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International Game Technology (NYSE:IGT)

Q1 2011 Earnings Call

January 20, 2011 5:00 pm ET

Executives

Matt Moyer - Vice President of Investor Relations

Eric Tom - Chief Operating Officer

Patti Hart - Chief Executive Officer, President, Lead Independent Director and Member of Stock Award Committee

Patrick Cavanaugh - Chief Financial Officer, Principal Accounting Officer, Executive Vice President and Treasurer

Analysts

Carlo Santarelli - Wells Fargo Securities, LLC

David Katz - Jefferies & Company, Inc.

Mark Strawn - Morgan Stanley

Cameron McKnight - Buckingham Research Group, Inc.

Chris Woronka - Deutsche Bank AG

Joseph Greff - JP Morgan Chase & Co

Steven Kent - Goldman Sachs Group Inc.

Steven Wieczynski - Stifel, Nicolaus & Co., Inc.

Robin Farley - UBS Investment Bank

Operator

Welcome, and thank you for standing by. [Operator Instructions] I'd now like to turn the conference over to Mr. Matt Moyer, VP of IR. You may begin.

Matt Moyer

Good afternoon, and welcome to IGT's First Fiscal Quarter 2011 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, January 20, 2011, and will include forward-looking statements, including forecast of future performance and estimates of amounts not yet determinable, the potential for growth of existing and the opening of new jurisdictions for our products, play levels for our installed base of recurring revenue gains, 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.

During this call, we may discuss certain non-GAAP financial measures, including but not limited to; EPS from continuing ops, income from continuing operations, adjusted EBITDA and free cash flow. In our press release, which is posted on the Investor Relations section of our website, www.igt.com, you will find additional disclosures regarding these non-GAAP measures. You will also find supplemental materials regarding our guidance for adjusted EPS from continuing operations and its reconciliation to GAAP posted under the Events tab on the Investor Relations section of our website.

With all that in mind, I'll now turn the call over to Patti.

Patti Hart

Thanks, Matt, and good afternoon, everyone. I would characterize our fiscal first quarter as a reflection of the remarkable improvement we have made in our profitability and in our internal processes. I would also characterize this quarter as quiet, no big surprises, not a lot of negative noise and a clear indication that we are headed in the right direction.

While the top line continues to reflect the sluggish market, we continue to make progress towards our objective of delivering more meaningful revenue growth and healthier game operation deals in the future. In the current global economic environment, it is absolutely the right decision to be customer-minded and incorporate feedback from the market into our business plans. We need to ensure that we are doing the right things in the most efficient manner in every part of our business. We have improved internal processes and positioned ourselves to capture increased earnings and cash flows when customer demand returns.

Additionally, we have worked to put our cost structure and balance sheet into the best shape possible. Our products are much improved, and they are delivering the excitement that players expect. We are poised to capture the exciting opportunities in front of us, and we are confident in our ability to further demonstrate our position as an industry leader.

We clearly exhibited the potential of our product development process at G2E with our incredible lineup of new products. It's very rewarding to see the fruits of our labors. The recent opening of the Troia Casino in Lisbon, Portugal, where we captured 70% of the floor and the Cosmopolitan of Las Vegas, where we deployed 50% of the machines on the floor, showcase our unique ability to serve all aspects of the next-generation casino. In both cases, our server-based systems, combined with our games, allow us to help our partners differentiate themselves with the market-leading slot floor.

We have also seen incredible levels of server-based adoption in the high-limit area of slot floors across the country. The order volume for our server-based Tier 1 installs has never been better. We have always believed that sbX was going to be a best-in-class solution and now, our customers can adopt it much more quickly and inexpensively.

Following G2E, we deployed our American Idol and Wheel of Fortune Triple Spin games on our new Center Stage platforms. Both new games are performing much better than floor averages and above our lofty expectations. We have quickly established this platform as a much-needed fixture on slot floors across the country, and we are readying a spectacular lineup of games to further strengthen this format.

Our Center Stage platform is upgradable, with minimal capital costs and limited downtime, improving returns for both our customers and our shareholders. Our 30-day exclusive with MGM Properties on our American Idol game could not have gone better. You will soon see the American Idol game prevalent around the globe. Our high-performing Sex and the City Game has now reached an installed base count of over 1,800 and continues to outperform our wildest expectations.

While our International business had a respectable quarter, the installation of Casino Rosario in our first fiscal quarter of 2010, creates a difficult benchmark for this year's results. We have built a very formidable international presence, and going forward, will drive increased sales and enhanced profits around the globe. I will now ask Pat to go over some of the financial details of the first quarter. Pat?

Patrick Cavanaugh

Thanks, Patti, and good afternoon, everyone. Our first quarter earnings from continuing operations totaled $73 million or $0.25 per share, inclusive of $0.04 per share related to certain tax benefits and a gain from the sale of our equity investments in China LotSynergy Holdings. The details are provided in this afternoon's press release.

This quarter's earnings compared to income from continuing operations at $75 million or $0.26 in last year's first quarter. As Patti mentioned, I think it was definitely a good quarter on the gross margin line, but left room for improvement on the top line. It is also our first quarter in quite some time without a lot of negative noise, possibly indicative of better times on the horizon.

Our consolidated revenues for the first quarter were $465 million, of which 56% were generated by gaming operations, and the remainder came from product sales. Gross margins for the company was at 59%, which is up 200 basis points year-on-year, mainly due to increased gross profit margin and product sales. That said, gross margins were up company-wide.

We also had a respectable quarter on our Gaming Operations business, and we continue to see stabilization yields with a return hopefully to more normal seasonal patterns. Game ops revenues were $261 million in the first quarter, which was down 3% sequentially and 6% year-on-year, mainly due to a lower installed base in both periods and decreased revenue per unit compared to the sequential quarter.

Gross margins increased 100 basis points to 63% over the prior year quarter, primarily due to the removal of lower yield and charitable bingo games in Alabama. We earned an average of $50.38 in revenue per unit per day, which is up $1.13 compared to last year's first quarter. While the installed base isn't expected to grow meaningfully this year, we have begun in earnest to replace some of our older participation games with new titles and platforms, a trend that should continue and may accelerate.

IGT's installed base ended the first quarter at 56,700 units, down 5,400 units over the prior year, largely attributable to the closing of Alabama and the conversion of leased units to for sale in Mexico. Approximately 82% of our installed base is comprised of variable fee games that earn a percentage of machine play, rather than a fixed daily fee.

Product sales revenues totaled $204 million for the quarter compared to $238 million in the first quarter last year, mainly due to softer sales internationally. Worldwide, we recognized 9,400 machines during the quarter, down from the prior year 11,900. International product sales revenue totaled $70 million on volume of 4,300 units for the current quarter compared to $103 million and 6,400 units in the prior year quarter. The decrease in revenues is primarily due to fewer new openings and expansions in the quarter versus last year.

Fiscal year 2011 is expected to be a lighter in new and expansion units versus last year or next year. Worldwide non-machine revenues, mainly from the sales of systems, conversions and intellectual property fees, came in at $81 million for the quarter or 40% of total product sales compared to $77 million or 32% of total product sales in the previous year. Product sales gross margins were 55% for the quarter, up 300 basis points from the prior year, due to a stronger mix of non-machine sales combined with an improved geographic mix.

First quarter operating expenses were $155 million, up slightly versus last year's first quarter due to higher R&D costs. We expect total R&D expenses for the full year to remain similar to fiscal 2010. Total SG&A was down $2.4 million, primarily due to lower bad debt expenses. We expect to see SG&A stay about flat on a dollar basis when compared to fiscal '10 as we invest in the people and processes necessary to take advantage of the expected industry turnaround and new business opportunities. Overall, operating expenses were 33% of total revenues this quarter, roughly in line with the prior sequential quarters.

In the quarter, we recognized tax benefits of $7 million or approximately $0.03 per share from the implementation of certain tax-planning strategies and the reinstatement of the research and development tax credit. As a result, the tax rate for the current quarter was 29%. We expect the tax rate to be 36% in each of the next three quarters or approximately 34% for the full year.

Cash and equivalents and short-term investments, inclusive of restricted amounts, totaled $254 million at December 31, 2010, compared to $249 million at September 30, 2010. Contractual debt obligations totaled $1.7 billion at the end of the quarter compared to $1.8 billion at the end of September. We have now reached a significant goal on our cash management strategy. We now have virtually our entire revolver available, giving us more options for our cash.

In the first quarter, we generated $42 million on free cash flow after dividends, down from $98 million last year, mainly due to higher inventories and jackpot payments. The inventory increase was due to our strong rollout of new platforms and games and to the timing of shipments around quarter end. We also had a higher proportion of people taking upfront lump-sum payments for our jackpots during the quarter. This concludes my prepared remarks regarding our first quarter results. Thanks for your time and attention. I'll now turn it back over to Patti.

Patti Hart

Thanks, Pat. For the first time in quite a while and certainly during my tenure, we now have enhanced flexibility in our balance sheet. We have prioritized opportunities to deliver positive and accretive returns through organic growth, as well as from outside activities, always with return to shareholders in mind.

Currently, we are looking at ways to drive our game ops yields higher, ahead of a full economic recovery. With the standardization of our platforms and a significant list of exciting new games, we could begin to accelerate the process of converting older titles and boxes to newer versions. We are also considering an increase in the use of financing to help our customers refresh their floors on a selective basis.

We are always looking to add to our creative resources, which is the heartbeat of IGT, and we are constantly evaluating ways to obtain access to emerging technology-based intellectual property. We see plenty of opportunities to supplement our Interactive business. We believe that the future will require a more robust interactive platform, it's just a matter of finding the situation that is right for IGT and our shareholders.

Given appropriate returns, our preference will always be to apply cash to strengthen our market position with better products, a broader talent pool and an eye towards the future. At the end of last year, I articulated our five primary objectives for fiscal 2011. I will now ask Eric Tom to give you a quick update. Eric?

Eric Tom

Thank you, Patti. We continue to reduce our reliance on the North American replacement cycle, through the improvement of gaining operations yield, improving our core and system products and growing our Interactive business and IT portfolios. I'd say we're off to a great start in 2011.

In our Participation business, the acceptance of our new games has been very promising and our yields are increasing. Over the past three years, our yield has fallen by an average of 8% from quarter four to quarter one. This year, it's still less than 1% sequentially and was up 2.3% over the prior year's first quarter. As Pat said, this feels like a more normal seasonal decline and perhaps, a sign of better times ahead.

The launch of our Center Stage platform, as well as our easily-convertible G23 machines have been very well received in the marketplace. We have supported those platforms with an ample supply of new games. Installed base has shrunk recently, mainly due to some large closures.

We're also proactively removing older lower-yielding games and replacing them with fresh, higher-performing games. While within the current CapEx budget, this will take some time to complete. We are looking for many new creative ways to accelerate this process.

On the core side of our business, our Reel Edge product won the prestigious first place honor for the best slot product at G2E. This product's in the final stages of regulatory approval and should hit the slot floor soon. Initial demand for Reel Edge has been above expectations.

We are optimistic regarding potential sales opportunities in Illinois, and thereafter in Ohio and Canada, although none of these are in the fiscal year's plan. IGT's product breadth and experience make us a logical choice for many new customers. Our pipeline of core games and the speed to which we are coming to market makes us poised for growth moving forward.

Our system installs in North America and internationally are growing. During the first quarter, we added seven new Advantage systems and eight new sbX installations. To highlight the power of our broad portfolio, of these seven new Advantage customers, five also installed sbX.

Additionally, there are more than 70 North American sbX and Tier 1 opportunities that we are working on. But please understand that these are only opportunities, and there's no guarantee that we will close any of these. We will also continue to grow globally. For example, we continue to perform well in Australia, in South America. As Patti said, we rang in the New Year in Portugal at Casino Troia with a successful installation of sbX and over 70% of the floor, represented by IGT games.

We're listening to our customers and positioning our international sales force to be more nimble and responsive. We're communicating, we're committed to developing games that meet our international customers' expectations and exceed the desires of specific regions' players, while also reducing costs and inventories and driving higher returns over time.

In Mexico, we proactively converted older leased machines to for-sale product, as the country moves to Class III games. We are confident we will follow that up with higher-yielding lease machines, using the capital generated to improve returns. Our geographic reach of our international operations is a competitive advantage, and we are definitely gaining momentum.

Our focus on profitability and processes also contributed to strong free cash flow in the quarter. In the first quarter, inventories were up on expected shipments in the near future. Our returns were faster than a year ago, both domestically and abroad. As Patti mentioned, we are looking at a myriad of opportunities to deploy our significant cash flow back into our business to grow our revenues and earnings more quickly.

Finally, our primary focus is improving our returns on investment. For this quarter, as we figure it internally, it was higher than last year at this time and is moving in the right direction. As we deploy cash, continuing to drive higher returns will be a primary driver in the decision process.

Overall in the first quarter, we have made solid progress on our 2011 objectives. Rather than merely focusing on the short term, we are investing in the long term, and we believe we are moving in the right direction. With that, I will turn it back over to Patti for her closing comments.

Patti Hart

Thanks, Eric. And I couldn't agree more, setting our sights on the long term is in the best interest of all of our stakeholders. The current environment requires that we remain prudent, conservative and focused first on managing what is within our control.

For the current fiscal year 2011, we are updating our earnings guidance to $0.79 to $0.87 per share, excluding the $0.03 per share from our lower tax rate in the first quarter and the $0.01 gain on an investment sale. That said, these are both equity and cash accretive items, reflective of deliberate business decisions. Moving forward, we may continue to have earnings events that may make direct comparisons difficult, but we think most of that is behind us.

I'd like to also point out that downside risks and uncertainty still exists, and visibility is as limited as ever. Overall, we expect to see positive top line contribution this fiscal 2011 in the form of furthering our international growth, leveraging our industry-leading Participation business, increasing our non-boxed revenues and garnering our expected market share in new jurisdictions. We will continue to take advantage of our significant cash flows, further strengthening our balance sheet, investing in new technologies and leading the industry as gaming transforms around the globe. We expect to see further improvement in our efficiencies, focused on driving higher returns on investments, lowering operating costs and harvesting stranded capital.

And finally, we are confident that opportunities for replacement sales will return. When our customers re-invest in their slot floors, IGT will be there as always with leading products and solutions. So Katherine, we'll turn the call back over to you and take questions. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Robin Farley from UBS.

Robin Farley - UBS Investment Bank

I wanted to ask about your guidance. If I heard you correctly, the top end of the range didn't move up, right? You just kind of moved the bottom end of the range. And so the margins though in the quarter were -- I think your guidance has been for high 50s, they came in the low 60s. I guess I'm just wondering whether you expected that in your first quarter? And also in your release, you talked about the second half of the year demonstrating better top line growth and so I'm just kind of thinking about the run rate from Q1, why maybe we wouldn't see the top end of your guidance range move up a little?

Patrick Cavanaugh

Robin, this is Pat, we're always going to be -- there's never any awards for being too aggressive, so I wouldn't imply a move up in guidance. You just have to understand that we still live in an environment of fairly-limited visibility. And it's pretty early in the year for us to -- I think, really do anything. But we wanted to at least, tighten up the range and take advantage of some of the things we did see. Maybe you took some of the risk out of the previous guidance. So I don't think anything more to read into it than that.

Patti Hart

Yes, I think, Robin, really just thinking about it, is annual guidance instead of with quarterly guidance and how do these things bounce around based on mix quarter-to-quarter, we just want to be certain that when we provide you guidance, it's something you can take to the bank, and that's really important to us. So I think it really is less about reacting to one quarter and saying, this is going to bounce around based on mix on a quarterly basis and making sure that we know we can deliver to you what we promised on an annual basis.

Robin Farley - UBS Investment Bank

And then my other question is just on, as you talk to your customers about their CapEx budgets, you mentioned that you are thinking about using your own balance sheet, if I understood you correctly, to extend credit to customers. Is that what you're hearing from them that they -- not just that the CapEx budgets are constrained that they're actually looking for sources of credit that, that's the biggest issue for them? Or is it that there's still difficult regional revenue comparisons? I guess, how much of a solution your balance sheet is going to be in getting your replacement cycle going?

Eric Tom

Robin, this is Eric. To give you a little more color on that comment, I think that's a continuing strategy on our part. I wouldn't say it's a new strategy. A lot really depends on the needs of the marketplace. I think the difficult economic times have made that a positive strategy for those willing to -- we don't have the capital dollars but willing to lease equally from us. So we've continuously been active in that marketplace. So I'm not sure just the availability of any cash is going to change any trajectories, I really think it still comes down to whether our customers feel it's time to reinvest in their slot floors. And that's -- while my travels around the country, we find it very important to make sure we get outside of Las Vegas as much as possible, Patti and I spend a lot of time on the road. The sense is from our travel customers, they've been fairly resilient in the downturn, continue to invest at a lower-than-normal, but steady rate. Some of our commercial regional customers are feeling more optimistic, feel more optimistic but aren't necessarily spending any more money and have a hard time giving us visibility to whether they will.

Operator

Our next question is from Joe Greff, JPMorgan.

Joseph Greff - JP Morgan Chase & Co

I just want to clarify a couple of things before asking some new questions. The $0.79 to $0.87 fiscal 2011 GAAP EPS, what you're including in there for this quarter is $0.21, is that correct?

Patti Hart

That's right, Joe.

Patrick Cavanaugh

That's correct.

Joseph Greff - JP Morgan Chase & Co

And then revisiting the gross margin on the Game Ops side, it obviously, was better than I think most people were expecting. If I heard you correctly, is that sort of the base level that you expect going forward from here, from which to grow with more positive yield and mix changes? Is that how you're thinking about the margins on that line?

Patrick Cavanaugh

Yes. But I think with one caveat, Joe, it's going to be a little bit volatile as it always has been. But I think what you've seen over time is the margins in that business. As the mix within there becomes less heavily weighted to jackpot-bearing type links, because naturally, whenever you don't have a jackpot, you've got an actually higher-margin activity. And I think that's a continual trend we see over time. But it's still going to be a little lumpy. And for the interest rates, to the extent we experience volatility there, we'll move it around a little bit.

Joseph Greff - JP Morgan Chase & Co

And then on the domestic product sales side, was there much of a change in your average order size? Was that materially different than the last couple of quarters? And then on the same topic, what is your best sense from talking with the customers, and this is a question for Eric Tom, what is your best sense in terms of how your casino operators are looking to spend their replacement budgets this year? Do you think we're returning to what would be a more normal pattern of seasonal spending, which we certainly didn't experience last year? If you can help us understand those conversations that you're having, that would be helpful.

Eric Tom

I'll answer the second question first. Not much indication, not enough indication to feel good about. The current environment, I think our customers feel better, as I mentioned earlier. But similar to previous quarters, it hasn't really resulted in them communicating to us that they're going to substantially increase their capital budgets for slot floors. Regarding your first question, the order sizes were smaller the last two quarters. This quarter, we were very focused on really reaching out to all parts of our marketplace in North America, and we pushed a number of products that fit that marketplace need. And so we were fairly successful at that. So I would say the order sizes tended to be smaller because of that focus.

Patti Hart

And I think, Joe, that would carry over into the international group as well. I think it was a bit more of small incremental additions at a number of properties as opposed to one large or two large orders that we've seen in previous quarters. So it's just -- we're mining for every machine.

Operator

Our next question is from Chris Woronka, Deutsche Bank.

Chris Woronka - Deutsche Bank AG

On the U.S. ASPs, is that kind of largely a function of a decision you guys made to kind of phase out some of the older titles? And if it is, kind of what are your expectations going forward if we kind of cycle that process?

Patrick Cavanaugh

Sure. I think what you saw was ASPs were down year-on-year and that was, remembering in Q1 a year ago, we did the push, the promotional push was all around the MLD, which is one of our higher ASP products. And then in this Q1, it was focused on non-MLD, other AVP products that had slightly lower ASPs. And then it was up sequentially, and that was largely due to the fact that the product we're pushing this quarter was kind of in between the high-priced point MLD and products that were shipped the last couple of quarters.

Chris Woronka - Deutsche Bank AG

And realizing we don't have any other numbers from your competitors yet, have you guys have any preliminary idea on ship share in North America?

Patrick Cavanaugh

I really don't have a good sense for it, but I don't envision dramatic swings in it. I haven't noticed, we don't have any sense that we should be anticipating dramatic swings either up or down.

Chris Woronka - Deutsche Bank AG

And then just finally on the game ops side, again on the U.S. side, is it possible to kind of quantify how you think about if your installed base apples-to-apples 41,000, would that average daily revenue have been comparable to what you reported? Or would it have been higher or lower?

Patrick Cavanaugh

I'm not sure I understand your question, Chris.

Chris Woronka - Deutsche Bank AG

Just thinking about, with the slightly smaller installed base year-over-year, right, would you expect that -- was there a positive benefit in the revenue per device? Do you expect it would've been lower had you kept -- had those same machines theoretically been on the floor?

Patrick Cavanaugh

Correct. And I think so, because a lot of the units that came off the floor, particularly in Alabama were lower yielding. But I think that's a continual mix. I mean it's a hard thing, we give you a consolidated number that unless we really gave you all the granular detail, it's really hard to draw conclusive or conclusions.

Patti Hart

Yes, I think you'll find that the subsets of when we think about our business and kind of stand-alone, MegaJackpot and CDS Class II kind of stuff, if you look at the subsets, the right subsets are headed in the right direction and that's really what we're looking for. They're headed up. And so you do see some consolidation as we either convert some to for-sale or we -- there's closures like there's been in Alabama. But fundamentally, we look at that next level down to see if things are headed in the right direction and we feel confident that they are.

Operator

Our next question is from Steve Wieczynski of Stifel Nicolaus.

Steven Wieczynski - Stifel, Nicolaus & Co., Inc.

I'm going to ask Robin's question just a little bit different on guidance. So if you take your top end of $0.87 and take out $0.21, that leaves you with $0.66, that assumes essentially $0.22 a quarter for the next three quarters, and that just seems extremely conservative. You assume that you still have your seasonality built back in there with the last three quarters should get stronger. So what's the one thing that's really keeping you back from taking that top end a little bit higher?

Patrick Cavanaugh

I think it's all around product sales, and we're being as straight with you as we can. Visibility is pretty limited there for all the reason Eric cited. In his travels and conversations with our customers, they're feeling seemingly better about their outlooks, but I think there's still a cautious optimism going on, which is understandable in the current macro environment.

Steven Wieczynski - Stifel, Nicolaus & Co., Inc.

And then second question, just as you walk away from G2E, I mean, maybe if Eric could go through with the top two or three games that customers were really impressed with? I think specifically on the video platform?

Eric Tom

Sure. I think for us, the top game that created the most buzz, and actually rarely occurs, we resulted in orders right on the floor was Reel Edge. I mean, it's a stepper game but the reason why it was unique, it was first, in a series of skill-based games that we're coming out with. And the marketplace is very enthused and excited about that as it serves a demographic that is challenging to serve, a younger demographics, and so we think that skill-based games will be interesting. We have a number of unique for-sale games in the video space that are creating the buzz because of the interactiveness, the hot dice game that we have, that allows you to roll dice and determining your multiples is fun and active. Puppy Stampede was a favorite, it's a favorite for our high end of the marketplace, our old demographic, certainly. In the MegaJackpot space, it was really an interesting fight for the game that had the longest line. I mean, Dark Knight was four deep, Hangover was probably three deep and surprised, maybe not surprise to Patti because I think she picked this one but a surprise me was Ghostbusters who was consistently being talked about by the players walking away from it. Very excited. So those are probably the three big ones that generated the most excitement.

Patti Hart

And the Reel Edge product, as Eric said, I mean we had a lot of order activity so into G2E and then during G2E, and that product is pending regulatory approval at this point.

Operator

Our next question is from Carlo Santarelli from Wells Fargo.

Carlo Santarelli - Wells Fargo Securities, LLC

I just wanted to maybe go through some of the gaming ops math, and hopefully, I'm understanding this correctly but this coming quarter, the fiscal 2Q will be the first quarter you kind of overlap the Alabama comparison. And if my math is right and I'm looking at it win per day of about $25 out of Alabama, I see win per day for the quarter, this quarter being down about 1.5% to 2% in an environment where regional casino slot revenues were modestly around the same or possibly potentially up a little bit. Is there anything else in the mix there that maybe we're missing?

Patrick Cavanaugh

Probably not, but I think to my earlier point, if you look at yields on just a consolidated basis, we have a lot more activity than anybody else in that business. I mean, price points that run this gamut. So I think to Patti's point, we tend to look at the most relevant ones, select wide-area progressive where we've seen yields up nicely year-on-year, and only up slightly sequentially, and I think that's probably is more of a normal seasonality. So I think the more we continue to add lower-yielding, i.e. grow the installed base in those lower yielding categories, and those really are where probably the most opportunities are, particularly outside of the U.S., where we added units in the U.K. and South Africa, et cetera. So it's hard to get to a clear apples-to-apples on a consolidated unit per yield number as we report.

Patti Hart

I think the good news in the game ops yield from our perspective, is that we were fundamentally able to absorb the seasonality this quarter versus the past several years. So we have -- we were coming into the quarter thinking about an 8% decline because our historic numbers had been about an 8% decline, and we were able, within 1% or 2%, to be able to absorb that, which basically is an indication of just better performing products. And maybe we're hoping a little bit of an indication that, that health is returning to the business. So that was, from our perspective, a big win.

Carlo Santarelli - Wells Fargo Securities, LLC

And then really quickly on the guidance, I know when you guys stated you guidance originally, I think you mentioned there was a little bit of Illinois and maybe about 1,500 units of Italy. Are those metrics still contemplated in the updated range?

Patrick Cavanaugh

I think the Italy piece is, the Illinois, I think we probably misspoke if we led you to believe that it had. I don't believe there's any Illinois in the guidance.

Operator

Our next question is from Cameron McKnight of Buckingham.

Cameron McKnight - Buckingham Research Group, Inc.

Patti's comments that the quarter was quiet and not a lot of negative news, sounds actually quite positive.

Patrick Cavanaugh

We didn't have any restructuring.

Patti Hart

It was actually just a real positive quarter, Cameron, from just the fact that we have all hands on deck operating the business right now. And there was just not a lot of cleanup activity going in the business currently. A lot, I mean, the sale of the COS equity was a very conscious decision we made to really convert that asset to cash, so while we're not taking it in the guidance, I think it was a lot of work to get that done. The same on the tax side. We've done a lot of work in our tax planning, so we're getting to the point we're now, it's kind of all hands on deck operating the business. The cleanup is, for the most part, behind us. A lot more transparency, predictability in the business in the things that we can control, which is what I meant by quiet.

Cameron McKnight - Buckingham Research Group, Inc.

This is probably a good question for you, too, Patti. We're seeing plenty of talk about state budget deficits, potential new jurisdictions. What's the feed you're getting from your government relations guys in terms of any new potential legislative activity?

Patti Hart

Well, I mean, we always, I mean, we're right at the table on anything that even a hint of potential gaming legislation. As Eric mentioned, what we're thinking about the short term, the short term being kind of through 2012 really is very focused on Illinois, Ohio and Canada. And there's a lot of activity in Massachusetts, there's a lot of discussions in Texas, a lot of discussion around expanding in Pennsylvania. I mean, the time between legislation and revenue for us is so elongated that focusing your work force much on those is really not in the best interest of any of us. So we're very focused on making sure we have product to be competitive in the short-term market, in the U.S. and outside the U.S., really working. I would say primarily in Italy as it keeps in its fits and starts and in Greece.

Cameron McKnight - Buckingham Research Group, Inc.

You have a comment for us on just trends so far in January, given that we've had some pretty ugly weather certainly here in the Northeast?

Patrick Cavanaugh

Yes, I don't know if we have much to remark on at this point, Cameron.

Operator

[Operator Instructions] And our next question is from David Katz of Jefferies.

David Katz - Jefferies & Company, Inc.

You mentioned investing in intellectual property. If you could provide us with some color of what kinds of things or what areas of the business you're looking to bolster the most and where those investments might be? I did also notice that your CapEx was a little bit lower in the quarter than it has been running in the last year or so. And I wondered what that was attributed to? And then the one last detail, maybe a little too much detail to discuss in this forum, but I was curious, where is your bank credit facility balance at this point? I believe there was a portion of it was going to expire the end of December. And do you have anything outstanding on that and when you're paying down $80 million of debt in the quarter, I think if I'm reading this correctly, what was it that you paid down and what is that against?

Patti Hart

So let me talk quickly, David, about the intellectual property then I'll let Pat chat a bit about the credit lines. Where we're really focused, from an intellectual property perspective, are really areas where we can access technology-based intellectual property that provide us market differentiation in our core business. So today, in places like display technology, social interaction, communal types of technology, but display technology is a very hot area right now. As you see with our MLD technology, that will just go to the next level. And then in the interactive space, it's around platform, access to platform technologies. So those are the areas that we've been most focused on, have not made any moves as you've seen but we've been very focused to the extent we see a technology out there that we think is leverage-able broadly in our business, would be something we'd be interested in.

Patrick Cavanaugh

And I think, David, Patti's explanation partly goes to helping you understand level of CapEx. And you know we've had -- our CapEx spend has been almost universally on the Game Operations business, so I think it's more reflective of just kind of that natural rate of CapEx that's needed to churn those assets as necessary. And of course, right now, we're trying to get our installed base upgraded to the newest technologies so we can avail our own installed base of the latest and best games. Relative to the credit line, I think we're getting very close to having nothing drawing on that. I think we ended the December with $20 million, $30 million, $40 million on it. So it's a fairly de minimis amount.

David Katz - Jefferies & Company, Inc.

So if I can just follow that up, if you're paying, what would you be -- should we just assume that you're paying down the next most expensive money that you have? Is that a fair assumption for modeling purposes?

Patrick Cavanaugh

Well, you have to assume that with the line of credit, that's the only pre-payable debt we have. The next two are the convert, which is probably fairly expensive to do anything with, at least right now, given where our share price is at. And then we have the two fixed-debt instruments. Obviously, we spend a lot of time continually looking at those because those treasuries and rates move around, things that didn't make sense yesterday and maybe make more sense today and moving forward. So that's a high-grade problem to have, which we'll address going forward. And at some point, we'll be in the market to redo the credit facility, which ultimately will result in better terms.

Patti Hart

And I think as I said in my remarks, which I think is just an important thing to remind you of, that we have been, for now multiple years, kind of focused on using our cash generation to extinguish debt. And so we haven't really had the flexibility to make any moves. We've been thinking about things for some time. So our first choice always is to put our excess cash back in the business, whether it's to deploy more machines into the Game Ops side of the business, or to access intellectual property. Whatever we can do that provide return to our customers and our shareholders would always be our first choice.

Operator

Our next question is from Mark Strawn from Morgan Stanley.

Mark Strawn - Morgan Stanley

A couple of questions on the Game Ops business. Just really quickly on just the composition of your mix there. I think Pat mentioned that you got some benefit from shifting away from some of the WAP games with the jackpot expenses. Have you seen that shift maybe out of your higher-yielding WAP games into say, lower-yielding 80/20 games? Have you seen that start to wane recently? And then a follow-up to that is just, if we look at the margins in that segment in the quarter, is there a benefit this quarter from an increase in interest rates lowering your jackpot expense? And if so, is that quantifiable at all?

Patrick Cavanaugh

Sure, the first question, I think we did in this quarter see the shift from WAP to non-WAP stabilize. And so but no sense for is, is that permanent? Or is that temporary? So stay tuned on that point. Relative to the impact to the benefit from interest rates, we did benefit to the tune of, I think, almost $4 million in the margin from the movement in interest rates, which we had a similar benefit a year ago in Q1 as well because of the movement between property, treasuries, agencies and primes as those fluctuate around.

Operator

Our next question is from Steven Kent, Goldman Sachs.

Steven Kent - Goldman Sachs Group Inc.

Can you just talk about the international side of the business? Because the international shipments look like they fell sequentially. I just wanted to see if you could talk about the competition out in that market? Because it does seem pretty fierce, especially as you go into maybe South Americans and some of the other markets where there are established players. And then maybe you could just talk about some of the initiatives from some of the other real competitors that we're seeing in the U.S. that will come out and some of the other ones that are entering into the U.S. market?

Patrick Cavanaugh

Sure.

Patti Hart

I'll comment on the International. For the International business, Steve, actually had a very nice quarter. It was down sequentially, primarily driven by a handful of very large orders that came in the fourth quarter. And of course, the year-on-year comparisons are just challenged because of the large Casino Rosario opening that we had a year ago. The competition is fierce everywhere, whether you're in United States or you're in the international markets. The competition is different region-to-region but it's fierce everywhere with good products from multiple vendors. It looks very similar, though. When you get into a given market, it looks similar relative to the number of competitors and the characteristics that you're competing on looks very similar market-to-market. Our real benefit in the international space is that we have deployed our resources close to the customer over the years, and so the number of resources that we had out in the marketplace are fairly significant, vis-a-vis our competitors. And the feedback we continue to get, as Eric mentioned, we're on the road a lot, spend a lot of time outside the United States. The feedback we get from customers continue to be outside of the United States, and our products are always their preferred products. And the products are improving. So I would say it's fierce everywhere, not different outside the U.S. than inside the U.S. And you might, Eric, want to comment about the U.S. competitive environment?

Eric Tom

Yes. I would say that if you could take fierce and bump it up a little bit, and that would be the U.S. marketplace. Konami has been doing very well over the last couple of quarters with some of their games. But we actually expect that. I mean, we actually move forward with this notion that we're going to be in a competitive environment forever more. And the one thing that you can count on is that if you develop better games like Konami is right now, if you develop better games and bring them into market, your customers would buy them. Because they're very much -- they're very interested in making a profit, and so I don't think they'd buy so much according to pure brands, but really on performance on floor. So with that in mind, we're pretty excited about some of the things that we're bringing to market. We have a number of for-sale games that are performing well above floor average, and our customers are beginning to hear about it. And we have a pretty strong backlog. We deployed 24 new games this quarter. Many of them, we expect to be top-notch performers.

Operator

At this time, I show no further questions. I'd like to turn the call back to the speakers.

Patti Hart

Thanks, Katherine. And thank all of you for your time, for your questions and for your continued support of our efforts at IGT. Thanks very much. Goodbye.

Operator

This concludes today's call. Please disconnect, and thank you for participating.

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