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Executives

Matthew G. Moyer - Vice President of Investor Relations

Patti S. Hart - Chief Executive Officer, Director and Member of Stock Award Committee

John Vandemore - Chief Financial Officer and Treasurer

Analysts

Mark Strawn - Morgan Stanley, Research Division

Steven M. Wieczynski - Stifel, Nicolaus & Co., Inc., Research Division

Robin M. Farley - UBS Investment Bank, Research Division

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

Felicia R. Hendrix - Barclays Capital, Research Division

Carlo Santarelli - Deutsche Bank AG, Research Division

Harry C. Curtis - Nomura Securities Co. Ltd., Research Division

Cameron Philip Sean McKnight - Wells Fargo Securities, LLC, Research Division

Joseph Greff - JP Morgan Chase & Co, Research Division

Joel H. Simkins - Crédit Suisse AG, Research Division

Clifford Kurz - Credit Agricole Securities (USA) Inc., Research Division

Darnel J. Bentz - KeyBanc Capital Markets Inc., Research Division

Todd Eilers - Roth Capital Partners, LLC, Research Division

William J. Lerner - Union Gaming Group, LLC

International Game Technology (IGT) Q2 2012 Earnings Call April 24, 2012 5:00 PM ET

Operator

Welcome to International Game Technology's Second Quarter Fiscal Year 2012 Results Conference Call. [Operator Instructions] This call is being recorded. If anyone has any objections, you may disconnect at this time. I would now like to turn the call over to Matt Moyer, Vice President of Investor Relations. Sir, you may begin.

Matthew G. Moyer

Thanks, Kim. Good afternoon, and welcome to IGT's Second Quarter Fiscal Year 2012 Earnings Conference Call. On the call today are Patti Hart, CEO; and John Vandemore, CFO. Before we begin, I'd like to remind listeners our discussion will contain forward-looking statements concerning matters such as our expected financial and operational performance, including our guidance for fiscal 2012; our expectations for the economy in general and the gaming industry in particular; the expected impact of the DoubleDown acquisition; and our strategic, operational and product plans. Actual results may differ materially from the results predicted and the reported results should not be considered as indicative of future performance. Potential risks and uncertainties that could cause our business and financial results to differ materially from our forward-looking statements are included in our filings with the SEC, including our most recent annual report on Form 10-K and subsequent quarterly report on Form 10-Q. All information discussed on this call is as of today, April 24, 2012. And IGT does not intend and undertakes no obligation to update this information to reflect future events or circumstances.

In addition, on today's call, we may discuss certain non-GAAP financial measures. Reconciliations of these non-GAAP measures to the GAAP measures we consider most comparable can be found in today's earnings release, which is posted on the Investor Relations section of our website, igt.com and included as Exhibit 99.1 to the Form 8-K, which we furnished today to the SEC a.s.a.p. With that in mind, I'll turn the call over to Patti.

Patti S. Hart

Thanks, Matt, and good afternoon, everyone. Our second quarter was marked by a significant accomplishment and meaningful progress made toward our fiscal year 2012 goals and objectives. We are very pleased to report our March quarter with revenues in excess of $500 million, the highest revenue performance in the second quarter for IGT in 4 years.

Our gaming operations installed base grew for the fourth straight quarter, in part due to the addition of 1,000 units in our domestic MegaJackpot footprint over the past 4 quarters. North American product sales were bolstered by strong pricing and by a 32% year-over-year increase in replacement unit sales, another indication that our product performance is allowing us to enjoy market-leading replacement share percentages. Our partnership with Revel has been successful and has delivered the very first Advantage system to the Atlantic City market, one of several important wins in our systems group this quarter.

We grew international revenues 15% due to strength in both product sales and gaming operations. Our 18% floor share of the most recent Las Vegas Sands Casino opening in Macau is more than triple the single-digit floor shares we had been experiencing in this market during prior openings.

Our International business pace continues to accelerate, with improvement in both quantity and quality of order flow. Additionally, recent international wins in gaming operations include placing the Dark Knight into Monte Carlo, Megabucks into Macau and the Sex and the City product into Australia. Our first cloud trials are up and running across Europe and our partnership with Lottomatica in Italy underscores the value of our leading game content and our intense focus on driving higher returns on our investments in research and development.

The addition of DoubleDown to our interactive group is providing accelerated revenue growth. Our planned product launches, coupled with our efforts to expand distribution into mobile platforms will allow this business to contribute strong top line growth, at the same time, being additive to cash earnings in the coming quarters and years.

Our global portfolio of products and our diverse distribution channels for our content are unrivaled in the industry and are driving increased earnings and consistent cash flows. We expect our financial results will continue to strengthen throughout the remainder of this fiscal year. We delivered a very respectable quarter and continue to generate positive returns for all of our stakeholders. With that, I'll ask John to share the financial details. John?

John Vandemore

Thank you. As Patti said, we are pleased with our second quarter performance. Total revenues grew 13% to $541 million and adjusted operating income increased 10% to $144 million. That drove adjusted income from continuing operations higher by 23% to $0.27 per share. Strong performance in product sales and growth from our interactive businesses drove improved results in the quarter but we were especially pleased with the broad-based strength across our global enterprise.

Gaming operation revenues grew 11% to $300 million in the second quarter, on increases in our interactive businesses and in our installed base. IGT's consolidated installed base ended the quarter at 56,100 units, up 3,600 units from a year ago and 500 units sequentially. For fiscal year 2012, we expect our global installed base to grow in the high-single digit range and revenues to grow in the low-single digit range, excluding the impact of our interactive businesses. However, the quarter was not without challenges. Excluding our online businesses, average gaming operations revenue per unit grew 3% sequentially from seasonality but decreased 4% year-over-year because of an increased mix of lower earning units.

Gaming operations margins was 60% in the quarter, down from 62% for the same quarter last year, primarily due to higher depreciation expense and the inclusion of our interactive businesses. We expect gaming operations gross margins to improve in the second half of the year, and for fiscal 2012, we expect gaming operations gross margin to exceed last year's 60.7%, again, before the inclusion of our interactive businesses.

Consolidated product sales revenues increased 16% to $241 million for the quarter. Globally, we recognized 10,200 units, up 13% from last year's second quarter, primarily driven by higher North American replacement units. Consolidated product sales gross profit was $131 million -- $132 million, sorry, a 15% increase over last year, primarily due to a 210 basis point increase in North American product sales gross margin to 57.3%.

Total machine sales revenues were up 23% over prior year quarter to $161 million. North American machine revenues grew 30% year-over-year on a 19% increase in units and a 10% increase in average selling price. International machine revenue grew 12% on a 3% increase in units and a 9% increase in average selling price. Consolidated non-machine revenues also grew, up 5% to $80 million.

For the remainder of the fiscal year, we expect continued growth in units and average selling prices, both domestically and internationally. We expect gross margins to be at or slightly below last year's strong margin performance, mainly due to product mix.

Second quarter operating expenses totaled $196 million or 36% of revenues, primarily due to the inclusion of operating costs associated with our recently acquired interactive businesses. Excluding the impact of these recent acquisitions and the adjustments detailed in the press release, operating expenses as a percentage of revenue were about flat with last year.

As of March 31, 2012, cash, cash equivalents and short-term investments inclusive of restrictive amounts, totaled $361 million. And contractual debt obligations remain unchanged at $1.7 billion. Fiscal year to date, we have generated strong operating cash flows of $177 million. In the quarter, we repurchased 3 million shares of common stock at an average price of $15.43, at a total cost of $46 million. In the first half of this fiscal year, we have returned over $85 million to shareholders via share repurchases and dividends. And we anticipate returning at least that much in the second half of the year as well. With that, I'll turn it over to Patti.

Patti S. Hart

Thanks, John. Given our financial results for the first half of fiscal 2012, as well as the positive contributions from every aspect of our business, we are confident in our ability to achieve our financial goals for the year. We continue to sense increasing optimism from our customers and we stand ready to put our customers first.

With that said, we are responsibly focused first on reducing risks and managing that within our control. For the current 2012 fiscal year, we are raising our adjusted earnings guidance to $0.98 to $1.04 per share, including the impact of our DoubleDown acquisition. Our core objectives for 2012 remain consistent as we look to grow revenues, build on the momentum of our internal improvements, leverage our income statement and energize our interactive business. And with that, we thank you for your time and we'd like to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Mark Strawn with Morgan Stanley.

Mark Strawn - Morgan Stanley, Research Division

One question on the new units, domestically they were recognized in the quarter. Were the Ohio units or the Atlantic City units in that number this quarter?

Patti S. Hart

Yes, I mean, I think we feel very good about the participation in the new units market. In the quarter, for this quarter, we recognized the lion's share of units for Atlantic City. For Revel, not the entire, there is a subset that we did not take in the quarter. But the lion's share, we took in the quarter. We did not have anything for Ohio, and I'm sorry Mark, nothing for Ohio.

Mark Strawn - Morgan Stanley, Research Division

Okay, great. And then just one follow-up on the game ops side, you mentioned the mix shift to lower-yielding units. It sounds like you're making good progress on the WAP side. It is just your, say, 80, 20 base is growing faster than your WAPs and we should probably expect that to continue overall?

John Vandemore

Well, I think we're generally pleased with our WAP product performance. It continues to perform as expected. Really, the quarter was really just a mix to the lower earning units, and we expect continued improvement sequentially over the remainder of the year.

Patti S. Hart

And I think it's a combination, Mark, of switch to stand-alone but it's bigger than that, right? As you see Aqueduct coming in, as you see [indiscernible] coming online in June, it's a lot of the -- a lot of reoriented lease ops kind of product that you have coming in, which is very good business for us. We'll continue to take, but it yields at a lower rate.

Operator

And our next question comes from Steven Wieczynski with Stifel, Nicolaus.

Steven M. Wieczynski - Stifel, Nicolaus & Co., Inc., Research Division

On the gross margin side, specifically the international side, you talk about these lower non-standard manufacturing costs. Can you just give an indication of where you think you can get those international margins over the next couple of quarters? And will some of those be, will some of those costs be able to be pulled out of there?

Patti S. Hart

Yes. I mean, we expect gross margins to strengthen as the year goes on. We had an isolated nonstandard cost situation in our Asia-Pac region in the quarter. So we are anticipating that the gross margins across-the-board but specifically in the north, or in the international market, will pick up between now and the year and end of the year, back to more normalized levels.

Steven M. Wieczynski - Stifel, Nicolaus & Co., Inc., Research Division

Okay. Got you. And then on, Patti, for DoubleDown, a little bit bigger picture question here. I guess the -- a lot of the concern out there in the marketplace is, how you guys are thinking to convert the non-paying customers of DoubleDown to paying customers? Because you -- you've had this acquisition now for 3 or 4 months, can you just kind of walk us through how you're thinking about that conversion process going forward?

Patti S. Hart

Yes. I mean, we've had it only for about 85 days. So not quite as one, not for a full quarter yet. So we're very comfortable if you look at the accretion to cash earnings the DoubleDown has provided, we feel very comfortable that it's outperforming our expectations in the business case, going into the acquisition. I think that the thing to keep in mind is that the way we count our daily users is a little bit different than others in the market because we count them when they come in the door of DoubleDown. So if you go into the DoubleDown Casino and you play more than one machine, it still is only counted as one. So we're very focused on the stickiness of the full-on casino as opposed to an individual game. So the real way to convert them to paying customers is to provide the best product and content in the marketplace and to expand into the mobile platform in a way that allows us to touch customers more broadly. So that's, I mean, the focus you'll see is strength of product. I mean, we've launched into the iOS platform, we've launched our Omaha Poker, we have our Texas Hold'em in beta, we've launched The Brady Bunch, we've launched American Idol. And so it really now is about reach relative to the mobile platforms is how we think it will really move the needle for us, I think, in conversion.

John Vandemore

I would add, Carlo, though that we are and admittedly it is early, but we have a pretty strong conversion in there already and we're pretty satisfied with that but obviously, we'll continue to focus on strengthening that as well.

Operator

[Operator Instructions] Our next question comes from Robin Farley with UBS.

Robin M. Farley - UBS Investment Bank, Research Division

On the North American replacement sales, it was a nice number, a nice increase year-over-year. Is this -- I mean, do you think you'll be growing from this level or was it just a timing issue where this quarter ends up maybe with a little more than you expected?

John Vandemore

Our outlook is positive for North American replacements. It will, we think, continue to strengthen throughout the year. But this was an excellent quarter for us driven by a lot of customer and corporate orders that were sizable. So we'll expect North American replacements to grow modestly over the remainder of the year. But there wasn't anything extraordinarily unusual in the quarter that doesn't lead us to believe that there's continued strength in that market for us.

Patti S. Hart

Yes, I think, Robin, it's just worth noting that when you think about our business on an annual basis, we're targeting in that kind of mid-30% market share range and we'll have quarterly fluctuation as we did last quarter and we have this quarter but we're very comfortable with those as objectives that we can accomplish.

Operator

Our next question comes from Steven Kent with Goldman Sachs.

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

If we could just talk about the way that you put DoubleDown into the quarter. I was a little confused. So in terms of revenue and EPS, what was the impact of DoubleDown? And it sounded like the last time when you talked about DoubleDown, it wouldn't be in your guidance, but it's in your guidance now. So how much of an impact was that? And then, if you – you’ve said you have $0.15 of acquisition-related charges for the full year, is that going to be evenly distributed? And is that all DoubleDown related? And then, if the earn out and the retention for DoubleDown is real cash, why are we backing it out and the same for amortization of intangible professional fees and distributor settlements? I guess I'm just confused about how you're handling DoubleDown in this quarter's operating results.

John Vandemore

Okay, well let me try to hit those in order. First and foremost, I would say, I think it's important to note, that we've done with DoubleDown now less than a full quarter. And we are extremely pleased with the progress related to integration, as well as just the overall performance. But the way we tried to incorporate that into our existing segmentation is to include the additional disclosures that we did on users and bookings. It is a component of our interactive businesses, which today reside within our gaming operations margins and results. I would say that we have drawn out the retention payments because they are of a short duration, they will only be in place for a short number of years, and recognize that currently, they are not cash payments. They are accruals against cash payments that will be earned into the future. And the reason why we chose to disclose those as unusual items, is we believe that without them, you would not have visibility into the underlying business, and we want to make sure you have that visibility. I would admit, our disclosures will continue to evolve in this area as we learn more about the business. And quite honestly, the market continues to evolve its disclosures about this business. In the quarter on an adjusted basis, DoubleDown contributed about $0.01, and we expect that to be the case for the next couple of quarters as well. I hope I hit on all of your questions there.

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

I guess so, I mean it's just the $0.15 of acquisition charges, is that evenly distributed for the balance of the year? And then, if it is accruals against cash, then it is really cash, it's just that you're going to spread it out over a couple of years. It's not like there's some other product you're giving these, the original DoubleDown founders. It is cash, right?

John Vandemore

It will ultimately be cash, given that they accomplish the requirements of the retention payments and the earn-out requirements that are based on performance. I think the notion behind our disclosing to you the impact of the acquisition-related charges was so that you knew what those charges were and in your analyses, you can either include those and attribute the purchase price at a reduced level or vice versa, attribute the full potential purchase price and then have the charges in the P&L to back out. So you're able to compare on an apples-to-apples basis. Just to add clarity, on the $0.15 that's in our press release, that predominantly relates to the amortization of certain intangibles, which we detail it separately in the current quarter and we'll most likely continue to do in future quarters, as well as the retention payments, which we are also independently calling out on our income statement due to their size and the short-term nature, over which they will appear in our income statement.

Operator

Our next question comes from Felicia Hendrix with Barclays.

Felicia R. Hendrix - Barclays Capital, Research Division

Just to clarify a point on that prior conversation. You raised the midpoint of your guidance by $0.03, so was that attributable to the $0.01 contribution from DoubleDown's in this quarter? And then, John, you said the next couple of quarters would be about the same, so that gets to about $0.03, so is that fair?

Patti S. Hart

Yes. I think it really is about risk mitigation, right? As we make our way through the year and the year end numbers provide more clarity, we're certainly hoping to count on a couple more pennies to carry forward this quarter's performance of DoubleDown forward. But not in the bank yet. So I would say the $0.03 at the bottom is putting a $0.01 in our pocket, off of DoubleDown, and then adding a couple more cents of clarity to what we think the North American replacement cycle looks like in gross margins around the globe and the contribution of international.

Felicia R. Hendrix - Barclays Capital, Research Division

Okay, so at the high end it’s kind of like the best of all worlds you had, it's a nice -- you have DoubleDown contributing, but also your underlying business trajectory continuing?

Patti S. Hart

Continuing as positive trends, yes.

Felicia R. Hendrix - Barclays Capital, Research Division

Correct. Yes, okay, that's very clear. I appreciate that. And then just your ASP, your international ASPs were better than we expected, and I know it's a tough variable to model and get right, but I was just wondering if you could talk about what was driving that? Was it -- I know, you had Macau, was it that? Or is it other efforts?

Patti S. Hart

Yes, I think with the record ASPs for us in the international market, so I think a very good quarter for us. I think it's a reflection of a couple of things. One is kind of a move upmarket for that part of our business. We've been very focused on moving ourselves there. We've been very focused on the locally attuned content. So we -- the product, I believe, is more relevant. Therefore, it drives more value for many of our customers. So that's been -- we've been able to reflect the localization of content and the pricing to customers as well. And there was very little foreign exchange impact this quarter. So you have a little bit of everything I think going on here. But I think it's a reflection of our focus on the international market, moving ourselves to higher ground there with more sophisticated installations and the investments that we've made, the R&D investment to build localized content.

Operator

[Operator Instructions] Our next question comes from Carlo Santarelli with Deutsche Bank.

Carlo Santarelli - Deutsche Bank AG, Research Division

When we look at SG&A, the new run rate, obviously extracting the charges, about $100 million annually. Is that a decent run rate? And can we attribute most of the incremental to DoubleDown? And then I have one quick follow-up on DoubleDown.

Patti S. Hart

Yes, we have SG&A, I think, we expect to sit in at $100 million to $105 million a quarter for the remaining of the year, including DoubleDown. So that's with DoubleDown. Our target continues to be kind of 31% to 33% of revenue, and that's our expectations. I think equally, on the R&D front, we're settling in at about 55 to 60 a quarter, inclusive of DoubleDown, so we picked up some R&D there. But reflected as a percent of revenue in the same way.

Carlo Santarelli - Deutsche Bank AG, Research Division

Great. And then, if I just kind of try and back in to DoubleDown, I get to a number or the -- your interactive business of about $35 million in revenue for the quarter. Would you guys be able to A, quantify anything around the revenue impact? And could you actually maybe provide us some guidance in breaking out DoubleDown from Entraction as a percentage of maybe that number?

John Vandemore

Well, we're obviously not going to disclose that on the face of our financials, and I think we're going to continue to examine our disclosure procedures with DoubleDown. And quite honestly, it's an evolving space. So we need to look at that carefully. I think the important points I'd draw out on DoubleDown are the $0.01 that we mentioned as contributing in the current quarter on an adjusted basis and the fact that it continues to be accretive to cash earnings, which is an important component of the acquisition, the fundamental philosophy behind the acquisition.

Patti S. Hart

And Carlo, we had it for less than a quarter, right? So you've got to remind yourself that we didn't have a full quarter of revenue from DoubleDown this quarter. Next quarter, we will.

Operator

And our next question comes from Harry Curtis with Nomura.

Harry C. Curtis - Nomura Securities Co. Ltd., Research Division

Just a follow-up on Steve's question. I'm a little bit confused about the adding back of the amortization of intangibles. Why are you adding those back if the intangible -- if goodwill is going to be amortized for quite a while? And then it’s the -- and a similar question related to the retention and earnout payment, if you expect ultimately to pay that because they're successful acquisitions, why would you -- I'm just curious, why would you want to add those back?

John Vandemore

I think we are offering this treatment as a perspective so that you can determine the run rate of the business as is. I don't think in any way, shape, or form we're suggesting that you would incorporate that into your analysis of the acquisition or to return to shareholders, we certainly do. However, we wanted to give you enough information to understand what were normal course charges that you can expect to ensue for this business for the period, for a longer period than in which those charges are going to exist. Just to be abundantly clear though, there is no goodwill amortization in those numbers. Those are only amortization of certain intangibles that get attributed a piece of the overall acquisition and will only be amortized over a short period of time. Certainly, you have to match the earnings capacity of the business with whatever you consider to be the invested capital and we just wanted to provide enough information so that you were able to dissect that in any way you choose, either to fully attribute all the cash payments to the acquisition and then back out the charges over the normal course, or the other way around would certainly be to use a lower than maximum acquisition cost and treat the P&L as burdened with those charges. Again, our perspective here was to give you as much information as possible with regards to the run rate of the underlying business.

Harry C. Curtis - Nomura Securities Co. Ltd., Research Division

Okay, that's helpful. And then my follow-up question is, if you could discuss in a little more detail, how competitive the pricing environment is, both in product sales and game ops. And specifically, are there -- we've got, you've got competitors that are underselling your boxes. To what degree are you having to tie other services to these product sales?

Patti S. Hart

Yes, I mean, well, I would first say that in my 3 years as CEO of IGT, I've never had a day in my job that it wasn't competitive in the marketplace. It's a competitive marketplace. There's limited capital flowing into the marketplace, which makes it more competitive. I think the key thing to look at, as evidence of how we're managing the business, is to look at the ASPs, right? So if you look at the average selling prices, both internationally and domestically, we had pickups year-over-year in both areas. So we've been very focused on packaging the product and making it create value for our customers. And it's reflected in the prices we are able to derive. So is it competitive? Yes, it's competitive. Does that necessarily mean discounting alone? No, it doesn't. It really is about building the best product that returns value to the shareholder -- or returns value to the customer. And so, I think, the -- our participation in the marketplace is indicated by a pickup in ASPs. At the same time, we had a significant pickup in unit shift in the replacement cycle. So I think that is a reflection on what we've been spending our time on, which is building the best content and gaming experience for the customers.

Operator

Our next question comes from Cameron McKnight with Wells Fargo.

Cameron Philip Sean McKnight - Wells Fargo Securities, LLC, Research Division

Just a couple of questions. First, on domestic replacement unit sales. Can you give us some color on where those units were shipped by geography?

Patti S. Hart

Yes. I mean -- we don't have that broken down right in front of us. I mean, we can provide you a bit more color, I suppose, at a later date. But I mean, suffice it to say that to ship the number of units we did in the quarter, you have to be shipping pretty broadly in the United States. I don't think you're relying on one geography versus another geography. If what you're asking is about Canada, there's really nothing that reflects the Canadian VLT market here. This is real strength in the domestic United States that we're seeing.

Cameron Philip Sean McKnight - Wells Fargo Securities, LLC, Research Division

Okay, great. And just to clarify John's earlier comments, should we be treating 5,000 replacement units a quarter as the baseline going forward?

John Vandemore

No. I think what we're anticipating is strength in the replacement units. But I don't know that it’s going to be at that level. So we'll see strength, I don't know that we think it's going to continue to be at that level.

Patti S. Hart

Yes, I think on a year-to-date basis, Cam, we’ve recognized 8,100 units. I think, that's a comfortable kind of 6-month rate for us that we feel very comfortable with. And as we indicate, I think, every quarter, you're going to find things moving around quarter-to-quarter but kind of sitting in at that level on annual basis is something we're comfortable with.

Cameron Philip Sean McKnight - Wells Fargo Securities, LLC, Research Division

Okay. So 4,000 a quarter, give or take?

Matthew G. Moyer

Yes. I mean, I think, Cam, the way I’d think about it is the replacement market is growing, is going to be flat to growing, it's kind of been IGT stands now for about 6 months. This year is going to be flat to growing. And our share in that is going to be in the mid-30s. So I think that kind of tells you that year-over-year, our North American replacement markets will be in that kind of 3% to 5% growth range with about a mid-30s share.

Operator

And our next question comes from Joe Greff with JPMC.

Joseph Greff - JP Morgan Chase & Co, Research Division

Looking back at the gaming operations in the quarter, if we were to look at the North American business, what were yields on a kind of a same-box basis? Were yields -- if you adjust for the mix of the lower-yielding units, would the yields have been up year-over-year?

Patti S. Hart

Hang on, we're just digging. Give us a second.

John Vandemore

I think you see the same general trends, maybe not the exact same amounts on a calendar basis with sequential increase owing to seasonality. And then the other trend we noted as being a slight decline versus prior year.

Patti S. Hart

On a same-store basis.

John Vandemore

On a same-store basis.

Joseph Greff - JP Morgan Chase & Co, Research Division

Same store, then, okay. And then my follow-up question relates to interactive and within the back half of the fiscal year guidance, how much or any of a gross margin ramp are you expecting for that business?

Patti S. Hart

Yes, well, gross margins for the interactive business, DoubleDown, in particular, Joe, is a little skewed because of Facebook, the way that Facebook credits come through. So a little bit higher revenue growth, a little bit more stressed gross margins. We expect those gross margins, because of the way it’s so kind of clinical in the calculation, right, it's a $0.70 of every $1 for us, we expect them to kind of hold in there in the DoubleDown business and the general interactive business outside of that, we expect slight margin pickup there in the back half.

Operator

[Operator Instructions] The next question comes from Joel Simkins with Crédit Suisse.

Joel H. Simkins - Crédit Suisse AG, Research Division

I'll try to ask you a non-DoubleDown question. In terms of the cloud-based gaming comps, you mentioned some initial trials in Europe. What have the interest levels looked like so far domestically and also what has -- did the conversation look like with those that have purchased sbX? And additionally, what are the regulators' view so far as the cloud concept?

Patti S. Hart

Yes. We haven't really pursued the cloud domestically at this point. We've been very focused with both regulators and customers outside the U.S. and are very comfortable with the trials, and we're very focused now on converting the trials to commercials. That will take place over the coming months. And I would think the U.S. is still well into '13 or '14, until we really start thinking about that. There's a lot of work that has to be done regulatorily. But also, just in really exercising the cloud technology with our customers that I had to bring it into the U.S. So we certainly have a lot of requests from customers to understand more, not only just in the U.S. but in Latin America, Canada and other places. We’re, for the most part, captive on the European continent as of today, and we'll stay there. We're -- it's just much more efficient for us in training our sales force and working with fewer regulators and what have you. And so we have this beyond proof of concept into a real revenue-generating product. So we've done it, I think, in a very focused fashion, which I think will benefit us long-term. So I would say '13, '14 is time for introduction to the U.S., assuming everything goes well, but likely not before that.

Joel H. Simkins - Crédit Suisse AG, Research Division

And one quick follow-up here, within gaming operations, can you just give us some color in terms of what's working for you right now? Is it a lot of the tried and true product or are some of the new games, Dark Knight, Ghostbusters, et cetera gaining traction?

Patti S. Hart

Yes. I mean, I think a little bit of both and it's interesting to see the legs on Sex and the City internationally. That's been a real pleasant surprise for us, to see how applicable that product is outside the U.S. So we've really been able to pick up some strength by adding life to the Sex and the City product, the original product. Dark Knight, not just here in the U.S. but outside the U.S., also very strong for us. Ghostbusters as well. So we're feeling very good. Breakfast at Tiffany's is doing very well. It's moved from exclusive, out more generally into the market. So we feel good about how the product is playing. And Big Buck Hunter is kind of the next generation for us. So I do like we have a nice lineup of products in the bag at the sales folks at this particular point in the game op side.

Operator

Our next question comes from Jon Oh with CLSA.

Clifford Kurz - Credit Agricole Securities (USA) Inc., Research Division

It's Clifford Kurz calling on behalf of Jon Oh. I just had one quick question, given the DoubleDown acquisition and the increased share repurchases, is it safe to say that there are probably no further acquisitions in the near future that you're currently looking at right now or thinking about?

Patti S. Hart

Yes, I mean, I would say do we have anything on the horizon? No. But we typically don't comment in advance about acquisitions. I would go back to the previous comments, which is, we are all about putting content into the market and reaching as many devices as we can reach with our gaming content. And that will continue to be our focus organically, acquisitively in whatever fashion. So right now, we've got our hands full with Entraction and DoubleDown and delighted with the way DoubleDown is performing this early in its life.

Operator

And our next question comes from Darnel Bentz with KeyBanc.

Darnel J. Bentz - KeyBanc Capital Markets Inc., Research Division

I just had a quick question on international. Big picture, where do you see the biggest opportunities internationally? Where your ship share has been historically, and where you think it can go with the more localized content that you're putting out now?

Patti S. Hart

Yes. We always think we know where the International business is going, and then our sales people teach us that they're actually pretty good at doing this. So they surprise me all the time. But I would say, obviously, in the markets that you would expect, where gaming is expanding, we have a lot of opportunities in the Latin American, South American marketplaces, as well as in Asia. Asia is a great opportunity for share pickup for us. In Central, South, Latin America, it's really more about new openings and some share pickup. But I will tell you that our EMEA group has really done a remarkable job at really getting us back in doors that we have not been in, in a very, very long time, introducing new product that many of our customers have not been introduced to. So I would just say, we can't count out our EMEA region. They really are scrambling for every machine order and they've proven that every machine order matters. So I won't, on this call, say that the EMEA folks won't contribute like the other 2 regions, because they surprise us. So we feel pretty good about our position outside the United States right now from a systems perspective, from a machine perspective. The cloud is really making an impact for us. And I think you'll continue to see the kind of growth that you saw this quarter in our International business.

Darnel J. Bentz - KeyBanc Capital Markets Inc., Research Division

What kind of ship share do you think that equates to internationally? Or would you be...

Patti S. Hart

So I mean, we're coming from kind of mid-teens, right? If you look at everything all in internationally. So I mean, can we set our sights on being north of 20? I think we can set our sights on that. It's not something that happens overnight, because you have to wait for the capital to come in the market. But I think the most recent replacement orders that have gone out the door have indicated that we're participating on a market share perspective at higher rates than we have historically.

Operator

Our next question comes from Todd Eilers with Roth Capital Partners.

Todd Eilers - Roth Capital Partners, LLC, Research Division

I wanted to see if you guys could maybe give us an update on some of the Canadian replacement, VLT replacement contracts, I guess, in a lot in Québec and I guess Alberta, maybe just an update on that area for you guys. And do you expect to record any of the game shipments in this fiscal year or for the second half?

Matthew G. Moyer

Yes. I think we're still, I mean, we still think we might get some in the September quarter, it just kind of comes down to timing and revenue recognition issues. It's really going to be more of a '13 event. There may be 1,000 or so that sneak into September. But we obviously got a very good share from the first announcement and we're hopeful that those kind of trends continue.

Todd Eilers - Roth Capital Partners, LLC, Research Division

Okay, great. And then one quick question on new opening shipments. You mentioned that you did not record the Ohio Casino opening. Should we assume that those games will hit in the June quarter? And then also, Las Vegas Sands opening in Macau, did -- were those units recognized this quarter?

John Vandemore

The Las Vegas Sands units were recognized in the quarter. And our current forecast is that the Ohio properties will be recognized in June. That being said, that largely comes down to the licensure process and the requirements we need to meet in order to ensure appropriate revenue recognition. But our current perspective is that will be -- those will be recognized in our third quarter.

Operator

Our last question comes from Bill Lerner with Union Gaming.

William J. Lerner - Union Gaming Group, LLC

Just a question on treatment for -- or in game ops. You guys talk about interactive impact on yields or average revenue per unit per day. I guess, I – this is really the sort of the same or related question, but can you just explain how that works in terms of interactive? How to make that apples-to-apples with your share of coin-in or win per day on a participation game? And then also, I guess related to that, how do we make -- what's the adjustment to the installed base if you're throwing it in yields, what should we be thinking of in terms of excluding it from the installed base if we were to try to make an adjustment, so we can understand that?

John Vandemore

So just to be clear, our traditional means of calculating yield, which we disclosed, includes the interactive businesses. Up until this point in time, that hasn't had any sort of distortive effect on the yields in this instance, in the release. And as we mentioned, we are calculating that for you as well, excluding the interactive businesses, which is the number that we gave that showed good sequential increase, owing to seasonality, but a slight decline versus prior year. And we give both of those numbers to give you a sense of both directions of the business, and we think, probably the latter is the more important to us, that’s the operations of the true underlying units that are in the installed base. So the installed base, we wouldn't actually suggest that you make any alteration, it's largely a numerator issue in the calculation.

William J. Lerner - Union Gaming Group, LLC

Okay. So then just, on the yield number, the $59 number that you dropped down to $52 for the adjustment. What's the sort of -- so it's, I mean, I'm confused about whether -- what the numerator, denominator is. So you're basically just taking revenue in interactive for some portion of your interactive business and literally dividing it over the installed base?

Patti S. Hart

Right. We're just extracting the interactive revenue so you -- again, I think at DoubleDown, the success of DoubleDown has been what it is. It now is at a point where having our interactive business in game ops can color the yield number. So we want you to see it with and without the interactive business. So it's just -- it's an adjustment to revenue with the same number of units, Bill.

Operator

At this time, I show no further questions.

Patti S. Hart

Okay, thank you very much. Well, thanks, everyone, for joining us today. We're pleased that you've taken the time to hear our report. And we appreciate your continued interest and support of IGT. Thanks a bunch.

Operator

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

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