Bally Technologies Management Discusses Q3 2014 Results - Earnings Call Transcript

| About: Bally Technologies, (BYI)

Bally Technologies (NYSE:BYI)

Q3 2014 Earnings Call

May 01, 2014 4:30 pm ET


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

Ramesh Srinivasan - Chief Executive Officer and President


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

Steven M. Wieczynski - Stifel, Nicolaus & Company, Incorporated, Research Division

Todd Eilers - Eilers Research, LLC


Good day, ladies and gentlemen, and welcome to the Third Quarter Fiscal Year 2014 Bally Technologies Conference Call. My name is Denise, and I will 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 go ahead, sir.

Neil P. Davidson

Great. Thank you, Denise, and welcome, everyone, to the Bally Technologies Third 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.

But 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 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 any of 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. 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, May 1, 2014.

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 measures to the most directly comparable financial measure, calculated and presented in accordance with GAAP, can be found in today's earnings release.

Now onto the quarter. Today we reported record financial results for the third quarter ended March 31, 2014, marking our 11th consecutive quarter of year-over-year earnings per share growth on an adjusted basis. Revenues set an all-time quarterly record of $338.4 million, up 31% over last year, with Systems revenue marking a sixth consecutive quarterly all-time record of $90.5 million, up 27% over last year.

Revenues from recurring sources were also an all-time high of $168 million and represented 50% of total revenues. Adjusted earnings per share was $1.10, up 18% over last year. GAAP diluted earnings per share was $0.70. As anticipated, and largely as a result of currency devaluation in Argentina, both adjusted earnings per share and GAAP diluted earnings per share included a $0.05 loss related to negative foreign currency movements during the quarter. Foreign currency losses incurred year-to-date were $0.09 per share.

Revenues from Electronic Gaming Machines, or EGMs, were $102.4 million for the quarter, up 19% from $85.8 million in the prior year, primarily driven by strong domestic replacement sales, the contribution from strong Equinox cabinet sales in Australia and Asia, but partially offset by the absence of 788 Canadian VLT sales last year, and fewer units sold to openings and expansions. We sold 5,278 new units during the quarter, including 3,459 units in North America, of which 2,496 were replacement units. Average selling price or ASP for the quarter was $17,203, up 7% from last year driven by sales of almost 1,100 premium Pro Wave cabinets, as well as higher ASPs sold in international markets, with fewer sales of lower ASP, VGT, and VLT units in the quarter.

EGM gross margin was 49%. However, after excluding approximately $810,000 of one-time inventory charges related to the acquisition, margins were 50% as compared to 51% last year.

On the Gaming Operations. Revenues from Gaming Operations were $101.4 million, down slightly from $102 million in the comparable period last year, driven primarily by a reduction in rental and daily fee revenue. Our rental and daily fee units decreased quarter-over-quarter largely due to the customer buy out of certain older non-premium units. However, our premium rental and daily fee install base increased modestly as compared with last quarter. Finally, despite being down 60 units over last quarter, last revenues set an all-time quarterly record. The gross margin on Gaming Operations was 65%, driven by jackpot expenses, which were approximately $1.5 million higher versus the last 8 quarter average. The inclusion of a full quarter of approximately 2,198 leased ETS seats, which have lower margins than leased slots, and approximately $1 million of asset-related charges related to the acquisition. As a result of the inclusion of leased ETS products and Gaming Operations, our annual gross margin is now expected to be between 67% to 71%.

Systems revenue set a sixth consecutive all-time quarterly record of $90.5 million, up 27% from $71.3 million in the comparable period last year, and again was ahead of our expectations, largely due to certain customers upgrading their current end game hardware.

Maintenance revenues for the quarter were $24.4 million, up 7% from $22.9 million in the comparable period last year. Systems revenue gross margin was 71% for the quarter, down from 73% last year, driven primarily by a higher mix of hardware revenues which represented 45% of total revenue generated during the quarter versus 38% last year.

With respect to table products. Revenue from table products, which includes the sale and lease of shufflers, chippers and proprietary table products, was $44.1 million, which included $29.5 million of utility products revenue and $14.6 million of proprietary table game revenue. Table product lease revenue represented approximately 70% of total revenue.

The installed base of utility products, proprietary table games, and table game progressive units, table side beds and add-ons all increased from the prior quarter. Table products margin was 76% after excluding $2.3 million of one-time inventory charges related to the acquisition. The effective income tax rate for the quarter was 37%. We expect our effective income tax rate for the fourth quarter of fiscal 2014 to be between 36% and 37%.

As of March 31, 2014, we had $1.9 billion of debt outstanding. Since the SHFL acquisition closed, we have paid down $102 million of debt demonstrating our strong free cash flow. In fact, free cash flow, defined as operating cash flow, less capital expenditures, was $166 million year-to-date, which is inclusive of acquisition-related costs as compared with $150 million in the prior year-to-date period. During the quarter, we paid down $68.4 million of debt with free cash flow and excess cash on hand, which helped our leverage ratio decline to approximately 3.9x even while repurchasing approximately 150,000 shares of our common stock for $10 million. Given our outstanding term loan A and revolving credit facility, which amounts to $788 million, is subject to a leveraged-based pricing grid. When our leverage ratio declines to below 3.75x, our borrowing costs will be reduced by 25 basis points.

Aside from investing at our business, the potential for tuck-in acquisitions and some share repurchases, we anticipate that we will continue to allocate the majority of our excess free cash flow towards the repayment of debt, with the goal of reducing our leverage ratio to approximately 3x by the end of calendar 2015.

Finally, we updated our full year fiscal 2014 guidance for adjusted EPS to a range of $4.35 to $4.50. As noted in today's press release, our annual guidance includes $3.21 per share for the 9 months ended March 31, 2014, which is comprised of adjusted earnings per share of $3.12, plus an add-back of $0.09 per share loss from unfavorable foreign currency movements incurred during the first 9 months of fiscal 2014. This results in a range of adjusted EPS expected for the remaining 3 months of fiscal 2014 of $1.14 to $1.29 per share.

With that, I'll turn it over to Ramesh.

Ramesh Srinivasan

Thank you, Neil. The March quarter posted adjusted operating margin of 27% compared to 23% in the prior year, and represented our first full quarter of operations as a combined company. The SHFL integration process continues to progress very well, and we remain on track to achieve a run rate of at least $40 million in cost synergies by the end of calendar 2014. We have reorganized our sales structure to enable common leadership and management across all product lines in each region. Apart from the obvious cost optimization benefits this structure is already beginning to yield a intended objective of maximizing the value of our customer touches across all our product categories. Our combined sales, customer relationships, and product management strengths are helping us identify several new revenue opportunity areas. We are also well on our way towards good utilization of our India Development Centers to enhance the various SHFL product lines quickly and effectively. The March quarter was solid for Bally in terms of EGM sales. Our new and innovative Pro Wave cabinet, backed up by constantly improving game content, drove a 22% year-over-year increase in North America replacement sales, excluding Canada VLT sales last year. This was our first such year-over-year increase in over 4 quarters. The Pro Wave exceeded our high expectations and helped drive domestic ASPs 7% higher.

We had another strong quarter in Illinois selling 739 VGT units. Since we entered the Illinois market in FY '13, we have sold over 4,100 units so far. We expect to continue to sell units into the Illinois market into FY '15. New titles like Full Dollar, Dragon Rising, Cash'M If You Can, Super Red Phoenix and Super Rise of Ra, and our existing series of Quick Hit games continue to perform well across various domestic regions. We expect to sustain the year-over-year improvements in North America replacement sales during Q4 as well.

Our Equinox cabinet continues to do very well in Australia and Asia. The Duo Fu Duo Cai link continues to top the charts in various casinos in Asia with increasing installs across Macau, Philippines, Singapore, and Cambodia. We shipped a total of 1,819 units across international regions during the quarter. We remain optimistic about our ability to leverage the SHFL EGM content in many markets around the world where Bally has already well-established distribution channels and sales efforts. All told, we shipped a total of 5,278 units across the globe, our highest EGM unit sale level in 6 years. With a well-established, broad set of innovative and very successful hardware platform line up, Pro Wave, Equinox, V32, V22/22, Curve and stepper and a steady flow of diverse and top-notch content from our various game studios across the globe, we are confident that we are marching towards a bright future with respect to EGM sales.

Despite a 60-unit sequential decline in our overall WAP install base, Cash Connection grew by 30 units and WAP revenues set an all-time quarterly record with yields up about 11% versus the previous quarter. We began installing Grease Pink Ladies and the New Millionaire Sevens title during March. James Cameron's TITANIC just made its debut last week, and we will be releasing The Magic of David Copperfield game shortly. As a result of these titles, we expect to enter FY '15 with a refreshed and growing WAP footprint.

In the premium games category, ZZ Top Live From Texas has made a promising start in various casinos, and currently enjoying the growing demand pipeline. Other premium games like Cash Wheel Quick Hit and Fireball After Burn continue to perform well. In addition, the Duo Fu Duo Cai link is beginning to roll out across various U.S. markets and is performing well.

Revenue from table and utility products was $44 million during the quarter. The MV3 shuffler continues to replace the older MV1 and MV2 shufflers at a good pace.

We continue to capture the additional opportunities, particularly on Baccarat tables in Asia where there are over 8,000 such tables. In Proprietary Table Games, Ultimate Texas Hold'em, Mississippi Stud and Free Bet Blackjack continue to gain popularity. In the interactive area, both as a technology iGaming platform provider and as a content provider, we made very significant progress during the quarter. Our iGaming platform continues to gain traction with real money wagering in New Jersey, while more customers from the U.S., Europe and South America are signing up with us for free to play sites. We continued to expand our slot and table content presence in New Jersey and across various major portals in Europe. More than 90 casinos are currently utilizing the 150-plus mobile technology features. We continued to integrate our products and offer more features across our mobile, iGaming platforms and core systems.

Systems had another very strong quarter, and again, exceeded our expectations. A couple of customers made quick decisions on expanding their iVIEW, iVIEW DM, and Elite Bonusing Suite investments during the quarter. The top 5 customers contributed 35% of revenues in the quarter compared to roughly 45% we have seen in previous quarters. We added 2 new casinos in Ohio to the Bally systems family. Currently, with that, 8 of 9 casinos in Ohio are running on Bally systems. Multiple corporate customers in Nevada, Canada, and South Africa continue to convert more of their sites to Bally from competitors systems.

During the first 9 months of FY '14, Systems hardware revenue has grown by 77%, signifying increasing market acceptance of our iVIEW and iVIEW DM solutions. Software services and maintenance grew by a combined 25%. We are very pleased to see the industry shifting towards accepting what has been a steadfast belief for many years that casinos need common hardware solutions to enable floor-wide installations of system-based marketing, promotion, and content tools to increase their competitive advantage. Our customer base, which has grown significantly due to our cost effective and well-planned R&D efforts and product investments, provides us an ever-expanding opportunity to innovate, create, enhance, and sell additional software modules and hardware products. The majority of the 450,000 slots connected to our systems are still either without an iVIEW or have a old version of it, and thus, may not be capable of leveraging our newer systems software features, including the Elite Bonusing Suite bonusing modules. And to date, there are only 34,000 iVIEW DMs in the field.

Given the increased demand for System hardware over the past 2 quarters, we now expect Systems revenue for this fiscal year to be at least 25% ahead of FY '13. That would result in the FY '14 Systems revenue being about 50%, 5-0, 50% higher than FY '12, which, by any measure, is quite impressive. Considering that during the December and March quarters our combined hardware revenue was $73 million as compared to only $43 million combined for the prior June and September quarters. We currently believe that hardware sales will be down in FY '15 compared to the full year FY '14. And as such, it is likely that Systems revenue in FY '15 will be lower than in FY '14, but at higher margin levels.

We are now getting ready to host more than 500 customers in June at our 11th annual systems user conference, EMPOWER 2014 at the Mohegan Sun Casino and Resort in Connecticut. We will be launching multiple new modules and other technology initiatives at this conference. Our TableView optical chip recognition product is very close to completing its free trial at 2 casinos with a very high accuracy level. We just completed a floor-wide production run of a new bonus systems -- Bonus Tournaments modules.

Our consistent performance over the past few years has proven our ability to execute well even in tough environments. We think we are relatively better positioned for continued solid and improving performance levels for the following reasons: one, the strength of the Bally SHFL combination is turning out to be everything we believed it would be. As we continue to integrate, we are discovering more opportunities to increase efficiencies, cost savings and exciting new revenue growth possibilities. Being a broad-base supplier of content and technology across practically all aspects of a casino's operations, and our increasing strong global presence gives us the capability to work through challenging periods in one business or another. In fact, gross profit from North America replacement sales represented only 11% of our gross profits during the quarter. And in Gaming Operations, only 45% of our revenue was variable fee based. Even within variable fees, a significant portion was based on the highly stable New York Lottery market.

We are very well-positioned in Asia across multiple product segments, and our system pipeline remains strong. We are now arguably the most diversified gaming equipment supplier in the industry and a market leader in multiple product lines.

Two, more than half of our revenue being recurring in nature gives us very good business visibility and a solid platform to build sustainable steady growth on. The addition of SHFL’s already well-established business further diversifies our sources of recurring revenue.

Three, our nearly 1,300 employees in our well-managed India Development Centers provide us the kind of competitive advantage that remains largely underappreciated. Combined with our extraordinarily talented and motivated R&D personnel in other locations, in the U.S., Europe, Australia, and China, the India centers have provided us cost-effective, terrific talent, which has propelled us forward at a rapid pace across multiple product lines, especially in Systems. While our R&D spend continues to increase in line with revenue growth, our actual R&D productivity levels are increasing at an even better rate. Add to that a practical, effective and customer-centric R&D philosophy, which does not buy into hype and avoids making big bets on trends which don't make sense for the industry from a technology implementation standpoint, and you have some pretty good ingredients for success. Winning more innovation awards than all our competitors combined over a 5-year period is only one indication of how well our R&D engine runs.

Four, over the years, we have built up and continued to enhance some very solid core competencies for this industry, including around-the-clock R&D engine that is very proficient in both content and technology development, and a world-class implementation team. These core competencies, which in many cases are quite unique within the gaming industry, provide us the ability to invest and grow through many different strategic opportunities. Apart from being a leading content provider across both slots and tables and across land-based interactive and mobile segments, being a true technology company serving the gaming industry has its competitive advantages.

Five, as we have demonstrated over the past few years, we've developed the ability to fiercely focus on our core business segments while also focusing on innovation in the future. Many organizations are good at one or the other, but not many are great at both. As we ventured into new areas through organic growth or through acquisitions, our focus on the core businesses will never waver. Both our core businesses and the potential for future new growth platforms still hold much in store for Bally.

Six, our proven and consistent execution led by our dedicated and talented teams has created a business which continues to generate a significant amount of free cash flow, which we will continue to utilize to deliver our balance sheet, return capital to shareholders in the form of share repurchases, and invest in new technology areas, which we believe will accelerate our existing channels for growth, and also open up new ones at appropriate times. With that, Denise, please open up the line for questions.

Question-and-Answer Session


[Operator Instructions] And our first question will come from Steven Kent of Goldman Sachs.

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

I just wanted to talk to you a little bit on 2 issues. One, on the average selling price, maybe you could give us a little bit more color on that. And what kind of trends you're seeing out there from some of your competition. They've been more vocal about saying more aggressive, more aggressive pricing in the market, and how are they competing on that? Are they discounting or are they giving better financing? And then for -- on the balance sheet side, share repurchases, $10 million this quarter. How do you think about that? What was the reasoning? And how should we think about cash priorities over the next couple of years beyond debt pay down, what's the primary focus?

Ramesh Srinivasan

Thank you for joining our call. Let me answer the first question, Steve, and then I'll let Neil handle the second one. As far as the ASP, as you saw, the ASP went up by about 7%. Pro Wave had excellent welcome in the industry. Proving once again that it is our job to produce great innovation, provide more value to customers, and the right value is there if we keep doing what we are doing well. And we've always believed that maintaining pricing discipline is important, especially in game sales, because just too much discounting to help the short-term is generally detrimental to the long-term. So in terms of what we see, marginal improvements since G2E, it's either flat or better. And as our Systems business has proven and our acceptance of Wave and products like that have proven, if we continue to innovate and do good work, customers are willing to pay the right value for that.

Neil P. Davidson

And then on the balance sheet, Steve, a couple of different things. I think in our history, we've proven that when we see a dislocation in the market and we believe there's value, we typically do repurchases. We have just under $140 million still available under a repurchase plan. Now that's capped by some debt covenants, but we will repurchase from time to time. However, with a leverage ratio of about 3.9 and the opportunity to reduce our cost-to-debt, at least on the pro rata portion, which is our term loan A in our revolver, by bringing that leverage ratio down below 375, our cost to debt, like I said, goes down 25 bps. We are focused on paying down debt. I mentioned in my prepared remarks, our goal is to get to slightly at or below 3 turn leverage, hopefully, by the end of calendar 2015.


The next question will come from Steve Wieczynski from Stifel.

Steven M. Wieczynski - Stifel, Nicolaus & Company, Incorporated, Research Division

Can I ask that ASP question a little bit differently? I guess if you look at that 7% increase that you referenced, is there any way to split that out between how much of that was driven by StarGames versus -- if you stripped out StarGames, what would that ASP have looked like?

Neil P. Davidson

Yes, we actually -- so we gave 2 stats in, I think, either Ramesh or I said it, our domestic ASP was actually up 7%, and our overall ASP was also up 7%. So the Wave, which we sold slightly above 1,000, almost 1,100 of them, was a big contributor to domestic ASPs going up 7%. But on the international side, clearly Australia does have higher ASPs and was able to take our overall ASP up.

Steven M. Wieczynski - Stifel, Nicolaus & Company, Incorporated, Research Division

Okay, got you. And then Neil, I guess, with the guidance. At this point, you only have 2 months left in your fiscal year and your guidance range is still a 15% spread. What is causing that big of a spread at this point? I guess what are the variables that are -- it will take it one way or the other over the next 2 months?

Ramesh Srinivasan

Yes, Steve, we basically have raised the bottom end of our range, and we've also narrowed it. It's not that broad a range if you consider that as a percentage of overall fiscal year numbers, it's only about 3%, but I do understand what you're saying. It seems broad with only one quarter left. Remember, Steve, we are just 5 or 6 months into the biggest acquisition we've ever done, and we're in the process of integrating both companies. So there's a bit more moving parts than is typically in our business and definitely more moving parts than last year. And also please keep in mind it's a much broader base business now across multiple business areas. Therefore, there are a number of different possibilities. We just, for example, we're just launching a number of app and premium games, and we're working through the timing of a couple of systems implementations. So given a broad-based business and given the number of moving parts, we feel the guidance range is fair.

Steven M. Wieczynski - Stifel, Nicolaus & Company, Incorporated, Research Division

Okay, if I can ask one more quick question. Ramesh, you talked about the Systems business, and now you expect fiscal year '15 to be down over '14. Is that basically off of very limited visibility with the hardware side of things? Because I think if I go about a quarter or 2, I think you made a very similar statement about this year. And if look at Systems revenue so far, they've been very, very strong.

Ramesh Srinivasan

Okay, I have to give you a little bit of color on that, Steve, so please bear with me. Let me give a bit of a comprehensive answer on that systems because that deserves a bit of explanation. Also remember, Steve, we are the only gaming vendor who actually announce the Systems numbers, right? The rest of the vendors make general statements about it going well and all that, but we are the only ones who actually tell you what the exact Systems numbers are. So getting a grip on how exactly the global Systems business is doing is a little difficult. But there are a couple of good research reports and all that, that provide a lot of good data, so if you look at that, the global systems business has about doubled in the last 8 years or so. And I think it will double again in the next 4 or 5 years. Because if you think of calendar 2013, the systems industry grew approximately somewhere around $80 million to $100 million, and we grew about $85 million just in calendar 2013. So given all that and our competitive advantage, the fact we get more than 50% revenue share, more than all our competitors combined, we are in very good shape. So from a competitive standpoint, we are in excellent shape. Now let's look at our own systems well. We have about 450,000 connections. Only half of them actually have iVIEWs. Only 15%, 1-5 percent of them have the latest iVIEWs. Only 1/4 of them have a Elite Bonusing Suite bonusing modules. And even those who have it have less than half of the total number of bonusing modules we have. A majority of the top global gaming corporations run on our systems. So the chances of 1 or 2 of them making a quick decision to increase their -- to upgrade their hardware or buy more Elite Bonusing Suites like it happened this quarter or the previous 2 quarters are always kind of possible, right? Are probable because of the number of corporations. But keep in mind in the small casino market, probably less than 300, 400 games per casino and less, we have less than a 20% market share. And we are actually getting our products ready now to go after that market. So that's a big potential. If you look at our Systems revenue, it has grown by about 50% over FY '12 just in the last 2 years. That's a lot. This year, software services maintenance has grown by about 22%, but in game hardware has grown by about 77%. Now, FY '14 was a very good growth year for us in domestic markets, which is very good compared to international markets. So keep all this in mind. This year, being very good for in game hardware, both well for more software sales. Because they have the right hardware, now they can buy more software from us, so that's good for FY '15 margins. So all this put together, keep in mind, we have not yet done our FY '15 planning process, that's not yet done. So generally, we expect software services maintenance to continue to grow at kind of the current rates. Our only point is, in game hardware this year in FY '14 could turn out to be somewhat unusually high. So that's the only point we are trying to make, that the in game hardware kind of sales we have had in FY '14 just might turn out to be a bit unusually high.


The next question will come from Todd Eilers of Eilers Research.

Todd Eilers - Eilers Research, LLC

Ramesh, just want to follow-up on the systems answer there and your comment about why you made the comment about next year possibly being down. If we were to look at it just on the gross profit basis, what would be the expectation there? Would you expect to still grow from a gross profit basis given that you would expect more software as a percent of the mix?

Neil P. Davidson

Yes. I think from a margin percentage basis, certainly we expect to expand into FY '15. So whether we ended at 71, 72, whatever that percentage is, it's probably going to be higher in FY '15. I think you'll hear us give a little bit more color next call about in terms of dollar amounts, what we think margins in total will do next year. Just too early right now to give an exact number.

Todd Eilers - Eilers Research, LLC

Okay. That's helpful. And then I just wanted to ask a question, just the comment regarding systems being strong in the quarter, I believe. There was a comment that there were a couple customers that made some quick decisions. Can you maybe elaborate a little bit more on maybe what types of products they purchased or just a little bit more color on that activity? And is that something that was kind of more just kind of a one quarter event or could we see more sort of that sort of activity going forward?

Neil P. Davidson

Yes, I'll take that one. I think a couple of things. I would say, I think actually earlier Steve used the word visibility and you're asking some questions about our pipeline. One thing that Ramesh just went through a couple of stats, we have a lot more visibility about our pipeline and about our customers and about the hardware and whether they have current generation, new generation iVIEWs or whether they even have DM's. We've had a lot of interest around our Elite Bonusing Suite. Something like an iVIEW 2 or even an iVIEW 1 which is the earliest generation iVIEW just can't use of those products, either can't use them effectively or can't use them at all. And so as a result of conversations when you start talking about our newest software products that frankly help our customers gain competitive advantages, they get very interested in upgrading their software. And remember, our strategy all along was you don't have to throw away a slot machine to basically put new in game hardware in. So the upgrade cycle to put new in game hardware is a much cheaper solution for us.

Ramesh Srinivasan

So basically, Todd, a majority of the global gaming corporations run on Bally systems. A majority of them have -- either don't have iVIEW or have a very old version of it. So what happened this quarter could happen in other quarters with other customers, right? This quarter, it so happened that a couple of customers made some very quick decisions on it. And given the broad base of customers we have, those kinds of things could happen from time to time. So it's not a quarter specific occurrence, I don't think. With those particular 2 customers that happened this quarter.

Neil P. Davidson

I'm surprised we didn't see it in your report first before we heard about it, with your surveys.

Todd Eilers - Eilers Research, LLC

Okay, thank you. I appreciate it. And I guess just a last question on Systems, if I might, on the maintenance side. It looked like it declined a little bit sequentially last 2 quarters. Can you maybe give us a sense for what's causing that while the rest of the systems revenue is going up and then how should we kind of look at maintenance fees going forward?

Ramesh Srinivasan

You should look at maintenance fees, Todd, on an annual basis. So FY '15 annual maintenance is up year-over-year over FY '14. As has been the trend for many years before that. So you should expect in FY '15 it will be more than FY '14, like FY '14 was more than FY '13 and so on. And the last few quarters have been relatively flat due to some unusual circumstances. There've been a few maintenance credits worked out with some customers. There have been some game controductions with a couple of customers. And the some of the recent bigger enterprise deals, the maintenance kicks in a little bit later, so that's all you're seeing. Year-over-year, you should expect growth as we go along.


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

Unknown Analyst

Brian Mellon [ph] on for Joe. if we back up the one-time charges, SG&A was still a bit higher than what we were modeling. How should we be thinking about that line item going forward? Do you guys have a percentage of revenue goals that they're working towards as the synergies flow through?

Ramesh Srinivasan

You should look at the SG&A. Brian, by the way it's great talking to you and tell Joe that we have a good time with you. So Brian, you should look at SG&A from an adjusted SG&A standpoint, Brian, and you should remove the one-time costs and all that when you analyze that. I would say adjusted SG&A, when you remove the one-time cost pertaining to the acquisitions and other areas, is actually, I think, down year-over-year by 2 or 3 percentage points. Right, Neil?

Neil P. Davidson

Yes, and this quarter, again, there might have been 1 or 2 unique things in SG&A that weren't acquisition related. So we're continuing to monitor. We're actually ahead of ourselves on the overall synergies. And while we're looking at SG&A as a percentage of revenue and we look at R&D as a percentage of revenue, the real thing that we're trying to drive towards is an adjusted operating margin. This past 9 months set a record in terms of Bally, and we're hoping to grow that, and that's going to come, as you mentioned, with increased synergies.

Ramesh Srinivasan

Yes, thank you. On behalf of our Board of Directors and the entire hard-working winning team at Bally, my sincere thanks go to all our customers, partners, shareholders for the trust you placed in us. We continue to make great progress. Thank you for listening, and for your interest in Bally. We appreciate your support and guidance. Thank you very much.


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

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