

Nothing drastic, David. But it was -- I mean, this year, G2E, I would say, was a reminder to us to keep our foot on the innovation pedal. But all -- I think all the gaming vendors are getting better. And you can see that everyone is innovating at a faster pace than before. And our score card with innovation, when you look at all the awards and this and that, we're obviously doing very well for the last few years. It was a reminder to us, we need to keep our innovation speed and focus up. And we've definitely been ahead of that curve for the last 2 or 3 years at least. So I would say there is one thought that came out of G2E, this is to make sure we keep our R&D investments, innovation speed and the greatness of our products growing at an even more rapid rate than before. I would say that was the single biggest reminder for me.

Operator

Our next question will come from Carlo Santarelli of Deutsche Bank.

Carlo Santarelli - Deutsche Bank AG, Research Division

Two-part question. First on the Illinois units in the quarter. Obviously, you guys called out what you shipped in the quarter. Do you guys see that as being the market size or the aggregate amount of shipments in the quarter and that market being down a little bit? Or is there some increased competitive pressures coming from maybe the DWMS entering the markets?

Neil P. Davidson

Haven't seen really increased competitive pressures, I'd say, this quarter, in particular. Most of our unit shipments just kind of followed the approvals by the gaming board there. So we did have -- in Q4, there were a lot of approvals. In fact, recently, there were a lot of approvals, so I would expect Q2 to be equal to or greater than Q1. But nothing -- no competitive pressure there. We're still getting our more than fair share of the market.

Carlo Santarelli - Deutsche Bank AG, Research Division

Understood, Neil. And then just onto the game ops segment. I mean, if you look at just the install bases of your WAP footprint, obviously, in your centrally determined footprint as well, you're seeing year-over-year about 12% growth in WAPs and centrally determined is down about 14%, yet we're seeing basically static year-over-year revenues despite that changing mix. Would you guys be able to comment maybe a little bit on what you're seeing on apples-to-apples product and yields maybe within the specific segments?

Neil P. Davidson

That's a pretty complex question. I mean, when you think about our centrally determined, those are single-dollar day units. You're right, some of those have been coming out when you look at the overall yields. I think if you calculate revenue over total units, it's actually up about a quarter over Q4, so sequential quarter. Bu, again, most of that has to do with mix between the different segments, whether it be lottery, whether it be centrally determined. With wide-area progressives, just based on what was going out -- as you recall this quarter, NASCAR was actually a contributor to our overall install base. We said NASCAR was a good game. It just didn't get mass appeal, so it did have a touch of an impact on our overall revenue per day in the WAP arena. But I would say when you look at same-store, same-games, it wasn't really a dramatic movement there.

Carlo Santarelli - Deutsche Bank AG, Research Division

Yes, that's more what I was referring to. And just in terms of what you're seeing out there in the environment on a same-store basis, I guess, from your games, just based on what we're seeing obviously in regional trends, trying to get a sense if you guys have seen a large impact from that or not.

Ramesh Srinivasan

Carlo, in terms of the effect of the economy, I wish it was better. I really wish that discretionary spending was helped by the state of the economy, and Washington sorted out its issues quicker. But I mean, that is a wish, right? So that does have a slightly negative effect on that. And that analysis is complex, the yield analysis, because product mix also has an effect on that. Sometimes a product that is coming out and a product that is going in to replace the same cabinet, the product that is going is doing better. So that's kind of making up for part of the economy effect as well. So it's a pretty complex analysis, but in terms of regional trends, if the economy improves, it will definitely have a positive effect on the yield.

Neil P. Davidson

And I do want to add one quick other statement that, we have products like Jackpot Empire, Hot Shot Dual Wheel, Cash Spin Jackpot, that have done tremendously well. So we've got a couple of products that have done well with recent releases. NASCAR took the overall yield down a touch.

Operator

Our next question will come from Steven Kent of Goldman Sachs.

Steven E. Kent - Goldman Sachs Group Inc., Research Division

Maybe you could just talk a little bit about the product sales and the average selling price. I'm sorry if you've already discussed this. But I know there's some mix change there, but earlier this year, we heard about more competition. And I just wanted to understand that a little bit better.

Ramesh Srinivasan

Steve, in terms -- when you look at the game sales ASP, if you ignore the minor changes of a few hundred dollars here and there, our domestic ASP has been more or less holding up the way it was before. And we've been very disciplined with our pricing, and you know that domestic replacement for us is only like 10%, 11% of our typical quarterly gross profit because of our broad-based product strength. And so, that affords us a little bit of room to maintain price discipline. So ASPs are kind of held steady for us. If you ignore the Illinois and Canada VLT effects, the presence of or absence of those effects. Our domestic ASP is held up on a pretty consistent level. And internationally, ASP is down because we shipped a lot more to Mexico this quarter. So if you remove all those particular regional and product efforts -- product effects, our ASP has held very steady across the quarters.

Operator

[Operator Instructions] Our next question will come from Todd Eilers of Eilers Research.

Todd Eilers - Eilers Research, LLC

Had 2 questions. First was a follow-up on international sales. While it didn't quite meet your expectations, I think you did mention a couple of times, healthy shipments into the Mexico market. I was wondering if you could maybe talk a little bit about your expectations going forward. We've seen some news articles regarding some potential regulatory changes in that market. Will that have any sort of impact on you guys? And if so, kind of what should we be looking for, for the remainder of the year?

Neil P. Davidson

We don't believe that's going to have an impact on us. Most of the regulatory changes that are going on down there are more around skill-based games, and really attacking, for lack of a better term, some gray area convenience store, single-machine places that I think the regulators want to toss out. So we don't expect that really to have an impact on us.

Todd Eilers - Eilers Research, LLC

Okay, great. And then just my second question was regarding the gaming ops install base. Obviously, you guys mentioned that you guided WAP to be -- unit installed to be flat to slightly up, I guess, for the next quarter, with growth in the second half from new game launches. But I'm wondering if you could maybe comment a little bit about the rental and daily fee install base. Looks like that declined again this quarter on a sequential basis. How should we look at that bucket of games going forward? What's sort of -- I know it's a big bucket. You've got some true premium games there and you probably got some games that you wouldn't necessarily call premium, but to the extent you can kind of comment on what sort of games are getting removed and how we should look at that going forward might be helpful as well.

Neil P. Davidson

I'd say the biggest drop wasn't necessarily removals; it was more some convert to sales of nonpremium games. So we've had a couple of customers that have requested to buy out some of our nonpremium games. With respect to our premium footprint, it still remains healthy. We've actually got a number of releases slated up over the next couple of months.

Ramesh Srinivasan

So as a general rule, Todd, our investments in that area, in terms of R&D and product releases, and the rate at which products are going to come out, both for the rental daily fee segment and the WAP segment, are both going to be much more during the coming few quarters compared to the corresponding quarters 1 year or 2 ago. So our R&D investments in this area is increasing, and you're going to see a lot more games come out that help us grow both the WAP and the rental daily fee segments going forward. And lottery continues to do very well for us.

Neil P. Davidson

Yes. I think Pawn Stars has reached about 1 year old. You have Cash Wheel quick kits style game going out on that, which customers have really been asking for. So there's a lot to come in our premium footprint.

Operator

Ladies and gentlemen, that will conclude our question-and-answer session. I would like to turn the conference back over to Mr. Ramesh Srinivasan for his closing remarks.

Ramesh Srinivasan

Thank you, Denise. A great job managing the call, very well done. And again, thank you, everyone, for your interest in Bally. We look forward to our next earnings call sometime early February. Thank you, all, for your guidance and support. Talk soon. Thank you.

Operator

Ladies and gentlemen, the conference has now concluded. We thank you for attending today's presentation. You may now disconnect your lines.

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