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Bally Technologies (NYSE:BYI)

Q3 2012 Earnings Call

April 26, 2012 4:30 pm ET

Executives

Richard M. Haddrill - Chief Executive Officer and Executive Director

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

Ramesh Srinivasan - President and Chief Operating Officer

Analysts

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

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

Joseph Greff - JP Morgan Chase & Co, Research Division

Carlo Santarelli - Deutsche Bank AG, Research Division

Mark Strawn - Morgan Stanley, Research Division

Todd Eilers - Roth Capital Partners, LLC, Research Division

William J. Lerner - Union Gaming Group, LLC

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

Ryan L. Worst - Brean Murray, Carret & Co., LLC, Research Division

Joel H. Simkins - Crédit Suisse AG, Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Third Quarter 2012 Bally Technologies, Inc. Earnings Conference Call. As a reminder, this conference is being recorded for replay purposes. [Operator Instructions] I would now like to turn the presentation over to Mr. Richard Haddrill, Chief Executive Officer. Please proceed, sir.

Richard M. Haddrill

Welcome everyone to Bally Technologies' third quarter fiscal 2012 earnings call. Today's results mark an all-time quarterly record for diluted earnings per share from continuing operations, record third quarter revenues and our fifth consecutive quarter of year-over-year revenue and earnings per share growth.

Revenues from all 3 of our sources again increased with approximately 53% of third quarter revenue being recurring in nature, which continues to support earnings visibility. We set revenue records in each of the last 5 quarters for gaming operations, driven by the significant investments we have made in our game development studios over the past few years.

In March, we released our newest wide-area progressive game, Grease, and it's off to a fantastic start. As of today, over 170 units are in the field with performance and thus far exceeding our expectation. To date, cannibalization of other value premium games has been very low. However, we are early in the launch process. In late May or June, we expect to begin placing our second cash connection title, Michael Jackson, which is ahead of schedule.

Key platform and hardware innovations are also paying off in our gaming equipment sales as we achieved a 22% share for new openings in the quarter. And in the fourth quarter, we expect to recognize units shipped to the 2 Ohio properties with about a 21% ship share.

Finally, our iVIEW DM strategy is developing very well. The largest floor installation to date of iVIEW DM is at Mohegan Sun with over 2,500 units. And we are making good progress on our portfolio of exciting DM applications. We now have a solid base of over 7,500 iVIEW DMs deployed across all major games manufacturers, where we are running a total of 9 DM applications. And our DM pipeline is excellent.

Our outlook for our fourth quarter and fiscal 2013 looks strong, so we are again raising the bottom end of our guidance for the remainder of fiscal 2012 to $2.37 to $2.45 per share. For today's call, Neil Davidson will cover our overall financial results, Ramesh Srinivasan will discuss operating highlights. And then, I will have some overall comments before we open it up for questions.

Neil, over to you.

Neil P. Davidson

Thanks, Dick. First, let me review our Safe Harbor language. Today's call and simultaneous webcast contains 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 markets for our products, 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, April 26, 2012. 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.

With that out of the way, we reported record financial results for the quarter ended March 31, 2012. And again, as Dick mentioned, raised the bottom end of our expectations for the remainder of fiscal 2012.

Overall, net income for the quarter was $30 million, which resulted in all-time record quarterly earnings from continuing operations of $0.67 per fully diluted share for the 3 months ended March 31, 2012. On record, third quarter revenues of $229 million.

As Dick mentioned, this marks our fifth consecutive quarter of both year-over-year revenue and earnings per share growth. In fact, including the $0.02 diluted earnings per share loss due to the impairment of certain notes receivable, our third quarter diluted earnings per share grew 56% year-over-year.

Revenues from game sales were $79.3 million for the quarter, up 24% from $63.7 million in the prior year. We sold 4,147 new units during the quarter. 2,936 units were sold in North America, 635 of which were opening and expansion units and 2,301 replacement units. This marks the third quarter in a row our North America replacement unit sales were up.

Average selling price for the quarter was $17,073, up 10% versus last year, driven by shipments of our newer Pro Series cabinets which made up 89% of the sales during the quarter. Game sale margins increased to 46% from 43% last year, primarily due to mix, which included higher conversion kit revenue and continued benefits from ongoing cost reduction initiatives in our Pro Series line of cabinets.

Based on anticipated mix for our fourth quarter, which we expect will include multiple Ohio properties, we anticipate our game sales gross margin will decline slightly over the third quarter. However, we still expect our game equipment margins will approach 48% to 49% within the next few quarters due to continued reductions in material costs on each of the Pro Series cabinets.

On to gaming operations. Revenues from gaming operations set a fifth consecutive all-time quarterly record at $92.5 million, up 16% from $80 million in the comparable period last year, principally as a result of a full quarter benefit from games placed in Resorts World Casino in New York, the continued placements of our premium games, and importantly, strong recent success with cash connection, our new wide area progressive link. In fact, WAP revenue set an all-time quarterly record, increasing by 13% versus last quarter and 61% versus last year, driven by our new WAP products, including the initial launch of Grease in March. The margin on gaming operations was within our expected range at 73%.

System revenues were $57 million for the quarter, up 20% from last year. Maintenance revenues for the quarter were a record $19.6 million, up 20% from $16.3 million in the comparable period last year, and for the full year will exceed the 12% growth we previously expected for fiscal 2012. The margin on systems revenue was 71% for the quarter, at the lower end of our expected range, due to a higher mix of hardware versus software sales.

We currently anticipate that fourth quarter systems margin will return to the higher end of our historical range of 70% to 75% based on mix. With respect to our effective income tax rate for the quarter, it was 37.2%, slightly higher than fiscal 2011 but still within our expected range for fiscal '12.

Quickly turning to the balance sheet. As of March 31, 2012, we had unrestricted cash of $35.7 million and our DSOs were 114 days, which is down from 118 days last year and still within our expected range. We continue to generate strong free cash flow, which enables us to maintain our leverage ratio comfortably below 2 turns, while continuing to buy back almost 900,000 shares of stock for $40.7 million during the quarter and an additional 285,000 shares for $13 million since March 31. We still have approximately $57 million remaining under our board-authorized share repurchase plan and would expect to increase this amount in the coming months, if necessary.

Ramesh, I'll turn the call over to you to talk about more of our product innovations and operating results.

Ramesh Srinivasan

Thank you, Neil. Overall, our recent string of good quarters continues with significant progress in all major business areas: game sales, games operations and systems. Revenues in each area were up from the comparable prior year quarter and each up for the second consecutive sequential quarter.

While our financial results are beginning to represent a good picture of how well our execution engine is working, what is truly the more heartening piece is how well our innovation engine is working. Bally received a record 5 of the 10 Slot Floor Technology Awards in the prestigious Casino Enterprise Management's Sixth Annual Awards presentation. DM Tournaments took first place in this top 10 list. We continue to focus on effective innovation that provides real and reasonably immediate value for our customers. I have to say a lot of the credit for this goes to our customers for it is they who drive us forward in general and our innovation in particular.

During this quarter, we also established 2 Guinness World Records for our iVIEW DM and Elite Bonusing Suite product lines, in partnership with Pechanga Resort and Casino, by running the world's largest slot tournament. The amount of excitement this event created for patrons and the increased revenue and profitability contribution it made to the casino were remarkable.

More recently, El Dorado Hotel Casino in Reno achieved measurable and demonstrable result with a 40, 4-0% increase in win-per-unit on games using iVIEW DM and a number of other applications. The extraordinarily positive return on investment case studies are beginning to happen at a good pace now. As our systems continue to make the transition from just being products that help casinos meet regulatory accounting and player tracking requirements into industry transforming player experiences with clearly enhanced profits for casinos. Backed up by new and innovative content, products like iVIEW DM are gaining very good traction.

Since our last earnings call, we have made good progress in Italy. We recently completed the most crucial step in the regulatory process, the experimentation phase for our products which has been the stumbling block thus far. What remains is the equivalent of preparing for and completing field trials of our products in casino production environment. We expect Italy to be an important market for us in the long term. However, the delays thus far have led certain customers to seek alternative products partially for certain VLTs previously committed to Bally.

Turning to the quarterly numbers. Gaming operations continues to be a bright spot for us, led by our new WAP products and market expansion in jurisdictions such as New York. Gaming operations revenue of $92.5 million and gross margin of $67.5 million were both quarterly records. We placed an additional 125 incremental WAP units this quarter, the fourth consecutive quarterly increase. WAP units have increased 54% since last year, and this is with Grease just getting started and Michael Jackson coming soon.

Game sales revenues for the quarter were $79 million, representing a 24% increase over the comparable prior year quarter. Just like with our premium games, we are seeing increasing acceptance of our new ALPHA 2 based core video content, which continues to drive ship share. We sold over 4,100 units this quarter. Driven by strong demand for our state-of-the-art cabinets and ALPHA 2 content, we sold 200 -- 2,936 units in domestic markets and a little more than 1,200 units in international market for a total of 4,147 units, the third consecutive year-over-year quarterly increase.

New unit sales for international customers were the highest they have been in 7 quarters. While our progress in Australia has been slower than anticipated, we did ship more units in the third quarter than in prior quarters. We continue to expand game sales, WAP, systems and recurring revenue opportunities in various countries in Asia, including Cambodia and the Philippines.

Among new domestic opportunities, we continue to make good progress in Illinois. We've had good discussions with customers there, have signed several contracts and feel our products are well positioned for the market, which should result in us winning a fair share. We expect to begin initial VLT shipments in Illinois during the second half of calendar 2012, with the mix of sale versus lease to be determined by the contract terms which are in various stages of negotiations now.

With respect to systems, revenues for the quarter were $57 million, which again included record levels in maintenance, representing a 20, 2-0 increase over the third year last quarter. In terms of deals won, we welcome several new corporations to our Bally systems family this quarter. Several current customers also expanded their partnerships with us through significantly increased use of products like iVIEW DM and the Elite Bonusing Suite. In terms of value of systems deals won, the past year has been the best such period we've ever had, which bodes well for the future of system revenue levels.

We completed our ninth annual user conference during the quarter with record attendance from all casino departments including marketing, finance, operations and IT. Overall, 550 customer users representing 443 customer sites attended the conference, up more than 20% from just a year ago. There are multiple sales opportunities we've come across since then, which can be attributed directly to the conference. Based on measurable feedback during the conference, it would be fair to say that both our products and our personnel were very well received by our customers and partners.

The Bally Interactive initiative continue to progress well. In February, we purchased Remote Gaming Server technology, which will enable us to provide access to Bally's deep library of proven game content on regulated Internet gaming sites across the world. We also purchased a B2B iGaming platform, which is open and cloud-based and provides our customers an integrated traditional and online casino solution allowing them to choose best-in-class applications for wager-based and play-for-free gaming, while providing for integration with back-end systems already in place. This approach will provide our customers an integrated single view of their patrons across all media. Overall, we are very pleased with our position in interactive and the progress we are making.

In summary, we are on a solid growth path as we expand our great team of people, and we continue to make good progress on all fronts. Our consistent financial results should continue to reflect well the actual progress being made on both the execution and innovation fronts.

Now let me turn the call back over to Dick.

Richard M. Haddrill

Well, thank you, Ramesh and Neil. We are executing well on our operational and our strategic plan. Our many global investments in recent years are now really starting to pay off and we are continuing to invest wisely in our future. We are executing well on our strategy to significantly increase our presence within WAP. While Grease is off to an excellent start and we are excited about the launch of Michael Jackson, I can assure you our WAP strategy does not end there. Our extended number of studio teams and our state-of-the-art ALPHA 2 platform and cabinets equipped with iDeck are serving us well in both game sales and game operations. We're also executing well in our unique iVIEW DM strategy. As we demonstrate strong ROIs and we're developing even further iVIEW DM applications, particularly wager-based apps, which we believe will be even more impactful.

Overall, we see multiyear growth opportunity for our systems business with the current exciting products, which includes iVIEW DM and our leading mobile apps and the announcement of key customer contracts with more to come in the coming months. We believe that our new game technology, our approach to WAP and iVIEW DM and our multiyear system contracts represent unique opportunities for Bally to grow its revenues regardless of general industry trends, which I might point out seem to be improving. These product strategies, when combined with our initiatives to enter markets around the globe, will result in long-term expansion of our operating margins as we leverage revenue growth.

We will also continue to actively manage our capital structure. We are still pursuing key acquisitions in the area of technology where we can leverage our infrastructure, and we will excess -- allocate excess free cash flow to the repurchase of our common stock, which has been one of the best investments in recent years.

So in summary, we are very pleased with our third quarter financial results, both operational and financial, and we're very excited about our upcoming fourth quarter and fiscal 2013, both of which should generate record earnings per share. In closing, I want to give thanks to all Bally team members who continue to work hard to ensure the success of our customers and of Bally for the long term.

Now it's time to open it up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from the line of Steven Kent with Goldman Sachs.

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

Two questions. First, could you just give us a more detailed update on Canadian systems installations and timing on sort of where you are on that? And then, for systems, the fact that you're seeing more sales of hardware, which you note in the press release, depressed margins. Ramesh, should we view this as a positive as it means that going forward this hardware will need more software or recurring revenues or is this more openings, I'm just trying to put that in perspective, sort of that change in mix?

Ramesh Srinivasan

Yes, Steve. As far as the Canadian systems installs are concerned, they are moving along exactly as planned, they are moving along well. All the major ones there have generated reasonably significant services revenue for us already. And we expect the Canadian installs to start reflecting in the revenue towards the end of this calendar year -- towards the end of calendar year '12. Now as far as systems margin and product mix is concerned, Steve, we are focused on increasing sales across all our systems product line, hardware, software, maintenance and services, and quarter-to-quarter, it could vary anywhere in the 70% to 75% range, so we don't see anything as a negative. We do expect hardware sales to pick up, but there's a reasonable expectancy that software, services and maintenance will also increase at least at the same rate. So I expect gross margin for systems to stay in the 70% to 75% range. It could be at the lower end one quarter, it could be at the higher end the next.

Neil P. Davidson

In fact, in my opening comments, Steve, you might have heard me say, we expect Q4 to come in somewhere at the high-end of our margin. So that would probably close out fiscal '12 somewhere in the mid-70% range, which is kind of where we expect to go in into this year.

Operator

Our next question comes from the line of Steve Wieczynski with Stifel, Nicolaus.

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

Neil, I guess this is for you. You talked about the improvement in the margin on the product sale side getting to the 48% to 49% level, I think you talked about a lot of that being cost reductions with the Pro Series. But just trying to get a feel for how much is going to be related to cost and then how much is going to be related to the -- to ASP improvement because your ASPs have been really strong here over the last couple of quarters?

Neil P. Davidson

Yes, we've continue to drive costs out of the Pro Series cabinets themselves. We have a path to drive cost out of a number of different components over the next really 6 to 9 months at this point that give us visibility into that 48%, 49% margin. So I think, given ASPs where they've been right around 17,000 -- 17,073 this quarter, we get to that 48%, 49% margin just through cost cuts from here on out.

Richard M. Haddrill

And conversion kits over time will help as well.

Neil P. Davidson

Right.

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

Okay. Got you. And then I guess for Dick, you talked about the cannibalization, you haven't seen much of that yet with the Grease launch, but again you said it was still early on. But how are you thinking about that over the next 2 or 3 months as you start to rollout Michael Jackson as well?

Richard M. Haddrill

Yes. First, cannibalization is really hard to measure. It's something we don't even like to talk much about, but we know you guys do. It's kind of easy to measure for the first 30 days or so because if you took a premium game back at the same time you put out a new one, you would assume you got cannibalized. But if you get a game back 60, 90 days later, you're not sure if you got cannibalized by one of your products or by someone, by a new Grease unit or by someone else's. That said, the good news about Grease and Michael Jackson is their game is very unique to Bally because of their level of complexity and hardware sophistication, sound chairs, et cetera. And second, they're both unique WAP products with a unique WAP link and we don't have that much WAP product out there. So our view is that the cannibalization is likely to be lower for these games than our other premium games and at least, so far that's been the case with Grease, but again very hard to measure.

Operator

Our next question comes from the line of Joe Greff with JPMorgan.

Joseph Greff - JP Morgan Chase & Co, Research Division

Dick, the comments on Grease were encouraging, I was hoping maybe you can just talk about the backlog for Grease, either qualitatively or quantitatively, and if there's much to talk about from a backlog perspective with the Michael Jackson game, maybe you can kind of put in perspective versus other title launches or new products in the past? And then, I have a couple of follow-up questions, you can maybe help break out the ASP delta between domestic and international? And then my final question is with respect to U.S. replacements, do you have a sense whether or not the calendar 1Q was a little bit more front loaded for your customers or do you think it's a little bit more of an even run rate going forward from here?

Richard M. Haddrill

Let's start off on Grease. Certainly, the game performance on Grease is, the best I've seen in my career here, again, on a limited number of units out there, but it's exceeding our expectations and our expectations were high. In terms of visibility on backlog there, I think we've been saying that our expectation was for a good game like Grease of its style and a good game like Michael Jackson of its style, based on our prior experience, we would think that it's not unreasonable to get around 750 units of each out within 6 to 9 months after launch. And again, the cannibalization is hard to measure. We're expecting it to be lower on these games and some others. I think we still feel that way being this far into the feedback from customers on Grease and orders on Grease and feedback from customers and preliminary orders on Michael Jackson, even though Michael hasn't been released yet. On the ASP question, I'll turn that one over to Neil.

Neil P. Davidson

Sure. So Joe, typically ASPs between international and domestic there's about $1,000 per unit delta. I'll caution you in the sense that from quarter-to-quarter that can change. If we have more sales in Mexico, where we typically sell at a lower ASP and get a daily fee, the delta is bigger. But this quarter it was around $1,000.

Richard M. Haddrill

And then your question on Q1, I'm either going to punt that to Ramesh or ask you to reask it again because I'm a little fuzzy. Ramesh, you got...

Ramesh Srinivasan

The question is about the replacement ship share, and the replacement ship share has been steady. It has been...

Joseph Greff - JP Morgan Chase & Co, Research Division

Not the ship share necessarily, Ramesh, but just the absolute level. I mean, do you think some of your customers maybe proportionally ordered more in the calendar 1Q than what they're planning to do on a steady-state basis for the rest of the year, whether or not you can kind of look at the calendar 1Q absolute level's unit replaced kind of a run rate?

Richard M. Haddrill

Yes, I think historically we've seen sort of a weaker quarter being the September calendar quarter. The other one's harder to predict on a calendar quarter basis between Q1, Q2 and Q4. So we haven't heard anything from customers that they were spending early in the year this year compared to prior years. That hasn't been a theme we've heard.

Operator

Our next question comes from the line of Carlo Santarelli with Deutsche Bank.

Carlo Santarelli - Deutsche Bank AG, Research Division

The first question is if we looked at your WAP placement in the period, what percentage of your WAP units that you placed were Grease in this quarter?

Neil P. Davidson

I'd say the vast majority.

Carlo Santarelli - Deutsche Bank AG, Research Division

Okay. And then in terms of your decision to rollout Michael Jordan -- sorry, Michael Jackson in May and June, how should we view that? I know you guys have kind of tinkered with the timing of that and is there anything you're seeing in Grease that has you coming out in that timeframe?

Richard M. Haddrill

Now I wondered if you got a hold of our product pipeline, looking at our new games now. We don't have a Michael Jordan. No, there's been absolutely no change in our schedule on Michael Jackson based on Grease. Michael Jackson has always been a game that we wanted get out as soon as we could. And the good news is that despite being a very complex game, it's progressing well at this point. We think it's going to be out, about 30 days ahead of what we otherwise previously thought. But no, both good games from what we can tell. We haven't seen Michael Jackson in the field yet and no change in schedule based on Grease performance, both we wanted to get to market as soon as we could.

Carlo Santarelli - Deutsche Bank AG, Research Division

Great. And then if I just ask one follow-up for Ramesh. Ramesh, obviously, you guys have a lot of DM press releases that are out there, the vast majority of which have not started to generate revenue yet. Is there any way you could quantify maybe the 12- to 18-month trajectory of how we should think about some of those incremental DM units being placed?

Ramesh Srinivasan

DM is just a normal part of all our systems deals. You can assume they are a normal part of systems deals going forward. And I would not project, specially DM going forward. All I will tell you is this particular quarter, Q3, was our largest implementation of DM in our history. We did more implementation of DM units this quarter than we ever had and I expect that trend to continue, and I expect that trend to pick up speed as we go along. And every quarter, we'll probably be installing more DM than we have previously done. But I also expect software and services and maintenance and all of that to also continue to expand reasonably well.

Operator

Our next question comes from the line of Mark Strawn with Morgan Stanley.

Mark Strawn - Morgan Stanley, Research Division

Just one quick question on your existing daily fee unit. I was wondering if you could give us a sense of how some of your stronger games there have been performing such as Cash Spin and Vegas Hit. So maybe we could get a sense on how they're trending and maybe try to factor that into our expectations for cannibalization going forward?

Richard M. Haddrill

I mean our core games if you see the statistics as they come out here with either our press release and our 10-Q indicate that they are up in number, but some of the growth is occurring internationally, where the win per unit is lower. And from an R&D allocation point of view, we've obviously shifted a little more allocation towards the WAP product and the core gaming apps product, but they're still performing well, games like Cash Spin, Cash Wizard. So we -- in terms of -- we expect faster growth certainly in the WAP than we do in the core premium games and some of the premium growth has come in at a little lower win as we expand internationally.

Neil P. Davidson

I'd say when I look at the yields on our overall premium footprint which is a subsection of that rental and daily fee, quarter-over-quarter, there wasn't a lot of material movement so the yield has been about the same.

Mark Strawn - Morgan Stanley, Research Division

Great. That's really helpful. And has there been conversions that have come out for them as well that can extend the life of those games over time, I would imagine?

Neil P. Davidson

Sure, we're always releasing conversions. For example, we showed Beach Boys just recently which is going to be a conversion kit for our Cash Wizard cabinet. We have a couple more titles coming out on our Cash Spin cabinet.

Ramesh Srinivasan

So Mark, making sure that we have enough of those coming in, in each of the cabinets out there is one of our major R&D focuses.

Operator

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

Todd Eilers - Roth Capital Partners, LLC, Research Division

Couple of questions, first on the systems side. I guess, this quarter and even next quarter seems to be a large number of new casino openings, many of which Bally has the system contracts for. Can you maybe give us a sense for what new openings might have hit in this quarter and what might hit next quarter just to kind of get a sense for the timing on some of these on the systems business?

Richard M. Haddrill

We try to stay away from giving too much specific customer information unless they've given us approval. But if you're looking out at our systems business, how we're looking at it here over the next 12 to 36 months, in the near term, there are some good openings coming from contracts we've already signed and some people purchasing iVIEW DM and rolling it out or to the earlier question, people had have purchased didn't not yet rolled it out that are going to be rolling out. So we're excited about the deals already announced, we're excited about the iVIEW DM possibilities. And then as we get towards the end of calendar '12, we've got the Canadian and on into '13, Canadian and systems go-live that will also contribute to the systems business. So as we look out over the next 12 to 24 months, even on to 36 months, we've got a pretty good feel that some of these bigger customers will roll over in extended period of time. And in the short term, we've got some pretty good visibility from upcoming go-live.

Neil P. Davidson

Yes, and I'll add just to the short term, Todd, just remember, unless the doors are open in the facility, typically we're not recognizing revenue on those system go-live, so that might help you with a couple of the upcoming openings.

Ramesh Srinivasan

And also please keep in mind, Todd, a good majority of our systems revenue does come from existing customers as well.

Todd Eilers - Roth Capital Partners, LLC, Research Division

Helpful. And then also I want to ask a question on the, I guess, the announcement you guys made a while back with your agreement or partnership, I guess, with Aristocrat for, I guess, your Internet gaming strategy and potential agreement to partner, I guess, on the poker side. Can you maybe talk, Dick, a little bit about that? And it sounds like you're looking to both go with the same poker network, any update there and maybe what should we expect from a timing point of view when you might announce a partner that you're looking at?

Richard M. Haddrill

I think we would hope to have one or more poker partners announced in the next 60, 90 days, possibly sooner. A couple of reasons for that partnership, one is of course the liquidity -- pooling liquidity in an area like poker; another is to be able to have as much influence as we can to help our customers get products to market quickly by encouraging each other to work on common standards in Internet gaming. And we hope to work cooperatively with other suppliers in that area as well, so products can get to market quickly for customers. Those are the 2 major reasons, and so far we've been able to work that out. With Aristocrat, it's always possible others will join that partnership as well. But on poker liquidity, we're directly coordinating with Aristocrat.

Operator

Our next question comes from the line of Bill Lerner with Union Gaming.

William J. Lerner - Union Gaming Group, LLC

A couple of questions, one, can you just talk about -- maybe this is for Dick. What's changing internationally, Dick, and using just the unit sales counts as a proxy to ask the question? I mean, is it distribution change? Are you adding more different resources to the region? And then I have a follow-up.

Richard M. Haddrill

Well, there are several things there. We started making some investments in markets like South Africa and, of course, across Asia, Australia and New Zealand, and those investments are starting to pay off in both games and systems. And then specifically on the game side, as we get more and more video content and most international markets are more video and, as you know, we've sort of transformed over the last couple of years from an 80% stopper [ph] company to an 80-plus-percent video company, now that also helps us internationally. And now we're starting -- just starting to do a better job of internationalizing our products. So we actually think there's a lot more upside over the next couple of years as we internationalize the products, capitalize on the new technology platform and capitalize on our video internationally. But we won't be able to capitalize on all of that in fiscal '13, it'll actually be -- there'll be somewhat -- it'd take us another 10 or 12 months to get all the way there.

William J. Lerner - Union Gaming Group, LLC

Okay. Great. And then your R&D and SG&A smaller percentage of revenues, I get the leverage in the model, I suppose you're seeing it in mix and pricing and maybe that's the answer or is it something else? I mean, that would be a great trend to pull out?

Richard M. Haddrill

Well, we've been frustrated, as you know, for a couple of years making some pretty big investments in a slow economy. Now the economy is at least stable and slightly improving, and our customer outlook is slightly improving. But also those investments, many of them coming into fruition. We have products now finally in Australia. We have iVIEW DM kinks worked out and good content there. We have the ALPHA 2 platform out. We have the iDeck and the new cabinet out, Pro Series cabinet. So all those investments are behind us. That's not to say we're not making more investments, but that should allow our R&D and SG&A to grow at a somewhat slower percentage of revenues although we continue to invest aggressively in R&D. If you look at our operating margin this quarter, it's 22%. We had this charge for writing off our investment of several years ago in a Mississippi boat. If that were adjusted out, we'd have a 23% margin. And we see the operating margin being able to get into the 25% range over the next 3, 4 quarters.

William J. Lerner - Union Gaming Group, LLC

Okay. And then last one just I guess maintenance in a way, the adjusted EPS in the quarter was $0.70, I just want to confirm that and if there's any color, that would be great.

Richard M. Haddrill

Can you ask that question again, Bill?

William J. Lerner - Union Gaming Group, LLC

It was just -- Dick, it was just a question about adjusted EPS, I just want to confirm its $0.70 in the quarter.

Neil P. Davidson

Yes. I would say that so in my opening comments, the impairment was right around $0.02, $0.025, so call it $0.69.

Operator

Our next question comes from the line of Darnel Bentz with KeyBanc.

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

You may have broken this out, I just missed it. But could you give the breakdown between new and replacement sales, and then also on the conversion kit side, I was just wondering what the year-over-year growth was of conversion kit and if you could talk just more broadly if customers are purchasing more conversion kits than they have historically, or what are the trends in that business?

Neil P. Davidson

Yes, I can give you the North America units were 2,936, the opening expansion were 635, which leaves 2,301 for replacement units. As far as conversion revenue, it was up slightly year-over-year, but in terms of margins, we were discussing it more quarter-over-quarter, we saw that conversion revenue increased more quarter-over-quarter than year-over-year and helped our margins.

Richard M. Haddrill

And I would say for us, conversion revenue is still relatively small because we're just getting a base of new cabinets out, and we're really just getting a big base of video cabinets out. So we see it sort of a trend over the next 1 to 2 years of being positive for us, but slow and steady.

Operator

Our next question comes from the line of Ryan Worst with Brean Murray.

Ryan L. Worst - Brean Murray, Carret & Co., LLC, Research Division

Can you just provide some color on the experience at El Dorado with DM and I think you gave a 40% increase in win per day number, could you just talk about the timeframe, what drove that, how sustainable that is? And any other experiences in different casinos that maybe are close to that?

Ramesh Srinivasan

The ROI case studies in terms of increased card play, increased coin and increased revenue profitability for the customers have been happening in multiple places. It's now reaching a stage where customers are taking pride in the fact that if you are using these products and it is really helping us. And El Dorado Reno was one example of that. Now to what -- so the 40% increase was on the games on which DM and supported by the EBS applications were run. And it's very exciting and the numbers are very, very positive. I'm not going to have a guess on how long that trend of 40% is going to last. Even if it is not 40%, I'll assure you the ROI studies are real now. And customers wanting these products because of genuine improvements that it can cause for profitability, those stories are building up one on top of the other now. And not only that, it's also creating a lot more fun and entertainment for the patrons in the casino as well. So both ways, these products are really beginning to contribute to casinos very significantly.

Richard M. Haddrill

And I think one important thing about the El Dorado computation is that it was run for -- from like about the beginning of April till a period of about a week ago when the information was shared with us, and so that was a 3-week period. It wasn't just run for 1 hour a day, it was during the entire time, measured 24 hours a day during that 3-week period compared to the prior year. So that's a pretty powerful message right there.

Ryan L. Worst - Brean Murray, Carret & Co., LLC, Research Division

Yes, I would agree. Is there anything in particular that you think is driving it? Is it certain applications or is it just better relationship with the customers and communication?

Richard M. Haddrill

Well, the more a customer can look at their player base and look at the applications we have available and marry the operations and marketing team into the products, they get good results. And that's really the key because every casino is different, every casino's style of marketing is different and that's what we find most important.

Ramesh Srinivasan

And it's a good commentary on the configurability of the products, so customers have different ideas on how to use these applications and how to use our DM, and the products are configurable enough to accommodate a lot of these ideas and allow customers to do what is good for the market and what is good for their patrons.

Ryan L. Worst - Brean Murray, Carret & Co., LLC, Research Division

Okay, that's helpful. And then just on the write-off, could you give us a dollar amount for that and was that in the SG&A line?

Neil P. Davidson

Yes, it was in SG&A and it was $1.75 million.

Operator

Our next question comes from the line of Joel Simkins with Credit Suisse.

Joel H. Simkins - Crédit Suisse AG, Research Division

I just wanted to ask a few quick questions. Back in the fall, you did announce an interactive division, can you give us a sense of your general strategy around social gaming, online gaming, particularly it looked like IGT and WMS have been a lot more aggressive in pursuing this path?

Richard M. Haddrill

Actually, we've got an excellent feedback from our customers both at our user conference and in individual meetings over the strategy we pursued, which is several prongs to it. One is we're converting our good Bally content to the Internet so we can make incremental revenue on those jurisdictions for which Internet gaming is approved using Bally content. The second part is our mobile strategy which today we're the leader in mobile apps here at least in North America and continuing to gain good business in that area, that was an acquisition we did last fall of MacroView. And then third is our iGaming platform, we acquired Chili Gaming, which provides an open and flexible platform so that our customers can pick whatever individual application they want to use for sports wagering, for casino-style games or for poker, and we'll offer some best-of-breed in those categories with tightly integrated partnerships. But if a customer wants to pick a different platform, that's fine, we'll integrate it to the Chili platform, so that they have a single view of their player across the casino operation and across their iGaming activities. So this is an extension of our B2B strategy to assist our customers, current system customers and future ones, to be able to market actively and expand their business in the iGaming arena and not compete directly with them, and that's our strategy and the customers like it, and we think it's a great way for us to make good money with some -- a reasonable investment.

Joel H. Simkins - Crédit Suisse AG, Research Division

Okay. And back to Michael Jackson and Grease, obviously this is a pretty significant IP. There's some big investments around that IP as well. How should we be thinking about G2E 2012 and your lineup there in terms of pursuing different IP, as well as your incremental investment R&D game ops going forward?

Richard M. Haddrill

Well, for us, we've made big investments in the ALPHA 2 platform and the Pro Series cabinet before we started investing more money in brands that carried that additional price tag. But certainly games like Michael Jackson and Grease are more than offsetting their IP costs from the incremental win. So look for us to do a couple of brands a year and leverage our good technology across games and systems and globally as well, and like -- a game like MJ is going to be terrific outside the United States as well. So I think you should look at it as we think any revenue earnings will more than offset the cost of the IP. We look for a couple more G2E.

Operator

Ladies and gentlemen, there are no further questions. I'd like to turn the call over to Mr. Richard Haddrill for closing remarks. Please proceed.

Richard M. Haddrill

Well, just in closing, I'd like to say thanks again to our investors, employees and customers for providing such a good platform for growth. We're excited about our future. Thank you.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. That does conclude the presentation. You may disconnect. Have a wonderful day.

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