International Game Technology's CEO Discusses F2Q 2014 Results - Earnings Call Transcript

Apr.22.14 | About: International Game (IGT)

International Game Technology (NYSE:IGT)

F2Q 2014 Results Earnings Conference Call

April 22, 2014 05:00 PM ET

Executives

Kate Pearlman - VP of IR and Treasury

Patti Hart - Chief Executive Officer

John Vandemore - Chief Financial Officer

Analysts

Steve Wieczynski - Stifel

Carlo Santarelli - Deutsche Bank

Steven Kent - Goldman Sachs

Joe Greff - JP Morgan

Felicia Hendrix - Barclays

Cameron McKnight - Wells Fargo

Robin Farley - UBS

Todd Eilers - Eilers Research

Thomas Andrews - BMO Capital Markets

Operator

Welcome to International Game Technology’s Second Quarter Fiscal Year 2014 Results Conference Call. All lines are in a listen-only mode, until the question-and-answer segment of today’s call. This call is being recorded. If anyone has any objections, you may disconnect at this time.

I would now like to turn the call over to Kate Pearlman, Vice President of Investor Relations and Treasury. Thank you. You may begin.

Kate Pearlman

Thank you, Kim. Good afternoon, and welcome to IGT’s second quarter fiscal year 2014 earnings conference call. Leading our call today will be Patti Hart, our Chief Executive Officer; and John Vandemore, our Chief Financial Officer.

Before we begin, I’d like to remind listeners that our discussion today will contain forward-looking statements. Actual results may differ materially from the results predicted and reported results should not be considered as indicative of future performance.

Potential risks and uncertainties that could cause our business and financial results to differ materially from our forward-looking statements are included in our filings with the SEC, including our most recent annual report on Form 10-K and our most recent quarterly report on Form 10-Q.

All information discussed on this call is as of today, April 22, 2014 and IGT does not intend and undertakes no obligation to update this information to reflect future events or circumstances.

In addition, on today’s call, we discuss certain non-GAAP financial measures. Reconciliations of these non-GAAP measures to the GAAP measures we consider most comparable can be found in today’s earnings release. Finally all references to 2014, refer to our fiscal year 2014.

Now I will turn the call over IGT’s Chief Executive Officer, Patti Hart.

Patti Hart

Thank you Kate and thanks to our listeners for joining us today. As we announced on March 25th, we’ve taken some decisive steps in the quarter to adjust our cost structure and position IGT for long term earnings growth. These actions are now behind us and we expect them to result in cost savings as we indicated earlier of $30 million in the current fiscal year and an estimated $50 million on an annual run rate basis.

When I look back at the quarter, there is a couple of areas that I just like to focus on with you today, the first is around our MegaJackpots business. A number of areas of progress for us in the MegaJackpots business. The first and foremost as we announced earlier is the renewal and expansion of our Wheel of Fortune global licensing arrangement with Sony. this really does allow us to take Wheel of Fortune brand to new geographies and to new platforms, so we do expect that you will be able to see Wheel of Fortune in the DoubleDown casino by year end.

So the Wheel of Fortune which is the undisputed most successful product ever in the history of gaming and our here at IGT, one of our most valuable assets now leveraging it across new platforms and into new geographies.

The second area is PowerBucks, we announced PowerBucks at G3 last fall, it’s now live. We are launching with [Scissors & Blade] as our partners. And we have gone live in both New Jersey and South Dakota and expect Nevada and Canada to come online by the end of the fiscal year. Our first launch of PowerBucks is a LAN based only, multijurisdictional link as many of you know and we will grow to include online, to expand the liquidity, to enhance jackpots over time.

And then the third area for MegaJackpots is our Avatar product. We had great expectations for Avatar when we launched it last fall at G3, but it in fact continued to outperform our expectations and is actually surpassing our Wheel of Fortune performance in about 40% of the locations where both Avatar and Wheel of Fortune exist. We have taken Avatar now global as well and have seen positive momentum with new placements of Avatar in Mexico during the quarter.

And then as we expect our wider progressive machines to do their part on the Avatar swap machine last week as we paid a $2.6 million jackpot at the downstream casino in Oklahoma. So, it’s really pulling its way for us in our wide area progressive line up.

And then the fourth area for MegaJackpot is our Crystal Core Cabinet. We introduced the Crystal Core Cabinet at G2E last year. it will actually be our second Avatar game and we have expectations for that game similar to the first game that is now ready for the market. So, our second Avatar title will also make its way in the coming months into the market on a new hardware platform.

The second area which is an area we don’t talk about a lot, but is an area that we have long participated in as our Class 2 business. This is a part of our business that is right and prime for an upgrade at this particularly time. So, we expect in the next quarter to release a number of new titles into the U.S. Class 2 market. And we also are leveraging our Class 2 work into the international market. So, in South Africa we expect to see good growth in the Class 2 market as we estimate in the next 18 months there will be about 2,000 new electronic Bingo terminals that will come online and with our history of performance we believe we are positioned to secure 50% of that growth in South Africa. So very good leverage of our historic success in the U.S. into South Africa.

The next area is our international systems business. We introduced our cloud product a couple of years ago. We have slowly methodically been growing that business. In the quarter, we deployed the cloud products in the UK to the Aspers’ entire estate. And we expect that to grow within our casino estate which is now three casinos are on our cloud product, we’ll extend to 10 in the next coming quarters as well. So, the cloud products slow methodical road as we had planned, but growth nonetheless.

In furthering our systems really taking our advantage systems infrastructure and repurposing it for the club environment in Australia and New Zealand, so we have completed the first installation of that system, the advantage club system in the Queensland market and expect over the remainder of ‘14 and into ‘15 to see additional growth and installations for this club focused product as well.

And then lastly in the international systems area is our work with Sogo in South Africa. Sogo had committed and we are working with them to install our advantage smart product across their mega casino properties in three locations. We will replace the Winter Craft systems that are currently in place, they’re now working with Sogo to take us from our commitment into implementation. So, a very good progress I think in taking our history and our success in the systems business to international market.

And then lastly is our DoubleDown business, which we’re very proud of. Continue to see it outpacing our expectations as well. Revenues in DoubleDown increased 27% year-on-year with growth in our daily active users to 1.8 million and our booking per daily active users to $0.43. So, we have always from the beginning of time settled down and focus on converting players to payers. And I think it’s evidenced in both our growth and the sustainable profitability associated with that growth.

And on the personnel front at DoubleDown, as you all saw yesterday we announced the addition of Will Dougherty who will join us as a General Manager at DoubleDown and we're very excited to have Will joining our executive team. He brings a wealth of operating experience from Amazon, Expedia, AT&T and McKinsey. He will really bring much knowledge and some best practices and experience to the entire executive team.

Now I want to take a minute to thank John for his leadership. John led the DoubleDown organization through its transition from a founder led organization to today’s management team, which is now in place and equipped to take DoubleDown to the next level. So, as Will joins us, John will redirect his energy to the work necessary to deliver on our promise and of expanded earnings growth for our shareholders.

So with that I’ll turn the call over to John.

John Vandemore

Thank you, Patti. I’ll start with gaming operations. As we mentioned in our call last month, gross gaming revenues continued to negatively impact our yields while for the quarter our yields were $47, a 5% year-over-year decrease. However, yields did increase sequentially inline with seasonal trends. Our installed base declined sequentially by approximately 900 units due largely to declines in MegaJackpots.

Combined these lower yields and a lower installed base resulted in a 9% year-over-year decrease in revenues. However gross margins remained relatively flat at 61%. We continue to expect gaming operations gross margins for the full year to be consistent with last year.

Capital expenditures decreased year-over-year and sequentially to $15 million. We expect an increase in third and fourth quarter capital expenditures due to the upcoming launch of our Crystal Core Cabinet. However, capital expenditures for the full year are still expected to be lower than last year.

We are optimistic about the potential impact of our new Crystal Core Cabinet and our recently announced PowerBucks, multi-state jackpot. And we’re excited about our product line up, including exciting titles like the recently released Jurassic Park and [Fast Kid Progress], a game in our value oriented game changer category, engaging players with its quickest community progressive jackpots. Overall, we remain focused on managing the gaming operations business for the highest possible returns and cash flow.

Turning to product sales, where we faced a difficult comp from last year, due to the sale of Canadian units. Total revenues decreased 27% year-over-year, driven by a decline in North American replacement sales. As a reminder, there were about 3,500 Canadian replacement units in the second quarter of 2013.

Also, as discussed on last month’s call, we are facing headwinds in our international product sales business. International revenues there declined 25%, as importation restrictions in Argentina and soft demand in a few other markets hindered our progress.

Our average sales price improved $600 due to the impact of a mix shift to higher price units in the quarter. And gross margins were essentially flat year-over-year at 51%. Several of our recent titles performing well in the market including Prowling Panther; a high volatility game designed for the gamblers and Jade Fortune, a new Asian theme game. We’re also excited about launches in the third quarter including Winner’s Choice, a game that allows players to engage multiple, well-known IGT titles at once; and Hot Roll Double Gold, the first introduction of a very successful Hot Roll series with a high denom mechanical wheel player.

Turning to interactive, as Patti mentioned, DoubleDown continued to impress with increased revenues of 27% year-over-year and increased 6% sequentially driven by a 20% increase in mobile bookings. Just to reiterate as we mentioned before, our EBITDA margins at DoubleDown when adjusted for acquisition-related charges remained consistent with our consolidated EBITDA margins. And we expect DoubleDown revenues to continue to increase for the full year about 20% as previously mentioned as we improve the customer experience, continue to draw our mobile offerings and revenues and continue to launch engaging IGT content on our site.

At IGTi revenues declined 11% year-over-year due to the discontinuation of Barcrest title in late 2013. However revenues increased 12% sequentially due to higher bookings in the international markets and the inclusion of New Jersey and Canada.

Turning now to operating expenses, adjusted operating expenses increased 4% year-over-year to $188 million due to largely increases in DoubleDown player marketing expenses of $5 million and bad debt expense in our international business of about $3 million.

Our quarterly tax rate was elevated at 39.5% due to the adverse impact of the pace of devaluation in Argentina. Looking forward, we expect our effective tax rate to hover around 35% for the remainder of the year.

On the balance sheet, quarter-end cash and short term investments inclusive of restricted amounts totaled $432 million. Operating cash flow totaled $43 million before including the prepayment of royalties Sony of $185 million.

As Patti mentioned, this payment reflects a priority use of our capital to acquire intellectual property, in this case safeguarding the world’s foremost brand in (inaudible) for the next decade and expanding use of the brand Wheel of Fortune and Jeopardy! to social and online real money wagering in the United States.

In the quarter, we returned $27 million to shareholders directly in the form of dividends. And as a reminder, on May 1st, we will redeem our $850 million outstanding convertible debt through a combination of proceeds from the bond issuance last year and borrowings under our revolving credit facility.

We remain committed to disciplined capital deployment and delivering accretive returns to our shareholders. Finally as it relates to guidance, we are affirming our adjusted earnings per share guidance for 2014 of $1 to $1.10 per share.

With that I will turn it back to Patti.

Patti Hart

Thanks John. And as you all can see, we are executing on many levels, a lot of balls in the air at IGT, and just want to take a minute to remind you of the areas of focus that we have been -- that have been for 2014 for us. The first is about content, because our business at the end of the day is a content business. And as you can see in the past quarter, we secured and renewed the Sony license, Wheel of Fortune being the most critical member of our content portfolio along with the action gaming poker relationship. Also very critical component of our business is our relationship with action gaming over the years.

Our second Avatar which will come to market, certainly there are tens, dozens of other games coming to market, but the second Avatar game also will come to market and then we recently announced that we have secured access to the tokidoki lifestyle brand, which before it came to me, I didn’t know what it was either. But really we are taking time to really look at it and understand that it has a bit of a cult following in the Asian marketplace. We think it will do well in Asia and it will make itself to other markets as well. So we’re very excited about our work with the tokidoki brand portfolio.

Our second area is all around distribution so we’re pushing our products to multiple platforms and new geographies with a particular focus in DoubleDown on mobile which is experiencing significant growth currently. And then lastly it’s all around shareholder value which was a key driver and our decision to reduce our cost structure and so now we feel like we have this company positioned for long-term earnings expansion and we really thank you for your support as we work hard within the walls of IGT to make our company stronger for our employees for our customers and to you, our shareholders. And we’d love to take your questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session of today’s call. (Operator Instructions). Thank you. And our first question comes from Steve Wieczynski with Stifel.

Steve Wieczynski - Stifel

Good afternoon guys. So on the gaming up side of things with your yields continuing to be pressured. Can you help us understand how you’re thinking about yields for the rest of the year and how that incorporates into your guidance? And I assume you guys are still thinking that those will be down through the next two quarters?

John Vandemore

Yes. I mean we’re working vigorously to protect yields at all cost and as we mentioned today we have titles for a lot of the product introductions about to hit the market or already on the market to starting to terminate. I would say our expectation for the full year continues to be the full year decline in yields we have certainly experienced that over the first two quarters. We’re optimistic about what Qs 3 and 4 will hold but net-net it equates to a full year yield decline in kind of that mid single-digit level.

Steve Wieczynski - Stifel

Okay. And then on the product sales, John I guess when you look at the non-gaming, the non-machine sales in the quarter that seem to be pretty high, can you help us understand what drove that and how you guys see that for the rest of the year as well?

John Vandemore

Yes, probably a little bit higher this year quarter than we would expect we had an IP settlement that timed in a little bit earlier than we had anticipated. So about half of that increase is IP, the remainder is parts and conversion, which is a bit of a temporal spend depending on when operators choose to put their parts moneys to work, but definitely good result in the non-box category.

Steve Wieczynski - Stifel

Should we expect that to come down a little bit in back half there?

John Vandemore

It’s expected to normalize runrate levels for probably, on average last four quarters will be a good role done.

Steve Wieczynski - Stifel

Okay. Great.

Patti Hart

Yes, and the IP revenue just comes in, so sporadically as you know when we are working through the settlements on IP. So I think if you look at the trailing four quarters you are get a number that’s probably accurate or as close to accurate as you can get.

Steve Wieczynski - Stifel

Okay, great. Thanks guys.

Operator

Thank you. Our next question comes from Carlo Santarelli with Deutsche Bank.

Patti Hart

Hey Carlo.

Carlo Santarelli - Deutsche Bank

Hey everybody. Just a follow-up on the non-machine revs. I’m just trying to tie kind of the product sales margins in the period obviously North American ASP is a little bit better and the non-machine revs obviously stronger as well. Is there a disconnect between the margins there on the non-machine side, I would have expected a little bit more flow through from that segment. Am I misreading that?

John Vandemore

Well, I mean (inaudible) there is a lot of noise in our margins and product sales and where you end up is about flattish. So you have some upward pressure on the ASP, you’ve some other adjustments owing to some unusual items of the timing of some non-standard costs that are working their way into the quarter. I think quite honestly the answer I can give you is a flattish revenue margin, it's a pretty good accomplishment. It is just a lot of puts and takes in there, that are not really worth going through in the amount of detail, I'd say flat margins which is pretty much where we've guided March for product sales standpoint is, where we expect them to continue to be….

Patti Hart

Yes, and Carlo on the non-box, we had a significant over achievement on the parts and conversion side of things and significant growth there year-on-year and those margins were pretty consistent with box margins.

Carlo Santarelli - Deutsche Bank

Understood, great. And then just one follow up, obviously it was late in the quarter when you guys announced the cost cutting initiative. Could you comment a little bit maybe on the traction that's been made thus far on that? And I know it's only been about a month. And also how we should think about SG&A trends in the backhalf of the year? Is that $30 million of saves this year expected to kind of come on that SG&A bucket for the fiscal second half?

Patti Hart

Yes. So, I mean the actions are behind us. As you know in some of the international markets, you have to work through timing and advances in guard and leads and what have you. But as far as the program dollars have been extracted and any of the reductions in the workforce have been accomplished. So, we announced it and accomplished it all in about 10 days Carlo. So that's behind us. And I think as far as the cost savings come, I mean I think exclusively from SG&A.

John Vandemore

There is going to be a little bit of cost of sales just (inaudible) attentions or could I say that the majority of it will be in SG&A. It won't come precisely flat over the remainder of two quarters, but for the most part it pretty close. That is to when you target program dollars it depends on when those program dollars would plan to have occur.

As it relates to SG&A, as a percentage of revenue our target internally has always been that 19% to 20% that we have previously guided to you. However keep in mind that’s subject to revenue performance as well. And (inaudible) I think we have clearly demonstrated one has to go after SG&A when revenue isn’t falling in line (inaudible) some time to be a lag. Right now I would submit to you that we are still expecting to be in that range but we are watching the revenue line carefully and if that migrates then we will have to make some further adjustments.

Carlo Santarelli - Deutsche Bank

And John just as a point of clarity I am assuming that the percentage of revenues is a number that’s taken kind of after the $7.8 million of unusual charges this quarter and the $2.1 million last quarter. So the GAAP number which is close to 240 and change should actually look more like 230ish number for the first half of the year?

John Vandemore

Yes, we definitely look at it on an adjusted basis just because all those unusual items flowing through are difficult to predict because they are in fact unusual in nature.

Carlo Santarelli - Deutsche Bank

Got it, okay thank you both.

Patti Hart

Thanks.

Operator

And your next question comes from Steven Kent with Goldman Sachs.

Steven Kent - Goldman Sachs

Hi, good afternoon. Just two questions. First Class 2 you mentioned that -- I haven’t heard you talk about that in a long time. So what makes you refocusing on that market, and then just maybe giving us a little bit more on current trend, what you are seeing out there on a competitive front and what you are seeing from both participation and on the product side?

Patti Hart

Yes, I think on the Class 2 Steve which I think is a good question, right, it is very similar to our poker business, I mean we have such a strong position in it and it kind of comes in bigger lumps and it is a market we feel like is ready for a bit of an upgrade and domestically here. But we are finding that the Class 2 businesses continues to hold on even in some of the properties that have moved to Class 3 that they are holding on to parts of this world for Class 2.

So it has been work that we have been underway for a year and year and a half in the company and I think it’s now released so it will start to bear fruit for us in the coming quarters. It’s a nice and vibrant market out there and so it’s one that we made a decision to address and direct some of our R&D spending to a couple of years ago. And it is expanding outside the U.S. as well in addition to Mexico where we still see some Class 2 growth now in South Africa so a good business for us.

So I think competitively again I think it hasn’t changed significantly quarter-to-quarter. There may be the seriousness of the competitive environment perhaps not changed, there is maybe a bit more players and more folks around the trough if you will and some of these situations, but it looks kind of the same and I think we have stayed with our strategy which is we build premium products and we invest in those R&D in the industry and we expect our shareholders to get a return on that investment.

But we have as you see with our ASPs, I mean we really have protected the margins on the business and I think that is holding up for us from a strategic perspective. But I think it looks the same on both game up, John any comments you have on game ups versus product sales.

John Vandemore

No, I think you had it.

Patti Hart

Yes, I think it looks about the same that is look for some time. I think we are fighting over less capital which is maybe one of the things less capital from a buyer perspective, but the same sorts of people with the same sorts of product offerings.

Steven Kent - Goldman Sachs

Okay, thank you.

Patti Hart

Thank you.

Operator

And your next question comes from Joe Greff with JP Morgan.

Joe Greff - JP Morgan

Hello all. You talked earlier about your expectations for yields on the game up side. Can you talk about what your expectation is for installed base change, are we at a point where we should see declines level off?

John Vandemore

Look our number one priority is to eliminate all declines, never knocked in or occurred. I think what we’ve seen is that the market continues to be impacted by the growth gaming revenue trends. As we talked about last month we continue to be I think internationally with activities there that (inaudible) our ability to expand our gaming operations business there. And then obviously the market is more competitive.

So it’s hard for us to predict given those conditions which [frankly haven’t] changed, they certainly haven’t changed a lot couple of week. I think some indications from the market that perhaps grow gaming revenues are expected to get a bit better, obviously we haven’t seen that thoroughly in the data yet, but that would be I think one indication for us that we have an opportunity then to help arrest that decline. As it stands today I think we’re watching it carefully, we’re working vigorously to protect what we have on the floors. But I think the conditions in the market haven’t been conducive to maintained the base and we are hoping for those change and to effect the change where we can with the new product introductions we have.

Patti Hart

And I think Joe one of the other things we’re facing and you know this as well as I do I mean you watch the market so well you have a number of announced casino closings recently, right so that always results in a reduction for us. And then you have a number of renovations going on places like the [El Paso and Cromwell] that adds (inaudible) they open with fewer machines than they started with. And so we have to really take all of that into our consideration and make certain that we are balancing the need for unit because it’s a very important part of our business and our portfolio and the wider progressive thing to drive liquidity in the jackpot with our need to really protect pricing and margin. So as we watch the market, we have had so far eight of nine jurisdictions report March numbers or I mean nine jurisdictions and eight of the nine reported fraud revenue down in March. And so, those things flip into cost them being more conscience of their cost and looking at their gaming operations as a result of that. So, I think we have to be conscious of the market we find ourselves in and adjust when we need to, but not over what I would say our guess is what I am saying.

Joe Greff - JP Morgan

Thank you. Patti, earlier in your prepared comments you talked about Wheel of Fortune being launched in DoubleDown by year-end. Is that fiscal year or calendar year? And is the anticipated benefit of that in interactive and social is that part of driving in the second half of the year to get to that 20% year-over-year growth range?

Patti Hart

Yes. Right, I mean my apologies for not clarifying that Joe, it is by calendar year-end. So, we're looking at what the right time is, I mean because this is different than when we put machines into our market that is much a marketing effort as it is a product build effort. We have to do it obviously preferred when the Wheel of Fortune is taping and filming and online and what have you. And so, the marketing program will be a critical component of the launch of this product. So, it will look, and you will see it before the end of the calendar year in DoubleDown. And I think it will be a significant driver as it has been in the casinos.

Joe Greff - JP Morgan

Great, thank you.

Patti Hart

Thank you.

Operator

Thank you. Your next question comes from Felicia Hendrix with Barclays.

Felicia Hendrix - Barclays

Hi thanks. I just had a comment on a question about the installed base, so I just want to kind of keep on that topic for a second. John when you said the market was more competitive, you can look at that competitively in terms of just new products that's out there from your competitors or on pricing. So, I was just wondering, is it kind of a little bit of both or more than one or kind of where are you seeing most of the competition comes from pricing or product?

John Vandemore

Yes. I think it's both. Keep in mind, when we talk about our MegaJackpot business, we're talking about some very premium products that has no comparable in the market and that's the product category and obviously that is almost continuously under pricing the rest by our competitors. I mean that's the big shoes to go after, although that some element of our MegaJackpot business is held up pretty well.

So, I would probably say it's both, but as you think about that top tier category of MegaJackpot product, note that that is almost continuously under pricing pressure. And I think the fact that it withstands that more often or not, is a testament to the value of that product category.

Patti Hart

Yes. I think, I actually think there is a third leg of this tool for competition, one is products, one is pricing and the other is that we're competing for lean expense dollars, operating expense dollars from our customers. And so, you're now competing outside of with your competitors who are actually competing for the next dollar of expense. And the customers if they really and expect their own businesses as the gross gaming revenue have declined like they have. So, I would say that's an added dimension of the competition in that part of our business.

Felicia Hendrix - Barclays

And I’m assuming that that kind of commentary can translate over a pretty well suited on the product sales side of things?

Patti Hart

Right.

John Vandemore

Yes.

Patti Hart

Yes, I would say that's true.

Felicia Hendrix - Barclays

And have you seen an increase in kind of the commercial environment there?

John Vandemore

Was there an increase, I mean promotionally I think you have different competitors attacking the market at different points in time. But no, for us, it wasn't a lot of additional promotional activity. I think it's just extremely fierce competition for what are you going to characterize when we spoke to you a couple of weeks ago.

What we believe now to be a flat to down and more likely down replacement cycle this year than last. When I compare that to what we all thought going into the year, which is maybe you were flat to up. So, I think pretty decisively down on the year and our estimate I think in a lot of the research pieces you all have putting out lately as well.

Felicia Hendrix - Barclays

Thanks. And then John, can we just talk or change subject to your R&D spend; you’re a bigger company, much bigger company than your peers. You spend twice as much on as your competitors on R&D. Just wondering as you think and you evaluate the expense side of your P&L overall, I mean do you think you are getting appropriate returns on your R&D? And maybe you could kind of bucket for us the various aspects of it and which areas might be up for evaluation the most?

John Vandemore

Yes. We don’t like to brag about our industry leading R&D. But I also would tell you it’s very tough to measure at any given point in time. R&D is an investment; you have to make rather continuously to see the affects over a period of time. Is it always optimized? No, absolutely not. I don’t think any company can tell you their R&D is optimized.

Overtime, are we comfortable with our level of spend and our corresponding level of innovation? Absolutely, you wouldn’t see Crystal Core, you wouldn’t see PowerBucks, you wouldn’t see a lot of the other innovations that we’ve been bringing to market both on land and online and now with the potential convert the two if it weren’t for what we can certainly pretty well owned R&D. And we are always looking at opportunities to make it more efficient either through the implementation of productivity tools or process improvements.

But I’d say, we feel very comfortable with the level of that today. We think it’s the necessary investment to drive the innovation we believe is necessary in the business. And I think there is a lot of upside opportunity from the investments we have made for the future that will continue to bear out and ultimately translate into the revenues that we expect to stem from those.

Patti Hart

Yes. I do think Felicia one of the things we didn’t talk about today, but I really talked about previously and is underway at IGT is really the notion of utilizing the DoubleDown infrastructure to enhance the effectiveness of R&D. I think one of the -- the things that created higher element of risk in our business generally not gets our industry that we do a lot of work ahead of being able to put the product in the market and have people test it.

So, you’re doing a lot of work and if you can increase, you are not increasing your add backs, but if you actually can increase the home runs and singles and doubles and triples you get when you look back. And so, inserting DoubleDown into that process, which is one of the projects that’s underway in the company today will significantly, enhance the return on the R&D we spend on the game side.

John Vandemore

Just to be clear that’s our industry leading R&D.

Felicia Hendrix - Barclays

Okay. Thank you.

Patti Hart

Thanks, Felicia.

Operator

Thank you. Our next question comes from Cameron McKnight with Wells Fargo.

Cameron McKnight - Wells Fargo

Hi, good afternoon. Thanks.

Patti Hart

Hey Cameron

Cameron McKnight - Wells Fargo

A question for John or Patti, on DoubleDown when you first completed the acquisition you guided for to be GAAP accretive by fiscal ‘14. Could you give us an update there and then I have a follow-up?

John Vandemore

Yes. And the update is in fact completely and totally GAAP accretive right now. Has been for the -- was in Q1, continue to ramp up in Q2 and will be obviously for the full year.

Cameron McKnight - Wells Fargo

Fantastic. And then on guidance you came in a few pennies ahead this quarter, but full year guidance is unchanged. Is there anything in the back half of the year that concerns you or are you just being conservative or a little prudent there?

John Vandemore

Yes. I mean we are not trying to play games with our guidance. I think the one timing issue we manage in the quarter; we did actually receive an IP settlement a little bit sooner than we have thought, we had anticipated that for Q3. So, quite honestly the penny is probably more about a timing shift. We believe our guidance is prudent given what we know, given the trends we see in the market and that’s why we’re affirming today.

Cameron McKnight - Wells Fargo

Okay, got it. Thanks. That’s helpful.

Patti Hart

Thanks Cameron.

Operator

Thank you. Your next question comes from Robin Farley with UBS.

Robin Farley - UBS

Thanks. John, on the social gaming side, I guess how should we think about monthly active users being down sequentially, I know daily active users were up, but how should we think about that? And then also it seems like maybe there is some sequential slowing in average booking per daily average user and kind of when would you expect that to trend?

John Vandemore

Yes. On the MAU we focus on what we believe is the most efficient use of time and energy to convert players into payers and sometimes that means we’re going to go after new payers that we can convert them into standard rate and get them in and paying and generating revenue. And other times it’s going to be on converting existing players. I’d say that more of our focus of late has been on converting players to payers and then converting to payers that we have to really good payers.

I don’t, I am not too queasy about the MAU levels as they stand because we have a very strong [cadre] of loyal good customers in there. Obviously we continue to look to expand our daily active because the more people are engaged, the more they are going to incline to pay for the service which is ultimately what we want.

And so I would think about it kind of holistically as many levers that are disposable that are disposable that can move revenue in the direction we wanted to go in that’s never going to be just one in any given quarter and I wouldn’t be surprised if we see small [evident] flow again the MAU decline was less than a percent so not much to worry about in our area.

Overtime we do expect those to grow, but I wouldn’t take pause over a given quarter, even a year as we really figure out first and foremost, how do you take players who already demonstrate a (inaudible) game and enjoyment from your game. How do you get them to pay at the right level and that’s what you see in a lot of very good online social game companies like DoubleDown do and that’s we're really focused on.

Patti Hart

Yes. It’s just most efficient Robin uses of our marketing spend is to get people who are already coming as opposed to trying to fill the funnel, but monthly active users; it’s really about the flow through at the bottom-line. So that’s where we’ve been really focused. I think on the outside, we continue to outperform even John’s expectations, which we have to do here at IGT and from (inaudible) perspective. So, I would expect that we would see that to have slight improvement especially as we move towards Wheel of Fortune over the next six to nine months, but not significant improvement from it is today.

Robin Farley - UBS

And does that comment apply to internally goes mostly about monthly users versus daily users, the booking for daily active user, the sequential decline there is that also just natural from expanding out the number of daily active users?

John Vandemore

Yes. Just to clarify, so bookings for daily active users were up, up a penny from 42 to 43 if I’m not mistaken.

Robin Farley - UBS

So, it’s just sequentially declining gross rates, so if I have decline to…

John Vandemore

Yes. It was again, I think you are just dealing with more people converting more people to player, at the end of the day what we are focused on is revenue and EBITDA and sometimes that means as you expand you’re willing to sacrifice a little bit on the growth in the (inaudible) in order to get more paired and more absolute dollars into them, Robin. And I would add that I don’t think you are going to continue to be demonstrated versus DoubleDown, it’s not always going to grow at the same amount every quarter, you’re going to get some jump. So, I fully expect and paid as well. When we bring the most excessive flat title ever to social gaming, I expect it’s going to grow at a little bit above normal market pace in that period.

And so, you’ll see some ebbs and flows quarter over quarter in the growth, but don’t make it something you can simply flat line. But again, we’re pretty happy with harped out, just to [legit] back to our R&D, it is also we believe in a social casino space industry leading, but we don’t like to correct.

Robin Farley - UBS

And then can you comment on, I think the earlier results from PowerBucks? And I realized that South Dakota maybe probably too small to have a big impact on New Jersey, but how about New Jersey impact on South Dakota, is there anything you can quantify for us, kind of what that has met to when (inaudible) larger market?

Patti Hart

Yes, I would say it’s too early Robin at this is point to really tell. I mean we get that information kind of delayed by 30 to 60 days and they don’t have it for full month yet in South Dakota. I will tell you, if you measure it based on the public relations in [Mega] it’s significant, I think we’re on every news channel, but there mainly be one in South Dakota. We were on all of them. And but it has been great buzz around it. I think the feedback from the properties has been very good but too actually quantify it, I would say we’re probably 30 to 60 days away from really being able to do that. I think you could expect to see a lift in South Dakota. But I think we expect to see a lift in New Jersey as well, if people really have an interest in this kind of jackpot centric game experience, which is really what PowerBucks is.

Robin Farley - UBS

Okay, great. Thank you very much.

Patti Hart

Thanks Robin.

Operator

Thank you. Your next question comes from Todd Eilers with Eilers Research.

Todd Eilers - Eilers Research

Hi guys. Thanks for taking my questions. Just wondered if you can maybe give an update on the Oregon VLT replacement opportunity, maybe just the timing on when you expect to ship those, and also could you, I’m not sure if you gave this, but can you give Illinois BDT shipments in the quarter as well?

John Vandemore

Yes, so tackling the second half first. I mean Illinois was about 1,000 units in the quarter which has been almost had a quarterly run rate for us. So generally sticking to same prognostications we’ve had enrolled with regard to that market, that was pretty normal. And I apologize but we don’t have the detail on our award and we can probably call that later, although I think what we have been extremely proud of that there to work our product teams done and getting us a pretty noteworthy ship share in that order. And again it echoes the sentiment we laid last year relative to the Canadian VLT that we’re clear industry leader with the ship show, we got when those RFPs come out.

Todd Eilers - Eilers Research

Great, and then also I want to ask a follow up on the class C opportunity as it relates to South Africa; is this a new market opportunity on existing market? And I think you said 2,000 gains, would these be participation recurring revenue gains or sold product and that if participation I guess any sense for yield levels I guess for that market?

Patti Hart

Yes. S, it’s actually an expanding market Todd, so not brand new, but expanding by about 2,000 electronic bingo terminals, always in the negotiation, we’ll see where it comes out. We expect it to look more like the product sale, may have a daily fee attached, but it looks more like a product sale and a participation business.

Todd Eilers - Eilers Research

Okay, great. And then final question I wanted to ask on with regards to your social casino strategy, would you guys ever consider launching a separate or an additional casino app to drive growth in that sector or are you comfortable with kind of the standalone single casino app that you have right now? And the reason why I ask is some competitors have launched separate app, so just kind of wanted to get your thoughts on that and if that’s you would consider. And then second part of the question would also just be an update on maybe the M&A opportunity in the social gaming space is that are there still -- I guess with the number of opportunities, have they increased, decreased or stayed about the same?

John Vandemore

Yes, I mean just speaking to M&A, we are not ever going to address the specific opportunities that we are looking at other than to say we continue to be mindful of what’s going on in the market and monitoring what’s going on in the market, both in our core land-based business and in the social space. I think you will continue to see us exercise the same discipline we have applied over the last years which is something would have to make both strategic sense and financial sense for us. From a strategic standpoint we are looking at expanding on our existing capabilities with intellectual properties similar to the Sony license renewal expansion, looking at technology and looking at talent. Those are the areas we tend to focus on the most. But again we are obviously mindful of the marketplace as a whole and vigilant about what’s occurring in the space.

As it relates to the separate app, I mean I certainly wouldn’t preclude any opportunity. I would say that our number one focus as it relates to the online social gaming space is ensuring we are delivering a great experience to our customers. And if that means that we should or would be advantaged by launching a separate app, particularly I would say a vertical or the augment our existing portfolio, we would. I think today we offer the most authentic experience in the social casino space (inaudible) and we have found that to really resonate with players, it’s the IGT content and so form factor, how they enter, how they play, how they wager, chips they wager with. And we think right now that is the key to success but I wouldn’t preclude and don’t think we ever preclude opportunity that we thought it was the right thing to do for the consumer versus just trying to tune up growth in the quarter or something like that.

Patti Hart

Yes. I think the other thing that we really tried to resist which is difficult to do sometimes in the social gaming space is this notion of just generating traffic. We really have been focused on the conversion and often times when you put together a distribution system, it’s just funneling new traffic to you, if they’re not converting, you’re basically using that capacity and then your own capital to support that capacity without the kind of revenue and profitability that comes from it. So we have really tried to focus to really avoid that disease. I think it’s very easy to get into just MAUs and DAUs and doing everything to bring people into the company but those people take up capacity in our servers, they take up capacity in our network. And we try to do very cognizant of that. So we wouldn’t precluded I think as John said but we would have to be pretty condensed that it actually not only brings more people in but it helps the conversion rate that the people are coming in.

Todd Eilers - Eilers Research

Okay, great. Thank you, appreciated.

Kate Pearlman

Todd, it’s Kate. I just wanted to add, the majority of the order in VLT will be in the fourth quarter.

Todd Eilers - Eilers Research

Okay perfect. Thank you.

Kate Pearlman

Yes. Thanks Todd.

Operator

And your next question comes from Thomas Andrews with BMO Capital Markets.

Thomas Andrews - BMO Capital Markets

Hey there. Just standing in for Edward tonight. Just wanted to ask a little bit about DoubleDown as well. Can you just talk a little bit about the traction you’re seeing in mobile versus the social or desktop platform? And what specific plans you have for both of those?

John Vandemore

Yes, I’d say the progress we’ve made in mobile is largely a result of the effort we put behind improving our mobile products and do those to the DoubleDown mobile team up in Seattle because they’ve put a lot of time and energy into both ensuring stability on the system, but also introducing new products, if you played the game a year ago and you look at it today on mobile, there is almost no resemblance, dramatically improved interface and product selection. I think that’s coupled with the notion that certainly mobile game play is where the growth is in the market have really led to the outsized growth in mobile bookings we’ve seen. And that will be an area of continuing focus going forward just ensuring that both our ability to reach across the breadth of mobile products out there including tablets and phones and devices that range from LTE, 4G all the way down to 3G is going to be a paramount important as well as continuing to rollout new products in that base. Some of which we already offer on desktop that we’re migrating into the mobile category. So a lot of effort from the team there to grow our mobile product offering and make it what we think is a world-class offering to consumers and accessible on all devices. Those are probably the two focus areas that really we think continue to drive our mobile offering. But I would also say that we’ve done a lot of great work on the desktop side as well. Although there may not be the sexier category and certainly not growing as fast as mobile from a market standpoint at this point in time, our team has done a great job of augmenting what we offer and how we offer on the desktop side as well, putting the recently re-launched that poker product that we’ve had out there. So, I think a lot of good progress across the board and mobile that certainly benefit disproportionally to the positive which is great.

Thomas Andrews - BMO Capital Markets

Is the Wheel of Fortune product something that you will be able to bring out on mobile by the end of the year as well?

John Vandemore

Yes.

Patti Hart

Yes. It’s our plan, actually we didn’t mention it John, it is our plan to launch Wheel of Fortune across platform. So when it comes, it won’t come sequentially desktop to mobile, it will come coincidently. So that is one of the reasons why we’re putting the work behind it as we are not only from a product design perspective but from a marketing perspective.

So, I think it will be a pretty significant launch for us at DoubleDown.

Thomas Andrews - BMO Capital Markets

Thank you very much.

Patti Hart

Yes. Thank you Thomas. Okay. I think that was it.

Operator

Yes, I show no further questions.

Patti Hart

Great. Well, thank you very much. We really appreciate your time today and your interest in IGT. Thanks very much.

John Vandemore

Thank you.

Operator

Thank you. This concludes today’s conference. You may disconnect at this time.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!