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Executives

Richard Haddrill - Chief Executive Officer

Neil Davidson - Chief Financial Officer

Ramesh Srinivasan - President and Chief Operating Officer

Analysts

David Katz - Jefferies & Co.

Joel Simkins– Credit Suisse

Steven Wieczynski - Stifel Nicolaus

Steven Kent – Goldman Sachs

Todd Eilers - Roth Capital Partners

Mark Strawn - Morgan Stanley

Joe Greff – JPMorgan

Carlo Santarelli – Deutsche Bank

Ryan Worst – Brean Murray

Dennis Forst – KeyBanc

David Rainey – SBR & Co.

John (Oh) - BLSA

Bally Technologies, Inc. (BYI) F1Q 2012 Earnings Call October 26, 2011 4:30 PM ET

Operator

Good day, ladies and gentlemen, and welcome to the First Quarter 2012, Bally Technologies, Conference Call. My name is Keshia, and I will be your conference coordinator for today’s call. At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session at the end of the conference call. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

At this time, I would like to turn the call over to Mr. Richard Haddrill, Chief Executive Officer. Please proceed, sir.

Richard Haddrill

Thank you, Kesiha, and welcome everyone to Bally Technologies first quarter fiscal 2012 earnings call. Over the past several years we have made significant investments in innovation and in new market expansion. These investments are now starting to pay off. This is exemplified by two consecutive quarters of year-over-year revenue growth, another quarter of record revenue for gaming operations, an increase in our game sale ship share, a record quarter for contracted sales of iView and iView DM, and increased earnings visibility which has allowed us to raise our expectations.

For today’s call, Neil Davidson will cover our overall financial results, Ramesh will discuss operating highlights, and then I will have some overall comments before we open it up for questions. Neil, over to you.

Neil Davidson

Thanks, Dick. First, let me review our Safe Harbor language. Today’s call and simultaneous webcast contain forward-looking statements about Bally and our future business. These forward-looking statements are based on currently available information. Actual results could differ materially from those anticipated in the forward-looking statements and reported results should not be considered an indication of future performance. We do not intend and undertake no obligation to update our forward-looking statements, including forecast of future performance, the potential for growth of existing markets or the opening of new products for our markets, as well as future prospects and proposed new products.

More information on risks and uncertainties that may affect our business and financial results or may cause us not to achieve our forecast are included in our Annual Report on Form 10-K for the year ended June 30, 2011, and other public filings we have made with the Securities and Exchange Commission.

The forward-looking statements made on this call and webcast, the archived version of the webcast, and any transcripts of this call, only speak to this date October 26, 2011.

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

Today we reported our financial results for the first quarter ended September 30, 2011, and increased our expectations for fiscal 2012.

First to our expectations for fiscal ’12. As we mentioned in today’s release, the volume and size of our recent systems wins have resulted in the highest value systems contract wins in the company’s history.

We are very excited with our systems backlog, which now provides us with more multi-year visibility than ever. Due to the size, nature, and complexity of several of the larger contracts, we expect revenues during the initial months to be more weighted towards services than hardware sales and software licensing.

As a result of more clarity surrounding the timing of several large-scale projects including system opportunities that have contributed to strong pipeline levels in the past, and now have converted to contracts and timing around both phases of Resorts World New York. We are now setting a top end for our expectations for fiscal 2012 diluted earnings per share of $2.45. And raising the bottom end to $2.20 from $2.15.

On to our quarterly earnings. Overall, net income was 20.4 million which resulted in $0.45 earnings per fully diluted share for the three month ended September 30, 2011 on revenues of 195 million.

When compared to the prior year, earnings were negatively impacted by foreign currency as we experienced a loss of approximately 2.1 million, compared to a gain of 1.7 million in the prior year.

On to game sales. Revenue from game sales were 64.4 million for the quarter, up 26% from 51 million in the prior year. Based on 2,329 units sold in North America during the quarter, nearly all of which were replacements, and despite our competitors not having reported yet, we believe our ship share was approximately 19 to 20%.

Our North America replacement unit sales were up 24% over the first quarter last year. And we believe our ship share was up meaningfully.

Average selling price for the quarter was $16,624 driven by shipments of our newer Pro Series cabinets. Game sale margins improved sequentially to 44% for the quarter. As a result of strong ASPs generated from Pro Series cabinets, the dollar margin contribution per unit was higher in this quarter when compared to the first quarter last year, even though our gross margin was 49%.

We continue to expect margin percentages to improve slightly over the balance of this year.

Revenues from gaming operations set another all-time record at 85 million, up from 79.2 million or 7% in the comparable period last year, principally as a result of continued placements of our premium games and wide area progressives.

This marks the second quarter in a roll with net incremental placements of our wide-area progressive products, driven primarily by Betty Boop and Money Vault. And our pipeline of WAP products continues to be strong. The margin on gaming operations was within our expected range at 71%.

As for system, revenues were 45.6 million for the quarter, up 12% from last year. Maintenance revenues for the quarter were a record 17.7 million, up 11% from 15.9 million in the comparable period last year and in line with our expected growth rate for fiscal 2012.

The margins on systems revenue was 76% for the quarter, as the mix of software and services increased to 33% of total revenue, from 29% in the fourth quarter, and 23% in the prior year period.

The effective income tax rate for the quarter was 36.7%, higher than our fiscal year 2011 but within our expected rate.

Turning to the balance sheet, as of September 30, 2011, we had unrestricted cash of 61.9 million, and our DSOs were down to 109 days from 116 days at June 30, which was also within our expected range.

During the quarter, our leverage ratio declined to 2.04 times. We are pleased with our use of strong cash flow during the quarter to fund the MacroView Labs acquisition and to repurchase our common stock. In fact, since June 30, we have repurchased 36 million worth of common stock, at an average cost of $29.07 per share, 31 million of which was in the first quarter.

Now, I’ll turn the call over to Ramesh for some more discussions on product innovations and our operating results.

Ramesh Srinivasan

Thank you, Neil. It was a very good quarter with respect to competitive positioning in both games and systems. All revenues went up from the comparable prior year quarter, with record revenues from gaming operations. We had an excellent G2E by all accounts with uniformly strong feedback from customers and others regarding our complete range of products.

Our new video game content on the Pro Series line of cabinets received a lot of attention and high praise. In terms of this positive attention converting itself into real game models, we only anecdotal evidence so far, as G2E was only a few weeks ago.

However, since G2E, we’ve received a couple of orders from customers with floors where Bally games are currently very under the percent.

The breadth and depth of our system solutions displayed at G2E, including monitoring modules with fluent return on investment, like the Elite Bonusing Suite, and service-tracking manager, greatly engage the attention of both current and prospect of customers.

The interest in replacing competitive systems in certain casino sites has picked up some G2E as well. For the fourth G2E in roll, we let all windows in the number of innovation to [inaudible].

We sold close to 3,400 game units this quarter. A 220% increase over the comparable five-year period. 2,329 of these units were in North America. 1,070 were in international markets. Marketing increases over last year’s Q1 of 16 and 30% respectively. Pro Series cabinets made up almost 75% of our worldwide shipments this quarter.

Gaming operations had a very good quarter with record revenues of $85 million. That revenue increased by 22% from the fourth quarter, primarily due to continuing rollout of new titles such as Betty Boop and Money Vault.

We placed an additional 120 incremental WAP units this quarter; the second quarterly increase in a roll. The average win per day for WAP units reached record levels during this quarter. We are looking forward to quite a bit of growth in the segment, based on the reception during G2E of upcoming games like Grease and Michael Jackson King of Pop.

We are also looking forward to the opening of the slots in New York in a few days from now. And it’s second phase opening which is expected to happen in a few months. We considered approximately 1,200 units this quarter in preparation for the first phase of this opening.

Continued [inaudible] previously with capital and there were more part for player experience worldwide, all backed up by a very customer friendly and committed professional services and support group.

We are making good progress in integrating the recently acquired MacroView mobile solution with the rest of our system product set. New products like the Macro View mobile solution and service tracking manager, are being very well received by customers, and have helped us increase the number of significant software base solutions available for sale.

Overall systems of revenue in our seasonally weak first quarter was about 46 million, up 12% increase over Q1 of last year. Maintenance revenue set another quarterly record at almost $80 million. We completed nine major goal lines during the quarter, many of them in international locations.

We completed 17, 1-7 significant upgrades during the quarter, making it 34 major upgrades during the past six months. One of the best six month periods we’ve ever had. The frequency of such major upgrades is a good value to customer acceptance, of newer releases of our products.

Being on the latest version also help our customer make better use of some of the innovative leading edge marketing and operating efficiency enhancing tools, which we are continuing to deliver to the marketplace.

We are seeing a significant upswing in customer demand for professional services as well. We are currently in the process of expanding our services to meet such demand. This quarter was also our best ever in terms of the number iVIEWs sold, a majority which were iView DM giving us a solid backlog for future delivery.

In summary, it is tough not to be excited a bit about the opportunities ahead of us. We will remain focused on good execution, without taking our foot off the integration gas pedal. Now, let me turn the call back over to Dick.

Richard Haddrill

Well thank you Neil and Ramesh. It was a good quarter and business is good. Now while our expenses are somewhat higher than I like, our investments in new markets and innovation are beginning to positively impact revenues and are proving to be good investments.

For example, specific investments in Canada, South Africa, and Australia will contribute to future revenue growth. And revenues from the Resorts World project and our entrance into Italy, are coming soon.

Further, over the last three years we have retooled. Our game platform, our game hardware, our game development teams and processes, and our system products, all of which position us very well in current markets with an outstanding product offering and product pipeline.

In recent months we also further secured a strong future for Bally. We signed major contracts with British Columbia and Sun International, both of which will contribute meaningfully to fiscal year ’13 and beyond. And the acquisition of market leading mobile applications company MacroView, and the establishment of Bally interactive, insures that we have a great foundation for the long-term.

In summary, during this quarter, we increased our domestic replacement units 24% over last year, and increased revenues in all three divisions. We made excellent progress with new products and markets, exceeded our internal plan, and increased our earnings expectations. We have a great business to continue to build upon. I sincerely thank the Bally team for their significant efforts and focus during this challenging economy, and I also thank our investors for your continued support.

Keshia, it’s now time to open it up for questions.

Question-and-Answer Session

Operator

(Operator instructions). Your first question comes from the line of David Katz, with Jefferies and Company. Please proceed.

David Katz - Jefferies & Co.

Hi, afternoon, all.

Richard Haddrill

Hello, Dave.

David Katz - Jefferies & Co.

A couple of details. The gross margins on systems was a bit higher than what I was looking for and I know there was some mix change in the quarter, but if you could talk about what visibility you might have as to how sustainable that 76% level is and how we should think about that for the next bunch of quarters, and then I have a bunch of other quick details, please.

Richard Haddrill

You know, David, our systems margin does vary based on the mix, whether it’s software or hardware. We did mention that we had a record quarter for signing up iVIEWs, which is a hardware with slightly lower margin than our software, but those will be rolled out over the next 6 or 12 months, so we did have a high mix of software. We still believe a good range of margin for systems is still that 70 – 75 or 76%. We continue to develop more software products, but we are seeing a nice sort of breaking of the pipeline in the iVIEW DM arena, which could also mitigate that. So, I think between that 70-75%-76% margin range is good.

David Katz - Jefferies & Co.

Just to clarify, the iVIEW DM sales push you to the higher end of that range or lower?

Male

iVIEW DM has a slightly lower margin than iVIEW, but still slightly lower than our software margins. So look for iVIEW DM margins in the 50-65% range, whereas our software margins are sort of 80-95% range.

David Katz - Jefferies & Co.

Got it, okay. On the central determined systems, that count has been edging lower the last couple of quarters. Can you just talk about what is in there and where that sort of settles in or what the dynamic is please.

Neil Davidson

Sure. This particular quarter, David, if you go back to our 10-K, it’s got some more detail about what the breakout is. But there have traditionally been about 9,000 system connections that are connected through iVIEWs in Mexico. We had one particular customer in this quarter that converted that connection to a fully-paid-up fee as opposed to a daily fee. So those units came out. But they’re very low earning units, so the revenue itself wasn’t impacted.

David Katz - Jefferies & Co.

Got it. Okay. And is there any inclination that there’s more of that, or – to come, or that’s – these are isolated events?

Neil Davidson

We don’t have anything in our expectations that would indicate any more events like that.

David Katz - Jefferies & Co.

All right. Okay, and then lastly, if we could just talk about New York and you know, we’ve obviously been waiting for [inaudible] for eight years now, or nine. And so those units are coming on in a couple of phases and you have half of them and those, I assume wind up in your lottery’s bucket?

Richard Haddrill

Right, that will be in the video lottery systems and I think Ramesh mentioned, we’ve got about 1,200 units that we built during the quarter. I think if you check Resorts World’s website, they’re hoping to open Friday at 1:00 p.m. for Phase 1. And then you know, we’re in a position to try and support, I think Resorts World has announced they’re trying for Phase 2 sometime in December. We’re in a position to try and support them and that would be probably doubling of their floors. So another 1,200 units for us.

David Katz - Jefferies & Co.

Right. And presuming that it goes as well, you know, as other – Yonkers or something like that, right, but what does it do to the profitability element? Is it higher or lower than the average, you know, for game ops or what can you tell us about it?

Richard Haddrill

Well, I think you can probably compute it pretty accurately that it’s public that our share is 6.25% of the daily wins. [Inaudible] and Resorts World can kind of decide what that daily win is going to be, you know, the anecdotal, it could be higher than Yonkers, in which case you could model pretty accurately I think what the impact is to us.

David Katz - Jefferies & Co.

Okay, and from a profitability perspective, is there any element that we should be considering here?

Richard Haddrill

We should be more profitable in our other New York business.

David Katz - Jefferies & Co.

Okay, that’s helpful. Thanks very much.

Operator

Your next question comes from the line of Joel Simkins with Credit Suisse. Please proceed.

Joel Simkins– Credit Suisse

Yeah, hey, good afternoon, guys. We’ve obviously heard some pretty good feedback post G2E on the hammerhead cabinet; Grease, Michael Jackson, some of the new content for iDECK. Can you give us any early indications on what the order book or the backlog might be for some of these and the concepts. And also, just give us a reminder in terms of the timing that we’ll see Grease as well as Michael Jackson deployed.

Richard Haddrill

Well, Grease should be out to the customers in the April timeframe, and Michael Jackson in the June timeframe, and these are subject to sort of a month variability or so either way. Lots of great feedback on those products, which are in our gaming operations and our highly profitable WAP segments. So we’re excited about that.

But we got terrific feedback on our other products. Our Curve technology, which is, you know, the video-[inaudible] combined technology, got excellent feedback. Our ALPHA 2 broad video titles got great feedback. So it’s always hard to tell because these last few G2Es, we got very good feedback, but you know, the CEO of one major groups said they’re spending more – our feeling is that whether it’s Bally products or the replacement cycle, that we’re seeing greater optimism coming our way from customers. So we are, you know, cautiously optimistic that the spend will be increased towards Bally in the months ahead.

Joel Simkins– Credit Suisse

And you know, we definitely have heard of sort of a step up in promotional activity in discounting around the show and the subsequent to the show. In some instances, it’s some of your competitors that normally don’t discount stepping that up as well. What’s your view right now on the current pricing and landscape and do you plan to respond to, you know, particularly, do you want to see some of your new products start to gain traction?

Richard Haddrill

Well, that’s been a pretty tough pricing environment for 2 or 3 years. It’s been a consistent education process for customers and suppliers alike that when you have a product that earns well, you know, discounting isn’t necessary and discounting gets you near-term footprint but at some point the percent of the floor you have exceeds the win share of the floor and it comes back to haunt you in the future.

So we’ve tried to be pretty consistent in our pricing, fair but consistent. We do have the ability to bundler with a strong product suite across games systems and gaming operations. But our view is, we’ve got good games, we want to continue to produce good titles to support our cabinets and there’s no need to be reckless in discounting.

We’ve seen a little bit of here and there for people to make orders, but we think it’s a short-term strategy and not a good long-term strategy.

Joel Simkins– Credit Suisse

And one final question, Dick. You know, you’ve historically looked at tuck-in M&A. What’s your view at this point in terms of larger, more strategic M&A and is this something you’re considering or is this just continue to block and tackle here and execute on the core business?

Richard Haddrill

You know, we’re always interested in that. Tuck ins are much easier to do. We have a lot of interesting opportunities to generate shareholder value through good execution over this next 12 months, so that’s our top priority. But we will continue to look at larger deals if they don’t distract from the core execution, which is frankly, an easier way in the near term to generate shareholder value.

Joel Simkins– Credit Suisse

Thanks.

Richard Haddrill

Thank you, Joel.

Operator

Your next question comes from the line of Steve Wieczynski with Stifel Nicolaus. Please proceed.

Steven Wieczynski - Stifel Nicolaus

Good afternoon, guys. Going to the margins on the product sales side, I know those are still not where you guys want them, but you know, can you guys just walk us through how you’re thinking about those and where you expect those, or what’s the internal expectation for those over say the next, you know, 12 to 24 months?

Richard Haddrill

Yeah, sure. So first and foremost, one of the things I pointed out in my opening remarks is the actual dollar contribution for a Pro series cabinet is the same as it’s predecessor because we have had upward momentum on ASPs. We’re still not happy with the cost of the Pro series cabinets, so we are working on that. In fact, one of the early renditions of the Pro series we’ve been able to shave about 12% off the cost. Over the next couple of quarters, we don’t see at this point, a huge change in gross margins, maybe 100 to 200 basis points, longer term over the next 3 to 5 quarters, I think we do get back up to that higher 40 – 48, 49 tier.

Steven Wieczynski - Stifel Nicolaus

Okay, got you. And then the same question. Kind of the same question for Neil. You know, on the R&D side, you’ve been pretty consistent here, somewhere between 10 and I’ll call it 12% of revenues, and given how competitive the landscape is right now, is that a, you know, fairly good level going forward or do you think that’s going to have to increase some?

Neil Davidson

I would say if you look over FY ’11, and really over the last two years, we’ve almost doubled our games studios. So we’ve already put a lot of spend into game content and we’ve got a pretty substantial library to date. So on the game side, maybe not so much of more spending there, but Dick mentioned Bally Interactive Mobile, Ramesh mentioned some more systems products that we’re working towards, so we might have some incremental investment in our R&D from those product lines.

Richard Haddrill

And Steve, I would add that, you know, a year ago, R&D was 13% of our revenue. This quarter it is quite a higher level or R&D by a couple million bucks, it’s down to 12% of revenue partly because we’re getting some leverage on that R&D spend. So even though we may continue to increase our spend in R&D somewhat, we do expect to be able to grow revenues in the near term at a faster pace.

Steven Wieczynski - Stifel Nicolaus

Okay, great. Thanks, guys.

Operator

Your next question comes from the line of Steven Kent with Goldman Sachs . Please proceed.

Steven Kent – Goldman Sachs

Hi. Just moving to another part of the business for a moment, maybe Ramesh could talk about this, just whether he’s seeing more competition on the systems side. I think an earlier question asked about the machine sales and that, you know, we did hear from a couple of other machine makers that they were offering deals to get people to try their products, have you see any of that on the system side?

And also, I guess just earlier, I think one of you mentioned that, you know, the goal on the machine sales would get margins into the 48, 49% range and I know it might sound insignificant but I can remember when you guys used to get it into the 50s. Is this a machine that just permanently, or a machines that are maybe permanent that you just can’t get back into that 50% profit margin?

Richard Haddrill

Well, I’ll take the last question first and then I’ll let Ramesh comment on the system competition. Our goal is to get back into the 50 – low-50% range, especially as we get more of the new cabinets out and can sell the conversion kits. You know, we – Neil, I think was talking about over the next 5 quarters. Clearly, the Pro series cabinet is more expensive. The iDECK is expensive, but it does allow us to still maintain good dollar margins, and we do see in the near term, getting go the 48, 49%. But if we’re out here 18 to 24 months, Steve, we would expect to be back at 50% plus.

Steven Kent – Goldman Sachs

Good.

Ramesh Srinivasan

In terms of your first question, Steve, wouldn’t say more competition in terms of – in terms of the number of competitors, it’s the usual suspects that we always see. We see one of them in each of the systems. I would not say more competition, if anything, it’s about the same. But what is really changed over the last couple of years is [inaudible]. We are at a much better state in each of these deals, vis a vis, [inaudible]. So the changes of us winning a deal is much higher today than it was let’s say 2, 3 years ago. And even when we lose a deal, we tend to finish a very close second. So I would say our competitive landscape from a Bally perspective is much better today than it was a couple of years ago, for the systems standpoint.

Richard Haddrill

And pricing is clearly an issue in systems, but usually someone throws in a very low price in systems when they’re clearly in second place. And pricing plays less of a role in a systems selection for sure because of the functionality gap and because of the reliability gap.

Steven Kent – Goldman Sachs

Okay. Thank you.

Operator

Your next question comes from the line of Toddy Eilers with Roth Capital Partners. Please proceed.

Todd Eilers - Roth Capital Partners

Good afternoon, guys. I wanted to ask a question regarding the Pro Curve cabinet or game. Can you give us a sense for where there any sort of meaningful sales in the quarter from that? If you mentioned it, I apologize, but I didn’t hear anything.

And then also, give us a sense for how much content you have for that box at this point.

Neil Davidson

So with G2E, we debuted about 17 titles and those were all expected out within the next 12 months. I think there’s 3 or 4 titles available today. It turns a number of units. Certainly, it was up over Q4, but we didn’t talk about the exact number of units.

Richard Haddrill

But a lot of interest in the product and especially with the strong title showing, customers are very interested in that product and we expect that to continue to grow.

Todd Eilers - Roth Capital Partners

Okay, great. And then I also had a question on the – I guess the mix of game sales that are licensed. I believe last quarter you mentioned higher-than-normal mix of kind of license to game sales. Can you give us a sense for how much you had in this quarter and how should that trend going forward?

Richard Haddrill

Yeah, we would expect to trend down over the next two or three quarters, but we had slightly less, maybe 200 basis points less royalty themes this quarter than last quarter.

Todd Eilers - Roth Capital Partners

Okay, great. And the just the last question. You mentioned a bit of – or one area of disappointment was the delay in Italy VLT approvals. With respect to the new guidance range, are you guys assuming any Italy contributions at this point?

Richard Haddrill

There’s a very modest, very small contribution from Italy expected in fiscal ’12.

Todd Eilers - Roth Capital Partners

Okay. And then…

Richard Haddrill

That’s why we’re still very positive about Italy’s contribution to fiscal ’13 and beyond.

Todd Eilers - Roth Capital Partners

Okay, and then I guess one follow up to that, I mean, was there anything new, I guess, that happened in the quarter or is it just still kind of waiting for final testing approval? I mean, I guess just trying to get a sense for if anything new happened in the quarter that caused the delay.

Richard Haddrill

No, there’s really been no new, you know, product suite approved in the last year in Italy. We believe we’ll be the next one approved. We’re making progress, but it’s a very difficult process because some of your early companies approved have had field issues, which has caused the regulators to be even more thorough in the testing process. But we’re making progress. We’d hoped to be able to be on this call and tell you we were approved. So we’re not – so that’s why we’re disappointed, but that said, we have an appropriately conservative rollout planned built into our forecast and yet, it still remains a great market for us long term with 5,000 machine orders and good – and still good communication and progress with the regulators and good communications with our customers in Italy. So we’re still very optimistic, but it’s going to be a slow, steady rollout.

Todd Eilers - Roth Capital Partners

Okay, great. Thanks, guys.

Operator

Your next question comes from the line of Mark Strawn with Morgan Stanley. Please proceed.

Mark Strawn - Morgan Stanley

Hi, quick questions on your guidance range. I was wondering if you could give us a sense of what you’re assuming in that range generally speaking on your replacement ship share and maybe increases in your install base?

Richard Haddrill

Yeah, in terms of ship share, I mean, we’ve seen the past couple of quarter, we’ve had incremental increases in our ship share. So with our content as it stands now, we would expect to see some upward tick in ship share over the rest of the year with respect to replacements.

We continue to remain fairly cautious on replacements. There really hasn’t been any catalyst out in the market that we’ve seen that have driven up an increase in replacements. The one thing I would point out is new openings and expansions. We think there were somewhere in the neighborhood of 10,000, or we’ll call it that this calendar year, about 10,000. Next calendar year, that doubles. And so some of that will fall into our second half of the fiscal year.

Mark Strawn - Morgan Stanley

Okay, and then in terms of the installed base, do you expect to see some of your new WAP titles, et cetera come out and have a net positive impacts on your installed base? Is that embedded say in kind of the midpoint of your guidance?

Neil Davidson

I'm mean, we are expecting gaming operations revenues to grow and as I mentioned earlier, the most powerful WAP games coming out are Grease, which we expect in April, and Michael Jackson in June. So those will have, you know, fairly limited impact on this year, but some. But what with our core products that we’ve had, you know, whether it’s Cashed In or Betty Boop or Money Vault, they’re also doing well and we’ve been expanding the WAP with them. So we are expecting gaming operations to continue to grow year over year.

Mark Strawn - Morgan Stanley

Okay, thanks a lot.

Neil Davidson

Thanks.

Operator

Your next question comes from the line of Joe Greff with JPMorgan. Please proceed.

Joe Greff – JPMorgan

Hey, guys. Most of my questions have been asked and answered. I just have two quick ones here. If I hear you correctly with respect to your updated fiscal 2012 outlook, the change relative to 2 ½ months ago relates to the systems business? With regard to the other two segments, the outlook is the same from 2 ½ months ago? Is that how I should interpret it?

Richard Haddrill

Well, I would say just – we’re three months further into the year, which is a couple months further into the year, which is helpful to giving visibility, number one. Number two, you know, the launch of ALPHA 2, now with more titles, gives us a lot more comfort in how our game content on the new platform’s going to do. So that’s a positive.

And we’ve continued to make good progress on game offsets, that’s a positive. And we have more clarity on systems. So depending on the timing of deals like [Inaudible] and British Columbia, we could have even had more of that in fiscal ’12 than we’re not expecting, but we have clarity for that and so the good news is, good product momentum allows us to raise the bottom. And we now have some ability to put a top on it because some of the system’s revenue that could have come in to fiscal ’12 is likely to be more impactful in fiscal ’13, and Italy is going to be more impactful in fiscal ’13.

So you know, it gives us more confidence in giving you guys a range versus just a minimum and raising the minimum.

Joe Greff – JPMorgan

Got you. Thank you. And with regard to the 220, the 245, are you assuming any additional buyback activity?

Neil Davidson

We may assume about 30 or 40 million right now, as long as we’re above two turns levered, we’re capped at 64 million for the rest of this year. Once we get below two turns, we get back to an unlimited state.

Joe Greff – JPMorgan

So within the guidance, other than what you did this past quarter, is there additional buyback?

Neil Davidson

We’re not assuming a ton more buybacks.

Joe Greff – JPMorgan

Okay.

Richard Haddrill

And as you know, Joe, the average share count is based on a couple things; one is stock buybacks, but the other is the share price. So both of those can affect the weighted shares outstanding.

Joe Greff – JPMorgan

Got it. Thanks, guys.

Richard Haddrill

Thank you.

Operator

Your next question comes from the line of Carlo Santarelli with Deutsche Bank. Please proceed.

Carlo Santarelli – Deutsche Bank

Hey, guys. Thanks. Neil, you talked a little bit about the expansion outlook, looking for next year, next calendar year. Could you maybe put the framework around where you guys, obviously running at about 19% ship share on replacements, but where you guys expect your ship share to be on new competitive openings? And then I had a follow up on your WAP-based, if you don’t mind.

Richard Haddrill

Yeah, Carlo, our new openings share has pretty much tracked our replacement ship shares. So it’s been trending upward over the last year or so. And we would think that’s reasonable going forward in your modeling.

And I would say that, you know, we have a few things that anecdotally lead us to believe that maybe the positive feelings from this G2E will come true a little bit more than the prior few. I think you’ve seen that our system pipeline, which has been big for a year and a half is now starting to break through with real contracts based on some of these recent announcements. We’ve had at least one major CEO tell us they’re spending more and no one’s told us they’re spending less. So even though we’re cautious in our forecasting on the replacement cycle, it feels a little bit better in terms of what’s really starting to happen for Bally at least.

Carlo Santarelli – Deutsche Bank

Okay, thank you, Dick. And then in terms of your WAP base, what is the gross number of WAP installations since you guys have rolled out Betty Boop and Money Vault, just to try and get a sense for how far along you are in terms of refreshing the older WAP base as we get into the Grease and Michael Jackson rollouts?

Richard Haddrill

You know, for competitive reasons, we don’t give that and keep in mind, we’ve got two WAP links, right; one at a quarter million and the new one starts at 400,000, but really resets at 750,000 and it probably hits around 2 million. So they’re two separate WAP links. The newer products are all on the new WAP link and are doing well, so they’re not – you shouldn’t assume that they’re cannibalizing the historical 250,000 WAP link.

Carlo Santarelli – Deutsche Bank

Thanks a lot guys.

Richard Haddrill

Thank you, Carlo.

Operator

Your next question comes from the line of Ryan Worst with Brean Murray. Please proceed.

Ryan Worst – Brean Murray

Thanks, good afternoon. Just on the guidance, Dick, I think you mentioned that BC was one of those contracts that were going to be more impactful in 2013. Do you have any of that in the fiscal year 2012 guidance?

Richard Haddrill

Yes, we do. We have some, but perhaps not as much as maybe some analysts would have in their models. But we do have – definitely have some.

Ryan Worst – Brean Murray

Okay. And then maybe you could provide a little additional color on the replacement sales in the quarter. The number was better than what I was looking for, and if you could provide any color on what products were driving that – those better replacement sales, or was it just that the end markets improved a little bit in the September quarter?

Richard Haddrill

Well, again, it’s hard for us to tell how much of it is Bally specific versus market specific at this time because we’re the first to release. But you know, we just really have had good reception for our new Pro series cabinet, but you know, a good feeling that we have good video content and a good pipeline of video coming, so people like to make the investment, they love the iDECK. So it’s been a variety of products that are doing well for us, and good interest in those that are soon to be released.

Aside from that, I can’t really tell you how much of it was market versus Bally, but to be up 24% year over year, it seems like it’s some of both.

Ryan Worst – Brean Murray

Okay. Thanks. And then just lastly, on the SG&A expense, it was down a little bit sequentially. Anything driving that and was the expenses for G2E in the September quarter or should we expect that in the December quarter?

Richard Haddrill

Yeah, it’s a great question. So G2E expenses will actually be in the December quarter since it occurred in October. And in terms of the sequentially lower, no one specific thing. We did have, compared to last question, a little bit less bad debt, but outside of that, there weren’t any specific areas.

Ryan Worst – Brean Murray

Okay, great, thank you.

Operator

Your next question comes from the line of Dennis Forst with KeyBanc. Please proceed.

Dennis Forst – KeyBanc

Yeah, good afternoon. I was hoping to get a clarification first, Neil. You had talked about on the game sales division margins improving through the year. Was that an improvement from the first quarter’s 44% or over last year’s 45.5%?

Neil Davidson

Over first quarter’s 44%.

Dennis Forst – KeyBanc

Okay. That answers that then. I wanted to ask about the decline in Central Determined’s systems numbers. Is that intentional? Are you focusing more on WAPs and letting some of those central determined games go? What’s the issue there?

Neil Davidson

That was actually very specific. We have some – what we call system connection fees were connected to iVIEWs and we did a convert to sale there so they were just some units that came off and weren’t paying a very small nominal daily fee, and moved to just paying an upfront free.

Richard Haddrill

So that was a small impact in the current quarter and a small impact on the future quarters.

Dennis Forst – KeyBanc

And then going forward, what will be the breakdown between North America and International in terms of the number of games out there, in the game op division? That’s primarily a domestic business, isn’t it?

Neil Davidson

No, I mean, it has some international [inaudible]. Obviously, as Italy comes on line, it will fall into a gaming ops and we’ll increase our international footprint. But with respect to our current base, we really haven’t guided to a domestic/international split.

Dennis Forst – KeyBanc

Okay. I thought I had another question. But I’ll get back in the queue if I can figure out what it was. Thanks.

Richard Haddrill

Great, Dennis, you bet.

Operator

Your next questions comes from the line of David Rainey with SBR and Company. Please proceed.

David Rainey – SBR & Co.

Great. Thank you. I have three questions. The first is probably for Neil. Neil, if I understood your comments earlier about the foreign exchange conversion reversal and the slight uptick in tax rate, if I try and back out that affect out of earnings, would your gap earnings have been about $0.05 per share higher if those two elements hadn’t occurred?

Neil Davidson

Yeah, I would say the foreign currency was probably about $0.03 or $0.04 this quarter.

David Rainey – SBR & Co.

Okay.

Neil Davidson

And then it versus, when you’re trying to get a competitive, last year, it actually added $0.02. So yeah, you’re right, it’s about $0.05 to compare.

David Rainey – SBR & Co.

Okay. Up $0.05 or $0.06, great. The second question is maybe for Ramesh. I was reading a third-party research report that was polling casino floor managers and they – their results suggested that about half of the casinos they polled expect to install a picture-in-picture player communication technology, which in my mind means an iVIEW DM-type product. So one, could you all briefly describe the lag time today between a customer order and an install, and kind of what’s involved. And two, how’s iVIEW DM positioned against the SDX Media Manager, which might be an alternative?

Ramesh Srinivasan

Yeah, okay. Number of questions in that. Yes. The demand for iVIEW DM has definitely picked up, no question about that. I can’t put a real number of weeks or months on the lag time because that really is very widely between customers. With some customers, it could take a long time to implement any kind of a system’s solution including DM, and in some cases it happens within a matter of two or three weeks. So I can’t put a lag time on that, that varies too widely. And iVIEW DM really competes not with so much with the SDX Media Manager, that is more [inaudible] kinds of companies with that. iVIEW DM competes with [inaudible] window and iVIEW DM is much better positioned because it doesn’t require new game purchases, it is backward compatible and also works with the new games. So iVIEW DM is extremely well competitively and I think we’re in a very good position to take advantage of this increased interest in picture-in-picture that you’re seeing in all these studies. We’re in a very good position to make advantage of the majority of that.

David Rainey – SBR & Co.

Great. Thank you. And then the third question is just about the development of Australia. I had read a news report, I think, about some Bally games new to the Australian market, that were performing well, but there was a regulatory question about whether or not you can plug headphones into them. Is this something to spend time on?

Ramesh Srinivasan

In terms of Australia, we are still in the early process. Yes, our [inaudible] games are in place there are doing very well. But there are a few more regulatory changes that we have to do in that operating system that is not going through the regulatory approval cycle. So we’re just in the [inaudible] process of regulatory cycle, which we tend to go through with any new market introduction when we get into a new market.

David Rainey – SBR & Co.

Fair enough. Thank you.

Richard Haddrill

Thanks, David.

Operator

Your next question comes from the line of John (Oh) with BLSA. Please Proceed.

John (Oh) - BLSA

Hi, thanks. I just wanted to explore a more macro question as it relates to the legalization process that [inaudible] increasingly more so in Florida and Massachusetts. Could you share with us, you know, what are your thoughts as it relates to timing of rollout and maybe, you know, some of the preliminary discussions that you may have had with anyone involved in these, and also maybe give us some guidance as to how we should be thinking about these markets?

And also, the second part of the question would be, given that some of these markets are probably happening a little sooner than we expect, how should we also be thinking about the split of your revenue, within your business; i.e. your business model. Could we see a stronger pull towards say equipment and systems and say lower focus on game ops in the next couple of years? Any thought on that, please? Thank you.

Richard Haddrill

Yeah, I mean, we see – judging the new markets is always complex because it involves politics. But in terms of the domestic new markets, you know, Ohio’s moving along. Illinois is, you know, one step forward and one half-step back, but moving along. Massachusetts is probably moving along and likely to happen in our view, but it will be several years before we generate revenue from Massachusetts whereas Ohio could – should start generating some revenue in Fiscal ’12 for us. Illinois, probably not in Fiscal ’12 but Fiscal ’13. Massachusetts is probably a couple years out and South Florida, it’s hard to say whether it’s going to happen. I assume we have some people betting heavily on it, you have other betting against it. So I would say that’s really too hard to call.

In terms of our product suite, you know, we believe that game ops for us continues to be an opportunity to grow. We’ve proven we can do very well in that segment and we still are relatively underrepresented in gaming operations here in North America. So we think it’s going to do well for us regardless of how the new markets evolve domestically. So don’t look for us to under emphasize that going forward, but we have a good balance of our R&D emphasis on both game ops and game sales, and systems.

John (Oh) - BLSA

Okay, thank you.

Richard Haddrill

I think we have time for maybe one more question.

Operator

Okay, your next question is a follow up from the line of David Katz with Jefferies and Co. Please proceed.

David Katz - Jefferies & Co.

Hi. I know the issue’s been touched on a couple times, but I just want to make sure I heard correctly. On the unit sales, gross margins, the comment was you know, progressing upward throughout the course of the fiscal year from 1Q. Is that correct?

Richard Haddrill

That’s correct.

David Katz - Jefferies & Co.

Okay. I’m all set. We’re all covered.

Operator

Okay, there are no further questions in queue at this time. I’d now like to turn the call back over to Mr. Richard Haddrill, CEO for any closing remarks.

Richard Haddrill

Well, thank you, Keshia. Thanks for all the active interest in this call. We appreciate the interest to Bally and support and we’ll continue to work hard in your interest. That’s all for now.

Operator

Thank you for your participation in today’s conference. This concludes the presentation, you may now disconnect your lines. Good day.

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