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Executives

Matt Moyer – VP, Investor Relations

Patti Hart – President and CEO

Pat Cavanaugh – CFO

Eric Tom – COO

Analysts

Robin Farley – UBS

Joe Greff – JPMorgan

Chris Woronka – Deutsche Bank

Carlo Santarelli – Wells Fargo

Steve Wieczynski – Stifel Nicolaus

Cameron McKnight – Buckingham Research

David Katz – Jefferies & Company

Ryan Worst – Brean Murray

International Game Technology (IGT) F4Q2010 (Qtr End 09/30/10) Earnings Conference Call November 9, 2010 5:00 PM ET

Operator

Welcome everyone and thank you for standing by. (Operator Instructions) Today’s conference is being recorded. So if you have any objections, you may disconnect at this time.

And now I’d like to turn the meeting over to Mr. Matt Moyer, Vice President of Investor Relations. You may begin, sir.

Matt Moyer

Good afternoon everyone and welcome to IGT’s fourth quarter and fiscal year 2010 earnings conference call.

On the call with me today is Patti Hart, President and CEO; Pat Cavanaugh, CFO; and Eric Tom, COO.

Before beginning, we’d like to remind listeners our discussion reflects management’s views based on the business environment as of today, November 9, 2010, and will include forward-looking statements, including forecast of future performance and estimates of amounts not yet determined or the potential for growth of existing and the opening of new jurisdictions for our products, play levels for our installed base of recurring revenue games, as well as our future prospects and proposed new products, services, developments or business strategies. We do not intend and undertake no obligation to update our forward-looking statements to reflect future events or circumstances. Actual results may differ materially.

Additional information about factors which could potentially impact our financial results is included in today’s press release and our filings with the SEC including our most recent annual report on Form 10-K and our quarterly reports on Form 10-Q filed during fiscal 2010.

During this call we may discuss certain non-GAAP financial measures including adjusted earnings per share, adjusted operating expenses, adjusted operating margin, adjusted EBITDA and free cash flow. In our press release which is posted on our website, www.igt.com, you will find additional disclosures regarding any non-GAAP measures including reconciliations of these measures with comparable GAAP measures.

With that in mind, I’ll turn the call over to Patti.

Patti Hart

Thanks, Matt, and good afternoon everyone.

In fiscal year 2010 we continued to have relatively strong financial performance in an economy that remains weakened. More importantly, we set the company on a course to achieve greater financial and operational performance in the future. Our 2010 financial achievements include growing our international revenues by 21% to $559 million, increasing our adjusted operating margins by 200 basis to 25%, and reducing our debt obligations by over $400 million.

Despite the challenging macro environment, our revenues were nearly $2 billion and we produced over $770 million of adjusted EBITDA, demonstrating our significant cash flow generation capabilities. We also improved our leverage ratio, increased our inventory turns and accomplished all of this with much lower overhead. We are intent on driving higher returns for our stakeholders. Meanwhile, many of our customers are improving their financial position which gives them the opportunity to increase investment in their slot floors. This is a very important step in getting our industry back on a growth track.

The bottom line results of these achievements are adjusted EPS of 85 cents for the year, at the upper end of our latest guidance. It also represents my team’s intent focus on making IGT the leanest, most competitive organization that it can be. As I have said before, driving constant improvement at IGT is a short, medium and long-term theme for me and my management team. I am proud of our 2010 financial results and our company’s focus on making the coming quarters and years even better.

Personally I have been spending a lot of time with our customers both domestically and internationally. These meetings solidify my faith that IGT is an industry leader and that we are doing the right things. That said, I’m still cautiously optimistic about the coming year. While it appears that the visitation numbers are stabilizing, it is still too early to call the bottom. We need to see a marked improvement in the economy in the form of more jobs, higher consumer confidence and disposable income before we can expect to see a return to healthy top line growth in our industry. Internationally we are enthusiastic about our growing business and the potential we see in new jurisdictions.

Finally, 2010 essentially completed my transition into the CEO role at IGT. And my leadership team is fully embedded into the business. Our long-term global strategies are now in place and every employee has a clear understanding of our goals. Fiscal 2011 is shaping up to be a rewarding year as we start seeing the results of our well-planned strategy.

I will now ask Pat to share with you some of the financial details for both the fourth quarter and the fiscal year. Pat?

Pat Cavanaugh

Thanks, Patti, and good afternoon everyone.

This afternoon IGT reported its results for the fourth quarter and the fiscal year 2010, GAAP net income and continuing ops came in for the fourth quarter at $26 million or 9 cents per share, inclusive of non-cash charges of $27 million after tax or 9 cents per share. This compares to a net loss of $10 million or 4 cents a share in the previous fourth quarter, last year’s fourth quarter.

For the year, GAAP net income from continuing ops was $224 million or 75 cents per share compared to $153 million or 52 cents per share last year, an increase of over 40%. Both the fourth quarter and the fiscal year were affected by a number of non-cash items, the details of which are broken out in our earnings release which went out earlier today.

Our adjusted EPS was 85 cents for the year and 18 cents for the fourth quarter, both near the top end of our previous guidance. We are particularly pleased with our adjusted operating margin that came in at 25% this year versus 23% last year, perhaps one of the best in the supplier space [ph].

Our consolidated revenues for the fourth quarter were $496 million, of which 54% were generated from our gaming ops business and the remainder from product sales. For the year, our revenues were $2, 55% from game ops and the rest from product sales. Consolidated gross profit increased 100 basis points to 56% and totaled $1.1 billion for the year.

Our gaming operations continued to feel the impact of challenging economic conditions, although we are encouraged by continued stabilization in yields. Game ops revenues were $268 million in the fourth quarter, which is down 3% sequentially and 5% year-over-year.

Gross margins decreased 200 basis points to 58% for the quarter, primarily due to fixed cost spread over a smaller installed base. We earned an average of $50.86 per unit per day, which is up slightly compared to last year’s fourth quarter. This blended yield is an average of the various components of our broad and global installed base, our game ops yields range, $10 to $15 per day on some of the lower-yielding markets such as we’re seeing in those in some of our international markets, to more than $100 today in some of our major jackpot units. On an important side note, our international installed base is now at 16,000 machines. If looked at on a standalone basis, this would make it the third largest installed base in the industry.

For the year, gaming operations revenues were $1.1 billion compared to prior year revenues of $1.2 billion, and gross margins increased 200 basis points to 60% compared to 58% in prior year. IGT’s installed base ended the fourth quarter 57,000 units, down 4,300 units over the prior year largely attributable to the closure of certain charitable bingo facilities in Alabama. Approximately 82% of our installed base is comprised of variable fee games that are in a percentage of machine play levels rather than a fixed daily fee.

Moving on to product sales, product sales revenues totaled $228 million in the fourth quarter compared to $230 million in the fourth quarter of last year. For FY10, product sales revenues were $886 million compared to $925 million in the prior year. Both periods were affected by fewer new openings in North America.

For widely [ph] recognized and shipped 11,000 machines during the quarter, down from prior year of 11,300. In this fiscal year, IGT recognized 42,200 machines, down from 49,700 machines last year. For units shipped but not yet recognized, please see the supporting data at the back of the press release.

International product sales revenue totaled $116 million for the quarter on volume of 7,700 units compared to $102 million and 7,100 units in the prior year quarter. For the fiscal year, international product sales revenue was $391 million, up from $307 million in the prior year, while units recognized for the year were 24,600, up from 23,900 in the previous year. The increase in revenues was primarily due to an increase in shipments into higher revenue jurisdictions and some to favorable foreign currency exchange.

Worldwide non-machine revenues mainly from sales of systems convergence and electric property fees came in at $89 million for the quarter or 39% of total product sales compared to $98 million and 43% of product sales in the prior year quarter. For the year, non-machine revenues were $329 million or 37% of total product sales, down from $346 million and 37% of product sales in the previous year.

Product sales gross margins were 53% for the quarter, up 100 basis points for the quarter, and were 52% for the year, again up 100 basis points from the previous fiscal year. Domestic new and expansion unit shipped but not recognized totaled 1,700 in the quarter, up 800 sequentially due to shipments related to Cosmopolitan and First Council in Oklahoma and the opening of Sugarhouse.

Moving on to operating expenses and others, fourth quarter operating expense decreased to $174 million or 35% of revenue compared to $257 million or 50% of revenues in the prior year quarter. For the full year, operating expenses decreased to $687 million or 35% of revenue compared to $810 million or 39% of revenue in fiscal 2009.

Quarterly adjusted operating expenses decreased slightly to $164 million in prior year quarter. For the full year, adjusted operating expenses decreased 7% to $615 million or 31% of revenues. Adjusted non-GAAP operating expenses as reconciled in the supplemental schedule at the end of our press release exclude non-cash impairment and losses on other assets, restructuring and debt refinancing costs and bad debt provisions.

Moving in to 2011, we may see SG&A stay about flat on a total dollar basis when compared to the full year 2010 as we invest in the people and processes necessary to take advantage of the expected industry turnaround and new business opportunities. SG&A for the fourth quarter was up sequentially but down year-on-year as we recognized certain yearend items and ramped up for this year’s G2E and a large amount of new products that we’ll be showing.

R&D expenditures totaled $53 million for the quarter, an increase of $1 million from the prior year. For the year, our investment in R&D was $200 million, down 2% over 2009. We expect R&D to be about flat to up slightly for fiscal 2011.

Moving on to the balance sheet, cash equivalents and short-term investments inclusive of restricted amounts totaled $249 million at September 30, 2010 compared to $247 million at the end of last year.

Contractual debt obligations $1.8 billion at September 30 this year compared to $2.2 billion last year. The available capacity on our $1.5 billion revolver totaled $1.4 billion. As of the end of this year, during this year we’ve reduced our debt obligations by over $400 million and improved our leverage ratio significantly. We went from 3.3 times levered at the end of last year to 2.4 as we exited this fiscal year.

For the year we generated $280 million in free cash flow, up from $169 million last year. We also increased our return on invested capital and anticipate further improvement as we move forward.

That concludes my prepared remarks regarding IGT’s quarter and fiscal year. Thanks for your time and attention. I’ll turn it back to Patti.

Patti Hart

Thanks, Pat.

We will continue to strive to improve our financial performance and leverage our industry-leading free cash flow. In the coming year, we will, however, also increase our focus on many important areas.

First, we will plan to further reduce our reliance on the North American replacement cycle by taking advantage of our diverse global revenue sources. We expect to begin to see improvement in our gaming operations yield. We believe we have the most exciting titles both on the floor and in our pipeline and I cannot wait for the world to see some of the best games IGT has ever introduced at G2E this year. We are planning for increased adoption of our improved systems products and heightened returns on our vast intellectual property portfolio.

Next, we will continue to expand our far-reaching international presence through both jurisdictional expansion and market share growth. We will maintain our urgency as it relates to returns on our international invested capital. In the last three years our international revenues excluding Japan’s discontinued operations have increased from 20% of total revenues to 28% this year.

Third, we will continue to find ways to drive our improving profitability and margins even higher. We carefully monitor every dollar we spend and are continuously looking for ways to minimize SG&A. Our research and development budget is as focused as ever before. We will develop gains our customers are demanding and products they value.

Finally, we are planning to accelerate our growth in the online and mobile business. We have attracted some of the best talent available to prepare us for broader participation in the interactive gaming space. We believe that it is inevitable that gaming will become widespread in the developed nations of the world in land-based, online and mobile applications. We will strive to be the leader in this fast-growing business and to help our customers thrive in the new digital arena.

Again, fiscal 2011 will be an exciting year for IGT. Much of the change in planning is behind us. Now it is time for all of us to benefit from the returns on our focused activities.

Eric Tom, our Chief Operating Officer, will now take you through a few of the specifics and how we plan to achieve these goals. Eric?

Eric Tom

Thank you, Patti.

We have in place a specific plan and measurement points to meet and exceed our 2011 strategy that Patti has outlined. Let me share with you some of the specifics.

First, we expect to see improved financial results from our MegaJackpots business through new player-centric products that are player-tested for usability and entertainment value before they are released to the floors. Through new processes, we’re quickly incorporating customer feedback as suggestions into our products. We utilize this immediate feedback to better facilitate our sales training, increase the success of future product launches, and reduce our stranded capital.

We’re strengthening our marketing capabilities and increasing our business segmentation efforts. We’ll bring new games more quickly than entice and excite both today’s slot players and future generations of slot players.

For example, our Center Stage product delivers big screen thrills for our players. It is the most exciting platform yet giving operators the flexibility to simply download new content without having to replace hardware. It is not only a powerful and magnetic presence on the casino floor, but for our shareholders, it represents a reusable platform that provides IGT a new improved set of economics for our game operations business. It keeps our machines in place longer, reduces turnover and dramatically increases our returns. For the players, they love the multi-way interactive game play, enticing bonus features and incredible sound shares [ph] and huge graphics screens.

In our core business, we have an unmatched library of video and spinning real slots. In fiscal year 2010 alone, we released well over 100 new games, more than any other manufacturer. This includes nearly 30 new games on our 8960 box [ph] that enables our customers to refresh their floors in these tough economic times.

We released the number one performing penny video slot Siberian Storm that has an innovative interface with over 120 ways to win. We also released Three Kings, the industry’s first free game progressive in the for-sale slot segment, that is outperforming our expectations and the competition.

Our new Reel Edge series gives players for the first time control to stop the reels, create wins and use a joystick to control the outcome of the bonuses in the top box. This gives that younger demographic the sense of playing of skill-based game that we believe is much more appealing to them than the traditional slot machine.

Additionally, we have introduced 3D action with an unmatched gaming experience that’s making game play even more thrilling. For the evolving spinning reel player, our 3D spinning reel games look, feel and sound just like their mechanical counterparts. We refer to this as the shake, wobble and bounce effect.

To market all of these games, we’ve developed an activity-based selling culture in our sales organization and we are confident that we will drive better results and more satisfied operators.

While I’m at it, I’m going to talk a little bit about our video poker business. IGT is the leading seller of video poker products in the United States for a variety of reasons, not the least of which is our strong intellectual property. Moreover, we believe, we also believe, that we know the customer better than anybody and that our incredible recurring cash flows allow us to be in a great position to maintain our industry leadership. We built many new layers on top of our foundation of patents and we continue to innovate the product line which will help us maintain our leadership into the foreseeable future.

In sum, as we move forward with our global product strategy, we’ll continue to focus on core content and leverage our talented pool of game-designed resources and extensive IP portfolio.

In our systems business, we’re improving our offering from top to bottom. We have incorporated customer feedback into our next generation of sbX that will increase interoperability with other game developers. It will allow for intelligent and real-time bonusing [ph] that drives increased player loyalty and incremental play. For example, we developed an app called W2G. This app allows a player to electronically receive a W2G text [ph] form instantly and gets them back to playing. It’s improved the operating economics and return on investment.

This new open network approach is driving our customers and outside content developers to create applications for our systems that allow for highly-customized experiences that boost returns for everyone. We think this really shows the promise of sbX beyond downloading config and the powerful potential of networking slot machines with a flexible slot floor.

We are eagerly anticipating the upcoming December 15 opening of the Cosmopolitan of Las Vegas. IGT will provide them with a multi-product and systems solution including sbX, 55% of their gain, inclusive of 4% MegaJackpots, plus an entire suite of Advantage system products. The casino floor will feature a GSA compliance server-based network which incorporates the award-winning player focus service window, sbX floor manager, media manager and access to IGT’s game library.

The debut of several applications that will differentiate this next-generation slot floor include an integrated enterprise rating capability that would allow Cosmo to understand the complete value of a customer across the entire resort and to reward patrons based on their particular total spend. Additionally, Cosmo will be enabled with an integrated analytical tool that will break down game performance by pay tables versus the generic total box [ph] of data only available today on integrated systems.

During the fourth quarter we had several key tier 1 and full sbX successes including the signing of six new sbX and tier 1 customers, the installation of tier 1 at three domestic locations, and a full sbX installation at two international locations.

In North America, as of September 30, we are currently in varying contract stages with four sbX opportunities combined with Advantage systems and 27 tier 1 opportunities. Please understand that these are only opportunities and there is no guarantee that we will close any of these opportunities.

Midterm elections were held last week and we feel that the outcomes of these elections will benefit us both in the near and long term. In Maryland, voters approved Question A which allows for zoning of a 4,750 BLT slot casino next to a Randall Mill mall. In Alabama, Governor-Elect Bentley has announced that he’ll follow through on his campaign promise to disband Governor Riley’s Anti-Gambling Task Force and instead work with the new Attorney-General to ensure proper enforcement of the state’s gambling statutes. Although the situation remains uncertain, there is a possibility that electronic bingo locations could be allowed to reopen if their machines are checked and approved by proper legal authority.

With the reelection of Governor Quinn in Illinois, we expect the implementation of the BLT program to continue. We also feel that the progress towards legalization in Massachusetts will resume next year regardless of their election outcomes. And we expect deliberate progress on other possible new jurisdictions.

We’re committed to developing games that meet our international customers’ expectations and exceed the demands of specific regions players while also reducing cost and inventories and driving higher returns.

Mexico is a good example of our success in the international markets. We developed an early presence in Class II marketplace with 7,200 machines that provided us a foothold for the eventual conversion to Class III machines. We currently have 7,200 Class III machines in Mexico, of which 6,200 are revenue share placements. We have a total of 3,000 AVPs in Mexico with a win per unit range of $70 to $140 as compared to our win per unit for Class II machines which was $56.

I’m energized about this year and beyond for IGT. As Patti mentioned, we spent much of the last year or so developing our strong long-term strategy. It is now time to execute and see the results.

With that, I’ll turn it back to Patti for her closing remarks, and we look forward to seeing you at G2E.

Patti Hart

Thanks, Eric.

I hope you now understand why I am so confident that IGT is heading into some of the most dynamic times in its history. Technology is advancing rapidly in this industry and I am certain that IGT will again lead the way.

Before I share with you what all this means for our bottom line, let me first take some time to thank our employees. We have endured a dramatic creative change at IGT and within the industry. I have asked everyone in the corporation to be more efficient and to do more with less. To date we’ve seen some pretty amazing results. That said, much of the well-hanging fruit has been harvested and some challenges still remain. I’m confident we will continue to achieve great things, in working together, we will all share in the results. So thank you to everyone.

In the long term, I believe we are well-positioned for top line growth with or without a meaningful change in replacement levels in North America. I also believe that eventually our customers will begin to focus on refreshing their slot floors to increase the differentiation of their entertainment offering. The timing is elusive. Therefore at this time I believe we must remain prudent and conservative, focusing on controlling that which we can control.

For the current fiscal year 2011, we offer GAAP earnings guidance of 77 cents to 87 cents per share, which is similar to our projections at this time a year ago. This is guidance that we are at this time confident in achieving. We also know that there is tremendous leverage in our business should demand for our products accelerate. While we have some lofty goals for this year, I must also point out that downside risks and uncertainties still exist and that visibility is as limited as ever.

In summary, we expect to see positive top line contributions in fiscal 2011 in the form of further international growth, leveraging our industry-leading MegaJackpots business, increasing our non-box revenues and garnering improved market share in new jurisdictions domestically and abroad. We will continue to take advantage of our significant cash flows, further strengthening our balance sheet, investing in new technologies and leading the industry technologically as gaming transforms around the globe.

We expect to improve our efficiencies and our focus on driving higher returns on our investments, lowering operating cost and harvesting stranded capital. And finally, we are confident that opportunities for replacement sales will return. When our customers meaningful reinvest in their slot floors, they will turn to IGT as they always have for leading products and technologies.

And with that, we’d like to take your questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session.

(Operator Instructions)

And Robin Farley, your line is open.

Robin Farley – UBS

Great, thanks. Just a couple of clarifications on your guidance. Can you tell us what in that 77 to 87-cent you’re including or not including for Italy and Illinois in that guidance?

Pat Cavanaugh

Hi, Robin, it’s Pat. Very little, if any, for Illinois, and I want to say up 1,500 units for Italy.

Patti Hart

That’s right, yes.

Robin Farley – UBS

Okay, great. And then also, ahead of the September quarter you had mentioned potential upside to your guidance. I think you had talked about maybe 2 cents of potential upside, depending on the timing of some software recognition at Aria [ph] I think it was. Did that 2 cents happen in this quarter or was that not recognized in the September quarter just yet?

Pat Cavanaugh

It was not, Robin. It would more than likely happen in FY11.

Patti Hart

Yes, we’re still working through, Robin, the acceptance of the system at Aria [ph]. So the machines are on the floor and they’re performing and the software is getting installed, and it’s just pending the recognition of the revenue at this point.

Robin Farley – UBS

Okay, great. And then, I know you – there was a lot of detail on – to serve the general strategic approach ahead of G2E, but can you just quantify in some way whether kind of – whether it will be like x number of new titles this year versus last year or just how you would contract the offering this year that we’ll see at G2E versus last year?

Patti Hart

Yes. So I would say that the difference in what we expect to release in titles and what you’ll see at G2E is a little different. So at G2E you’ll find that we’re a bit more focused this year in our product offering really trying to put on the floor the products that have differentiations in the characteristics or new features or what-have-you. Our expectation is that the number of new titles that we’ll put in the market in 2011 is very similar to what we put in the market in 2010.

Robin Farley – UBS

Okay, great. Thank you.

Operator

And next we have Joe Greff with JPMorgan. Your line is open.

Joe Greff – JPMorgan

Hey, guys. Within your fiscal 2011 GAAP EPS range of 77 to 87 cents, what’s the difference, the 10 cents different? Does that relate to some acceleration in North American replacements, does that relate to some acceleration or growth in the gaming ops installed base? How do you sort of reconcile the two? What goes better for you to get to 87 cents versus 77 cents?

Pat Cavanaugh

I think like it was this past fiscal year, Joe, it’s largely all around replacements, the level of replacement activity. So at the higher end would assume – we see some improvement in replacement activity.

Patti Hart

Yes. And I think, Joe, it’s important to note as well, one of our key focuses as a management team is really reducing our reliance on the North American replacement cycle, so a part of that 10-cent range is really realizing that, right? So it’s really saying, are we really able to exercise the global footprint of the company as well in 2011 as we did in 2010? And so therein lies part of the range as well.

Joe Greff – JPMorgan

Great. And, Pat, you may have mentioned this earlier, but the international machine sales strength relative to our forecast, what specific markets was that? And is that sort of one time in nature? Thank you.

Pat Cavanaugh

Hopefully it’s not one time in nature. And the two markets that really we had very good performance were Latin America had a real strong quarter again, and that market continues to grow and prosper. So hopefully we could – that continues in the future. And then we had a very strong quarter in Australia as well.

Patti Hart

Yes. I think another thing that’s worth noting, Joe, is when you look at the international business in the quarter, not only were the units that we recognized up from the expectation but the ASPs were up pretty significantly. So, $3,000 year-on-year and $1,200 sequentially. So we’re finding that the health of the business in the international marketplaces is really holding up.

Eric Tom

And to re-echo what Pat has said that we hope it’s not a one-time thing, one of the opportunities that IGT has is it has a broad portfolio of markets to sell within and a broad portfolio of products to sell. So in difficult times like we’re experiencing in North America, managing your portfolios’ opportunities to go where the opportunities are is really an opportunity we have that I think others don’t have as much freedom to do.

Pat Cavanaugh

Right.

Joe Greff – JPMorgan

Great. Thank you.

Operator

And next we have a question from Chris Woronka with Deutsche Bank. Your line is open.

Chris Woronka – Deutsche Bank

Hey, good afternoon, guys. Patti, I think you mentioned that you’re expecting your gaming ops yield to improve next year. What are some of the things that are driving that?

Patti Hart

Well, I mean I think you’ll see a lot of it at G2E. I mean I think we really have the best game ops product lineup that we’ve in many years that we’re putting into the marketplace. So the first thing I would say is yields in game ops are a combination of consumer discretionary spending and just rocking games. And I think this year we have a really good lineup of games.

We also are really deploying our strategy as a company around the reuse of hardware in the game ops space, so that we’re not really pulling the hardware off the floor but that we’re software upgrading to the new games, so we can push our lives of the hardware out longer which just comes back to you, right, from an earnings perspective. So I think it will be a combination of incredibly well-playing games but moving to common hardware platforms that are upgradable in the field as opposed to having to bring them off the floor.

Chris Woronka – Deutsche Bank

Okay, great. And you talked about becoming less reliant on the U.S. replacement cycle and more international. Where do you think the mix can get to, if not next year, in the next couple of years? Is it going to be more of an even shift or do you see one or two years being much different than the other?

Patti Hart

Yes, I would expect for the next couple of coming years, that we would expect outside [ph] growth in our international marketplaces. And I think it’s a combination of jurisdictional expansion and an ability for us to take some share and markets where perhaps we haven’t been as aggressive as we have in North America. So I would expect to see the international business closing the gap a bit on the U.S. business, if you will, I would say in ‘11 and ‘12.

Chris Woronka – Deutsche Bank

Okay, great. And then just finally, how much capital are you guys talking about in terms of the online and mobile initiatives on the investment spending?

Pat Cavanaugh

I think, you know, measured, not anything that you should be too overly learned [ph]. I think we’re taking a very logical and factual [ph] approach to how we develop and grow that business.

Patti Hart

Yes. And when we think about it, we really have absorbed it in the R&D line item, so we have absorbed a redirection of R&D expenses from other parts of the business, particularly systems platform is a bit more mature now than it has been. So while we’re redirecting some of our R&D spending, we’re committed to keeping the R&D line item flat.

Eric Tom

A lot of my particular focus is really driving process, automation, efficiency into the organization, breaking [ph] the organizational structure, and then really taking that and reinvesting it in other lines of business is the strategy. So we’re funding a lot of this just internal with internal savings.

Patti Hart

Yes. Right.

Chris Woronka – Deutsche Bank

Okay, great. Thank you.

Operator

Okay, thank you. Next we have a question from Carlo Santarelli. Your line is open.

Carlo Santarelli – Wells Fargo

Thanks. Patti, I just wanted to clarify one of the statements that you made about your gaming ops segment. When you say grow, are you referring more to yields in that business or revenue growth? And could you maybe try and partition how that’s coming, whether it’s mix in the yields or if it’s more driven by some strength you might be seeing in some of your games?

Patti Hart

Yes. So I would say we’re focused as a management team more on getting more from the installed base we have because it is stranded capital and it’s the place we put capital to put incremental capital in without being able to [inaudible] with the return side [ph], rather have my capital that’s deployed working harder first, right? So that’s what we’re focused on today.

And I think it’s a combination, when I think about yields, it’s a combination of looking for a little bit of help from the economy and just putting better games out into the marketplace, replacing that bottom end of what is in the installed base today with higher performing products.

So a little bit of it will be mix because we’ll have higher performing mix assuming that nothing happens dramatically with Alabama, right? Alabama is the outlier. If we were to bring that back on, then I think you see a mix shift the other direction. But we’ll take that business.

Eric Tom

I think deploying better games may or may not have an immediate result in rate, but it provides a much more leverageable platform once the economy returns.

Patti Hart

Yes, frankly [ph].

Carlo Santarelli – Wells Fargo

Okay. And then if I look at your North American average sales price in the quarter, it looks to be down more year-over-year than sequentially, up a little bit sequentially. But are you guys seeing a lot of competition? Do you feel your competitors have been aggressive with discounting and are you responding to that? Or do you feel like you are going out with what you have right now and it’s more of a mix thing than it is competition?

Eric Tom

This is Eric. Yes, there is – the competition is fierce. It’s been fierce for the last few years. Our competitors, we have a sense, are getting very aggressive. We’re not following down their path. We think the value of our games is worth the price. And while we have promotions and incentives, we really aren’t looking to lower our ASP.

Pat Cavanaugh

Yes, and that – Carlo, this Pat – if you look at year-on-year, Q4 of last year is when we first started rolling out in earnest the MLD product which has a much higher ASP. And obviously we were doing that in kind of a normal discount environment. This year’s fourth quarter had a fair amount of MLD carryover from the Dynamics promotion that ended the end of June, i.e. people had to have their orders in. Some of those orders came in in Q4, and that’s really what explains the lower ASP.

Carlo Santarelli – Wells Fargo

Thanks, Pat.

Operator

And next we have a question from Mr. Steve Wieczynski with Stifel Nicolaus. Your line is open.

Steve Wieczynski – Stifel Nicolaus

Good afternoon guys.

Pat Cavanaugh

Hey.

Steve Wieczynski – Stifel Nicolaus

Hey, Pat. In the game ops, with the net decrease of 1,800 units sequentially, how many of those came from – were from Alabama?

Pat Cavanaugh

I think almost all of them. I think there were roughly – I think there 1,900 units left there at VictoryLand. It was the last property that closed; that closed in August. So almost all of those, in fact you could assume the entire amount in there.

Steve Wieczynski – Stifel Nicolaus

Okay, got you.

Pat Cavanaugh

As well as pretty much – we have a continual – a lot of movement in and out of our installed base, as you might imagine. But both the year-on-year numbers, so the annual decrease and the quarter decrease, largely Alabama.

Steve Wieczynski – Stifel Nicolaus

Okay. And is it fair that – do you think margins in the game ops will kind of trend here in the upper 50s assuming a normalized rate environment?

Pat Cavanaugh

Yes, I think so. I think 58% to 60% is the right kind of range. We had a little bit of a downtick this quarter, which is not unusual. Fourth quarters are always the time when you pick up a lot of stuff as you’re growing through the audit, so.

Steve Wieczynski – Stifel Nicolaus

Okay, great. Last question, did you say you shipped units to Cosmo this quarter?

Pat Cavanaugh

We did. We didn’t recognize them, no.

Steve Wieczynski – Stifel Nicolaus

Okay. So when we look at your ship share, I mean it looks to me just a little bit softer than I think what we were expecting. So, is that kind of the difference there?

Pat Cavanaugh

Yes, that would probably explain –

Patti Hart

Yes, that’s part of it. I think when we look at the ship share though, Steve, I mean we really, in the U.S. I mean we’re kind of feeling like we’re in that kind of 33%, 34% range. When you really look at the focused activity that has been going on in that company, you have to really take it up a notch and look at the global ship shares. So you line up our ship share on a global basis with WMS and Valley, and we ship more than twice the closest competitor on a global basis. So that’s where you as an investor get real operating leverage from IGT, is really us pulling on every leather we have, and we did have so many more.

So, like Eric said, we have to go where the business is. So we’re comfortable that when you look at the ship share on a global basis, which is the way we think about our business, right, we build a product, we ship it everywhere in the world, we’re real comfortable with the representation we’re getting in the marketplace.

Steve Wieczynski – Stifel Nicolaus

Great. Thanks guys.

Operator

And next we have a call from Mr. Cameron McKnight of Buckingham. Your line is open.

Cameron McKnight – Buckingham Research

Good afternoon. Just on your strategy going into the G2E, based on the press releases that have been coming out, it looks like you’re shifting product back towards more branded and theme-based gains?

Eric Tom

I think that’s – I don’t know if that’s an unusual trend for us. We’ve always believed that the branded games attract customers to sit down. You still have to have great math and great games to keep them in the seat. But I don’t think that’s anything unusual for us.

Patti Hart

Yes. And, Cameron, I think it’s interesting because it’s the branded games that play best in the press release always, so you have to be careful about doing a press release on something no one’s ever heard of. But having spent a lot of time in the last two weeks in the pre-G2E previews with our customers, I can tell you that some of the non-branded IGT-created games are getting incredible feedback.

So I think for us, again, it’s about portfolio management. So we’ve got to have the big brand, we’ve got to have the themes, but we’ve got to fill in all around it. And I think Eric talked about this Reel Edge product which we had one customer that ordered product right on the showroom floor, which hasn’t happened to us in a while, when they saw the Reel Edge product. So I think it really is about the portfolio management, the things that get printed [ph] are all about the big theme games, that the things we’re building really touch a broader base.

Cameron McKnight – Buckingham Research

Great, thanks. And on the replacement market, WMS made some comments that they were seeing some very early and cautious optimism from customers as far as replacements are concerned. Have you been sensing the same from some of your discussions?

Eric Tom

We’ve been very busy visiting customers, Patti and I, over the past several quarters. I would say that they are optimistic but we get no visibility on when they’re going to start spending. So I think they feel better but we don’t get a sense that they’re going to – they’re spending soon.

Patti Hart

Yes. I think that they’re all waiting for different things. It depends on who it is. I mean I had one customer say to me last week in the showroom, "You have great games, I wish I could buy them today," right? So it’s kind of interesting that I think they’re all feeling that need and there’s this giant pent-up demand. But they have their own obligations that they have to meet internally, so they’re walking that fine line. So our responsibility is to go where people are spending which I think is what you see in our results this quarter and to position ourselves for those, when the spending comes back, to have the best product in the market. And that’s really what we’re focused on.

So we hear good things, but then we want to see – it’s like show me the money. I’m the Patti Hart show-me-the-money CEO right now. So we’ll see.

Cameron McKnight – Buckingham Research

Okay, thanks. And finally on the balance sheet, do you have any intentions of restructuring things there or trying to take up the convert?

Pat Cavanaugh

Actually we’re studying all that right now, Cameron, because at the rate we generate cash, we won’t have any pre-payable debt before too much longer. So part of analysis being done at this time around that.

Cameron McKnight – Buckingham Research

Okay. Thanks very much.

Patti Hart

Thank you.

Pat Cavanaugh

You bet.

Operator

All right. David Katz with Jefferies & Company, your line is open.

David Katz – Jefferies & Company

Hi, afternoon. How are you?

Patti Hart

Good. How are you?

David Katz – Jefferies & Company

Just fine. A couple of questions. One, Patti, just thinking about your approach, and I don’t recall exactly what the dates are, but one of the mandates I think you issued when you started was getting new product to market in a good amount of time. Are you pleased, satisfied or is there more work to do in terms of getting new games out sort of on the shelf that can be purchased when they are? And then I just have one housekeeping follow-up please.

Patti Hart

Sure. Sure. I would say I am incredibly pleased with the progress. I will never think the work is done, right? That is my responsibility, is to keep that pressure on. And so I’m incredibly pleased with the progress that we’re making not only in our speed to market in developing the product but our speed to market in manufacturing and delivering the product. So if you look at not only the development cycle but the order to revenue cycle, has been dramatically improved. And you see it in our inventory turns, you see it in the way we’ve really exercised the working capital in the company. So it’s that full cycle from development of a product to having it on the floor generating revenue for us and our customers, I’m very pleased with the time we’ve taken out of that process.

Next year’s continuing to mime [ph] that process because there’s more work to be done. There’s much more work to be done. And as the complexity of the products increases, which it is and will continue to do, you have to keep your eye on that and make sure that it doesn’t really float back out in development time. So, very happy with progress, but for my employees that are out there listening, more work to be done.

David Katz – Jefferies & Company

Can I just follow that up? What was the turn time on order shipment when you start it? Where is it today? Is there any detail you can give us with that?

Patti Hart

Yes, I think we’ve taken about 20% out of the process actually. So we haven’t really made public the details, but we are down 20% in order to revenue from where we were 18 months ago.

Eric Tom

Our focus on delivering products to market naturally is first focused on the MegaJackpots business because time is money in that business. The faster you get, the better game on the floor, the faster it starts to earn revenue.

What I’m harping about, reinforcing what Patti has said, is in our process of game development, a lot of the improvements are structural in a sense that we’ve deployed tools that allow the game developer to be more effective. In the order to delivery process we have a lot more process definition, a lot more process improvement. It has driven that speed to market.

So like Patti said, not done yet but still work in progress.

Patti Hart

Yes.

Eric Tom

But good progress.

Patti Hart

Yes, good progress.

David Katz – Jefferies & Company

Now in the past you’ve talked about the game ops segment and what we referred to as mix issues. And my sense is that there were some leasing of games going on with certain customers. When you comment today about the yield on your installed base improving, does that suggest that some of those mix issues were – are passed or are you eclipsing those, or how do we think about that?

And then just my one last detail is, what kind of tax rate are you assuming in the guidance please?

Pat Cavanaugh

Yes. Hi, Dave, this is Pat. I think that the mix issues, we’re always going to have that challenge because we’re creating products in all of those categories. And sometimes you have product in one – say you take wide array progressive [ph] versus standalone, and sometimes you’ll have a very dynamic product that really drives some of that shift. But I think the thing we’re encouraged by is that yields are starting to stabilize and the pipeline of games that we have, we’ve got a real renewed focus, intense focus on web and standalone, so that no one product category gets ignored, which I think in times past at times we’ve shifted a little bit too far in one direction, either the product sales at the expense of game ops or vice versa. And I think now given that we have two individuals in charge of both of those, there’s intense focus on both.

And then relative to the tax rate, on a go-forward basis, I think about 39%.

Patti Hart

Yes. And I think it’s also important to note on the game ops yield that we were managing game ops at the consolidated level from a yield perspective. What we don’t want to do is put so much focus on that yield number that we don’t participate in jurisdictional expansion. So a lot of the opportunities to enter new jurisdictions come at the low-yielding product levels. And so using that as a way to enter market is a really important strategy that has served IGT so well historically. And so keeping our focus on the sub-segments, if you will, of game ops, but thinking about it at the consolidated level in a way that is always a trade-off between participating and entering new markets with holding up the high-end performing games in the MegaJackpots sector.

David Katz – Jefferies & Company

Got it. Thank you very much.

Operator

And our last question comes from Ryan Worst with Brean Murray. Your line is open, sir.

Ryan Worst – Brean Murray

Okay, thank you very much. Could you guys provide a breakdown of the North American units recognized between new and replacement, 3,300 was the number?

Pat Cavanaugh

I think even though we didn’t in the press release, I think it’s fair to assume that the vast majority of these would be replacement. It’s generally when we have deferred revenue, it’s on the new units.

Ryan Worst – Brean Murray

Okay. And then, Pat, could you talk about the timing of the recognition to game sales to Cosmo? Is it going to be kind of like an Aria [ph] deal where you recognize it over a length of time?

Pat Cavanaugh

No, I believe most of it will probably happen coincident with the opening, because a lot of it’s tight because of the software.

Patti Hart

Yes, we do – contractually we cut our keep [ph] in the Aria [ph] contract and I think we were a little bit more focused on revenue recognition in subsequent contracts. So I think you’ll see this one will contractually allow us to recognize revenue in a different fashion.

Ryan Worst – Brean Murray

Okay, that’s helpful. And then could you talk about the international gaming ops revenue? It looked like you were down year-over-year versus op in the previous two quarters. Could you talk about the change there? Is it just FX or –?

Pat Cavanaugh

We were up year-on-year but down in the quarter, and I’m trying to remember – I think it had – some of it had to do a little bit with the shift in Mexico as we’re transitioning to Class III. I think it’s more of a temporary blip as opposed to a trend.

Ryan Worst – Brean Murray

So, are most of the Class III replacements in Mexico, are they going to be revenue share as well? And do you expect to convert your entire Class II base to Class III games over the next year or so? Or how long will that –

Pat Cavanaugh

Yes, I think – first, to your first question, I think yes, the answer is yes, they’ll probably most will be rev share. And I would assume that most of that Class II base does transition over the next 12 to 18 months, I would assume.

Ryan Worst – Brean Murray

Okay, great. Thank you.

Pat Cavanaugh

You bet.

Patti Hart

Okay. Well, listen, thank you very much for joining us today. We’re celebrating the end of 2010, launching ourselves into 2011. We really appreciate you taking the time out to spend some of that time with us and hear our story. So, thanks very much everyone.

Operator

That concludes today’s conference. Thank you for participating. You may disconnect your lines.

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