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Bally Technologies Inc. (NYSE:BYI)

F4Q08 Earnings Call

August 20, 2008 4:30 pm ET


Richard M. Haddrill - Chief Executive Officer, Director

Robert C. Caller - Chief Financial Officer, Executive Vice President, Treasurer

Michael Gavin Isaacs - Chief Operating Officer, Executive Vice President

Ramesh Srinivasan - Executive Vice President, Bally Systems

Neil Davidson - Chief Accounting Officer


Joseph Greff - J.P. Morgan

David Katz - Oppenheimer

Todd Eilers - Roth Capital Partners

Rushin Shah - Morgan Stanley

Steve Wieczynski - Stifel Nicolaus


Good day, ladies and gentlemen, and welcome to the fourth quarter 2008 Bally Technologies Inc. conference call. (Operator Instructions) At this time, I would like to turn the call over to Mr. Richard Haddrill, Chief Executive Officer. Please proceed, sir.

Richard M. Haddrill

Thank you and welcome, everyone, to Bally Technologies’ fourth quarter 2008 earnings call. We are again very pleased to report record revenues and earnings for both the quarter and the fiscal year ended 2008. Bally is executing very well in this difficult economic environment and we are well-positioned in the market despite the slow consumer spend. We continue to gain market share in both games and systems.

With me today on the call are Gavin Isaacs, our Chief Operating Officer; Ramesh Srinivasan, Executive Vice President of Systems; Robert Caller, our Chief Financial Officer and Treasurer; and Neil Davidson, our Chief Accounting Officer.

First, Robert will review the Safe Harbor language and cover our overall financial results. Then, Gavin and Ramesh will discuss the highlights of each of the games and systems business units, and then I will have some overall business comments and we’ll open it up for questions.

Robert, over to you.

Robert C. Caller

Thanks, Dick. First I’d like to 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.

More information on factors, risks, and uncertainties that may affect our business and financial results, or may cause us to not achieve our forecasts, are included in our annual report on Form 10-K for the year ended June 30, 2007, and other public filings we have made with the Securities and Exchange Commission.

These forward-looking statements made on this call today and webcast, the archived version of the webcast, and any transcripts of this call speak only as of this date, August 20, 2008.

Today’s call and webcast may include certain 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 record financial results for the fourth quarter and for the full fiscal year ended June 30, 2008. Total revenues were $247 million in the fourth quarter, a 22% increase, and $900 million for the fiscal year, a 32% increase from the comparable prior year periods, respectively. Net income for the fourth quarter was $31.3 million, or $0.54 per share on a fully diluted basis, as compared to net income of $18.5 million, or $0.33 per share in the comparable prior year period, an increase of 63%.

Net income for the fiscal year was $107.2 million, or $1.85 per share on a fully diluted basis, as compared to net income of $22.3 million, or $0.40 per share in the prior year period, an increase of 74%.

Adjusted EPS, which adds back the effect of share-based compensation, was $0.57 per share for the fourth quarter and $2.00 per share for the fiscal year.

Adjusted EBITDA for the fourth quarter was $75.2 million, a 44% increase and $271.8 million for the fiscal year, a 96% increase as compared with the same periods last year. Operating income was $56.4 million and $199.2 million for the quarter and fiscal year respectively, and equaled 23% and 22% of revenue for each period respectively.

We recorded strong growth in all three of our technology businesses. We reported record revenues in the fourth quarter in both gaming equipment sales, which increased 9% over the prior year period, and in gaming operations, which increased 36% over the prior year.

We also reported record annual revenues for these two business lines with gaming equipment revenues up $410 million, a 27% increase over the prior year, and gaming operations revenues of $236 million, a 34% increase over the prior year. Revenues from our systems business were again very strong in the fourth quarter, increasing 52% to $54 million, and for the full year increasing 54% to a record $206 million, as compared to the prior year periods.

The 9% increase in fourth quarter gaming equipment revenues was driven by an increase in game sales to 7,360 units from 7,241 units in the comparable prior year period. Of the total units recognized this quarter, 6,010 units went to customers in the United States and Canada. International sales for the fourth quarter and fiscal year constitutes 15% of total revenue and continued to grow.

Our average selling price, or ASP, increased 6% during the quarter as compared to the same quarter last year, largely due to the impact of product mix, certain price increases, and reduced discounts.

Margins on new gaming equipment were 45% for the quarter and the fiscal year. The improvement in our game margin over the past 12 months -- our game margins have improved significantly over the past 12 months from 36% in the prior fiscal year. We continue to focus on improving our game sale margins and expect several basis points of improvement over the next six to 12 months, as Gavin will discuss in more detail in his comments.

Our gaming operations business again reported very strong results. Revenues in gaming operations in the fourth quarter increased 36% to $69 million from the prior year quarter. The increase in revenue was due primarily to increases in the installed base, our rental and daily fee games, and the popularity of our premium games.

Gaming operations margin was 68% in the fourth quarter, as compared to 63% in the comparable period of the prior year. We expect future gaming operations margins to range between 65% and 70%.

The increase in our systems revenue and the backlog in our systems business continue to be strong. Revenues in the quarter increased 52% to $54 million, reflecting an increase in the go lives of a number of new system installations, sales of new products, such as the iVIEW player communication units and related software products, and the continued increase in our maintenance revenue, which was $11.5 million in the fourth quarter.

Margins in the systems business this quarter remained in the high end of our target range of 70% to 75% at 75%, due to the increased mix of software versus hardware sales. Hardware has a higher cost of goods sold in software.

Our SG&A expenses increased 17% to $65.6 million for the quarter, as compared to $56 million in the prior year quarter, but declined as a percent of revenue to 27% from 28% last year. Q4 SG&A increased $5.2 million over Q3; however, Q3 SG&A included an unusual $2.7 million credit related to the resolution of the MindPlay table game matters.

R&D personnel increased 52% as compared to the prior year and reflects our continued increased investment in our future technologies. R&D as a percentage of income was 7% for both periods. We continue to derive significant benefit from our India development centers.

As of June 30, 2008, we had cash of $66.6 million. During the quarter, we repurchased 156,200 shares of our common stock for $6.4 million at prices ranging from $39.41 to $42.71 per share. For the year, we repurchased approximately 585,000 shares for $23.1 million and paid down debt by approximately $29 million. On August 12th, our board of directors increased the total share repurchase authorization to $100 million.

Our EBITDA leverage at June 30, 2008 was approximately 1.17 times as compared to 2.17 times at June 30th of 2007. Inventories increased to $94 million as of June 30, 2008 from $81 million in the prior year as a result of a significant growth in our business.

Our inventory turns increased slightly to 3.5 times at June 30, 2008 as compared to 3.4 times in the prior year. Current receivables grew to $216 million from $172 million in the prior year, again as a result of an increase in our business. Days sales outstanding increased to 80 days at year-end from 69 days at June 30, 2007, as a result of a higher percentage of system sales, which generally have a longer collection cycle, and international sales, which generally have longer payment terms. However, our [AG] buckets as a percentage of receivables remained relatively consistent.

We have initiated discussions with our bank group to refinance or amend our existing $290 million term loan. We expect to complete this process by September 30th of 2008.

Now I will turn the call over to Gavin for some more discussion on gaming equipment and gaming operations results. Gavin.

Michael Gavin Isaacs

Thank you, Robert. What an amazing year -- records falling everywhere. I feel like I’m at the Olympic pool in Beijing. As Robert discussed, we are extremely proud of the record revenues and margins derived from the sale of our gaming devices and from our gaming operations during the quarter and the full fiscal year. Our revenues from the sale of gaming devices increased 9% to $114 million during the fourth quarter and 27% to $410 million for the fiscal year, as compared to the comparable periods in the prior year.

During the quarter, we recognized the sale of 6,010 units to customers in the United States and Canada. This reflects the continued demand for Bally games and the strength of our alpha based products in this current replacement cycle.

The increase in revenues was not significantly impacted by the weakness in the Nevada market, as historically our gaming revenues in Nevada are less than 10% of our total gaming revenues.

We estimate that our North American ship share in the quarter was approximately 20%, which although below our Q3 level, is up significantly from recent years. We did not book any sales of games to the Seminole Tribe of Florida as all of our 2,000 units are leased under long-term arrangements.

For 2008, we increased our overall ship share to approximately 23% from approximately 17% in the prior year.

The split between our mechanical reel and video games shipped in North America continues to be about 50-50. This increase in video products reflects our continuing improvement in this important segment of the market, and we are continuing to focus on improving these offerings.

Next month, we will start releasing our new range of videogames, which we anticipate will improve performance of our current products and drive additional sales.

Quick Hit Platinum has proven to be a top performer in our 32-inch cabinet and we are releasing more titles to support that unique and very effective cabinet.

We remain one of the leaders in stepper games. Last quarter saw the impact of the initial release of our new CineReel cabinet. Over the next few months, we will release more titles in all categories, especially Five Reel and [in higher denomination] to support and enhance our growing installed base.

As evidenced by our recent shares of new casino openings and expansions, we are well-positioned because of our improved fleet of products and the under-representation of Bally products on the floors of North American casinos today.

As of June 30, 2008, all games which we have shipped to the Oregon Lottery have been deferred to future periods. We expect to begin recognizing this revenue and margin in the first half of this year.

We were also especially pleased with the increased results from our international operations. New unit sales to international locations increased to 1,350 units, or approximately 18% of our unit sales recognized in the quarter. This compares to 1,166 units in the same period last year.

Previously stated, 2008 represented an investment year for our international operations. With a solid and well-trained team now in place, we are starting to see the benefits.

Our 45% margin on game sales in the fourth quarter is significantly improved over the 41% recorded in the comparable period of the prior year. Margin improvement in game sales remains a significant opportunity and a key focus for the company. The company continues to focus on improved purchasing and manufacturing efficiencies related to our single game platform. Engineering efforts and pricing effectiveness based on strong game performance and better management of our software.

In February 2008, we completed a successful implementation of a new warehouse management system, which is already improving the efficiency of our warehouse operations.

Our goal is to increase our margins on game sales into the high 40s over the next six to 12 months.

Our gaming operation results were also very strong, with revenues increasing in the fourth quarter 36% to $69 million and 34% to $236 million for the fiscal years compared to the prior year periods. Our margins on gaming operations during the quarter was 68%, well within our estimated range of 65% to 70%.

During the quarter, we completed the deployment of 2,000 games to the Seminole Tribe in Florida that are on a long-term lease and are performing well. Our gaming operations strength is also a result of the continued strong performance of our participation games, such as Hot Shot Progressive, Reel Winners, and Millionaire Sevens.

We have just launched Reel Money and initial results are exceptional. It is actually ahead of where Hot Shot Progressive was during the same phase of its rollout.

Our renewed focus on gaming operations includes a dedicated experienced team who is focused solely on managing the business, better asset management, conversion of weaker performing titles, and target selling. This should ensure that we continue to grow in the sector and achieve our goals.

We have experienced some customers who have removed recurring revenue units from their floors. However, these reductions have more than been offset by opportunities for the placement of additional Bally games in both domestic and international markets.

We are obviously keeping our eye on developments in the economy and the impact it is having on casino operators in fiscal 2009. We expect the replacement market will remain sluggish in fiscal 2009 but are optimistic that the growing acceptance of our products in the market and our relatively small but growing installed based of daily fee games will benefit us as compared to others.

We are seeing good demand for our products in various North American markets, including Washington, where we continue to grow and enhance our market share to currently over 75%.

Internationally, we are profitable and increasing ship share in every market. Our initial alpha product launches into South Africa are performing well. South America remains our strongest international region and we have high hopes for Europe and Asia.

In recent years, we have rebuilt our team. I believe we now have a very stable, effective, and focused group. We have invested in training and accordingly, our strong customer focus is beginning to show dividends for both Bally and more importantly, our customers.

Everyone from our factory floor to our customer-facing sales people are energized. We recognize that we can make more major improvements, and that is driving us. And this great team is backed by constantly improving products. Most importantly, we all love coming to work.

Overall, the team is learning the finer points of cricket and are being educated in the art of Australian slang.

Now I will turn over to Ramesh for some additional details on the systems business.

Ramesh Srinivasan

Thank you, Gavin. Between [listening to Australian] slangs and the thick Indian accents, people are going crazy here. Bally is becoming a global corporation, for sure.

Apart from the fact the systems team has been a bit slow in learning the subtle nuances of cricket, I can blame them for little else. The system management team has now been in place and stable for more than a year and is producing great results on all fronts, especially with respect to building solid, good teams, innovation, product improvements, and customer service.

Great people create great systems and technology products. The systems team, which was a little more than 400 less than three years ago, has now grown close to 1,000 across the U.S., France, India, Macau, the U.K., and other parts of the world and is continuing to drive us to great heights.

We recorded another excellent quarter with our systems revenue at $54 million, which is an increase of 52% over the corresponding prior year quarter. For fiscal year 2008, our revenues increased to $206 million, a 54% increase for the year.

Systems revenue related gross margins were 75% for the quarter and 73% for the fiscal year. This is our third consecutive quarter with systems revenues in excess of $50 million, compared to the previous record level of $39 million. This quarter’s results were principally driven by existing customers reinvesting with Bally.

During the quarter, we recorded over 70 significant go lives, including new installations, upgrades, and add-on products, which is a record for the systems division by a wide margin.

This is a very good commentary on our current market momentum, our increasing ability to execute well, customer acceptance of our latest version releases, and the innovative new add-on products bringing value to our current customers. In addition, the backlog in our systems business continues to be strong.

Maintenance revenues increased by 22% compared to the prior year quarter. To put our maintenance revenues in perspective, our fiscal year 2008 maintenance is equal to about 3,000 recurring revenue games earning $50 a day at 70% margin 365 days a year. And this predictable revenue stream is currently growing at the equivalent of about 600 games a year.

With an increasing systems footprint, apart from increasing maintenance revenues, we also expect an opportunity to sell newer products and services to our current customers to grow in the future. The newer products are mostly software based and are expected to carry high gross margins.

The cumulative number of iVIEW player communication network devices purchased and committed to be purchased as of June 30, 2008 now adds up to approximately 120,000 units and continues to validate our evolutionary server gaming network floor of the future strategy.

[inaudible] important and exciting inflection points in our systems business. The releases of 11.0 version of our systems products, which are already in process, will move us closer to our goal of becoming truly world-class. As previously disclosed, these releases have involved major reengineering exercises, enhancing our previously well-established products into [model] state-of-the-art technologies, providing new sense like vertical and horizontal scalability and internationalization, while retaining the functionality, breadth, and depth they have always been known for.

For example, the new version of SDS, which will be released in the coming months, will enable SDS, the industry’s leading slot system, to run on both Unix and Windows platforms, based on a single Java-based code set. This product is currently going through the quality assurance process. This creates a significant opportunity for us to penetrate the small to medium casino segment more effectively than ever before.

We have added many new products to our portfolio. The Bally integration gateway will enable easier and better interoperability between systems products, regardless of whether they are Bally products or not. The new integrated Bally business intelligence product providing traditional data analysis and data visualization based off a single version of data is about to go live in a leading casino.

The download [consecration] manager, DCM product, is already in production used to download marketing content to iVIEWs enabling iVIEW downloads within minutes, which used to take days and in some instances, weeks to accomplish before.

The DCM product has also undergone a recent technical field trial at a leading casino to download games and game [consecration].

We have also gained considerable experience in handling high-speed floor networks. Apart from approximately 35,000 class 2 games and larger games, we have worked on high-speed floor networks connected to our [sensor determinant] systems for quite some time. We now have more than 38,000 class 3 games connected to our systems based on high-speed floor networks.

We continue to lead the industry in developing and implementing server gaming products. The release of the iVIEW display manager later this year to manage customer communication through game windows uniformly across the entire gaming floor, regardless of game manufacturer, is an actual evolution of the ideal technology and Bally's strategy to provide more easily adaptable technologies through a single system-based CPU.

Overall, our solid base as the industry leader in systems products and our commitment to server gaming and other new technologies position us well today and for the future.

Now let me turn the call back to Dick.

Richard M. Haddrill

Thank you, Ramesh, Kevin, and Robert. What a great team. Bally is well-positioned for the future. We have several dynamics that we believe will allow our revenues to grow, even in these uncertain economic times. We expect to benefit from a growing installed base of great gaming operations units, an historically low base of Bally gaming products in North America, especially given our recent ship share.

We expect to benefit from expansion into new markets and a larger base of system customers who will buy our many newer products and our services, and generate increased maintenance fees.

We also expect further improvement in game sale margins and our overall operating leverage in fiscal 2009.

And looking beyond 2009, we are very excited about the long-term as we have recently completed our five-year strategic plan.

Now on our previous earnings call, we estimated fully diluted earnings per share for fiscal year 2009 to be in the range of $2.10 to $2.50 per share. There have been both positive and negative developments since the preparation of that forecast but net net, we remain comfortable with that initial guidance. We do expect revenues of each of our technology businesses to increase in fiscal 2009 versus fiscal 2008.

Now, we do caution investors that this guidance for fiscal ’09 is based on our overall assumptions of business today and on economic conditions, which do remain uncertain.

Now, we also do expect some normal seasonality in the operating results for fiscal 2009, with the first half of the year having somewhat less earnings power than the second half of the fiscal year.

In closing, I would like to truly thank the management team and employees of Bally for their tremendous efforts that continue to propel Bally forward as leaders in our industry and for making work so much fun.

And we’d like to thank our investors for your confidence and support.

We’d like to now open it up for any questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from the line of Joe Greff of J.P. Morgan. Please proceed.

Joseph Greff - J.P. Morgan

A few questions here -- one is on the gaming equipment side. Gavin, you referenced high 40s as the target gross margin over the next six to 12 months. I was hoping you could just give us a little more detail on how you get there and how much of that is mix, how much of that is the benefits, the continued benefits of the warehouse management system.

And then my second bigger picture question, hoping you can quantify as you look out the next 12 months, or for your fiscal year ’09, if you can kind of help quantify in North America what you think the number of new or expanded units, or units related to new or expanded casinos, and then what you expect to see in terms of the North American replacement market.

And then my third and final question will be, and hopefully you guys didn’t mention it but if you did, I apologize -- the number of system go lives in the fiscal 4Q and what the major ones there were. Thank you.

Michael Gavin Isaacs

I’ll start off with your middle question first, if I may. We just sort of keep a running tally on what we think new openings to be and we keep moving them in and out as the projects move in and out, obviously. We’re seeing between 30,000 and 32,000 units for 2009, new openings, and approximately 30,000 units at this stage in 2010.

As or the replacement cycle, that’s somewhat uncertain but as we -- we hope that as newer products come out and people begin investing in their floors, that will pick up as the years get -- as people get more used to the times.

In relation to the margins, and then I’ll hand it over to Ramesh, we have made a lot of improvements from an efficiency side in the warehouse and in the factory. We are getting a lot more efficient at building and some of the benefits of that still haven’t flowed through to the margin line, so we do expect to get some improvement in margins through operational efficiency.

Obviously mix is going to have some part of it but the other part of it is going to include our -- we don’t anticipate -- we believe that we are getting better with our software pricing and we anticipate that will [open in a flow through] effect.


Richard M. Haddrill

Before we go on to Ramesh, just a couple of things to add to that, Joe; you know, Bally hasn’t been able to sell too many conversion kits in the past. That also is having a slight impact on margins now and will continue going forward as we expand our footprint of product on the alpha platform and teleconversion kit. And we also, on the replacement cycle, longer term as we have done our strategic plan, do realize that the large number of gaming devices bought during the [TITO] replacement cycle are reaching that five years and older timeframe, which means they are fully depreciated on most corporation books and should contribute to a slightly increasing cycle.

Last point I’ll add to that is our own casino at Rainbow, where we deferred capital for about a six-month period when we had Rainbow on the market. We did find that after about six months, we really needed to invest to maintain our profitability, which we have done successfully.

So we believe that in this slow cycle, we are seeing people spending very little now but that that can’t go on for too long.

Ramesh, I think Joe also had a question on system go lives.

Ramesh Srinivasan

Like I said during the initial announcement, the number of go lives in this quarter was more than 70, and it consists of three major kinds of go lives. One is the new and other customers who had the casino [moved to our systems], customers who upgrade to our later versions of our products, and add-on products -- that is, current customers who buy the newer products that add on to the basic system solutions from us that they already have.

I expect that number of 70 to actually increase or stay consistent over the next few quarters as well.

Joseph Greff - J.P. Morgan

Great. Thanks, guys.

Ramesh Srinivasan

Go ahead.

Michael Gavin Isaacs

Sorry, Joe, I’ve just gone back and looked at my notes -- 2010, we think it’s about 35,000 at the moment, not 30.

Joseph Greff - J.P. Morgan

Great. Thank you.


Your next question comes from the line of David Katz with Oppenheimer.

David Katz - Oppenheimer

A couple of questions; firstly, we’ve been expecting this sort of updated version of your systems software that provides an opportunity to get into the smaller casino market. Can you help us define how big that opportunity is, or how you sort of see the parameters of it and what we should be expecting from it as a result?

Richard M. Haddrill

You know, David, I think on that point that depends a lot on how satisfied customers are with their existing provider and we just see it as one more arrow in the quiver of growing our system business, which includes a variety of new products, from business intelligence to tournament management to iVIEW DM to now a Windows-based version of the product, so we’re not going to forecast revenues by each of those product lines for Wall Street and for competitive reasons but we do see that as an area that Bally has not been historically strong in due to cost issues, the Windows platform being less expensive and one where now, with our long functionality, long history of functionality in systems combined with the lower cost platform, we should be very competitive.

David Katz - Oppenheimer

All right. And just going back to the estimate that Gavin gave out about 30, 32,000 slots in North America, what’s in there? I guess as I look down my forecast or my list, my running tally, I look at some of the bigger chunks, which might include Washington State. What kind of expectations do you have in there for Washington, or where are some of the bigger chunks that you are thinking about?

Richard M. Haddrill

Boy, now we’re really doing your guys’ work, but we’re happy to help, we’re happy to help. Let me just add to on, while Gavin is --

David Katz - Oppenheimer

I want to make sure you’re not talking us down a little bit.

Richard M. Haddrill

No, no, you guys are great and we don’t mind helping where we can. The point I’ll -- let me just add something as Gavin looks that up, that on our Q4 systems revenue, over 70%, well over 70% of that revenue came from existing customers that were not doing openings, right? So there’s been a little perception recently that our systems business is highly dependent on new openings, which just -- you know, Ramesh said we had a large number of go lives but many of those go lives are people upgrading to recent versions of our products or installing major new products that Bally has rolled out, so it’s not just based on new casino openings.

Ramesh Srinivasan

On your other question about the smaller sized casinos, lots of opportunity in the international markets as well for smaller sized systems that are cheaper, run on Windows, and the products that are internal, like internationalized, that can be easily translatable to the local languages. There is [inaudible] opportunity among smaller casinos in the U.S., especially international markets as well.

David Katz - Oppenheimer

And just in your game ops, it is I think a pretty diverse or mixed bag of different pricing structures and different types of deals. Can you perhaps give us a little bit of help as to sort of where some of the larger pockets are that you derive from, or give us some kind of ranking as to how we should evaluate events as they occur and news flow as it occurs relative to your game ops?

Robert C. Caller

David, are you talking about specific properties or revenues by type of device?

David Katz - Oppenheimer

Well, I think more the latter, by type of device. We certainly know Hot Shots are in there, we know Lotteries are in there, we know [inaudible] is in there and where -- which are sort of more important than some others?

Robert C. Caller

Well, David, as a reference point, if you look at the statistical table that we have in our earnings release where we break down the types of games that we have, you know, we have over 44,000 centrally determined games that earn on a daily basis $4.00 to $5.00 a day. We have about 8,000 lottery games that are generally earning something in the $10.00 range, and then in our linked progressives, we have earnings power in that group in the $70.00 to $80.00 a day range. And then the largest group is our rental and daily fee, and that’s made up of a composition of games that earn between $20.00 and $60.00 a day, and the average is somewhere in the middle there on that category.

Richard M. Haddrill

And David, let me editorialize a little bit -- our gaming ops revenue increased by a whopping $10 million this quarter, which really is across the board. Obviously the Seminole’s contract we began to fulfill those 2,000 units starting in February and pretty much completed them by early July. But we also had good success -- you know, this new Reel Money product looks good, Millionaire Sevens, continued expansion of the Hot Shots product line and, as Gavin referred to in his comments, we are simply doing a better job of managing the units out there to higher win per unit in many cases by either refreshing the title or just better day-to-day management.

One other point that is perhaps unique to our gaming operations business is that about half of the gaming operations revenue is related to rental or system daily fee, as opposed to being a variable based on coin in or amount wagered, so that gives us some insulation from economic ups and downs.

David Katz - Oppenheimer

Last one, and I don’t know how much you can say on the subject of the patent suits but it is certainly one that is relevant for us. If there are any updates or timelines or any thoughts you can share, we’ll take them.

Richard M. Haddrill

You bet. Just a brief summary there, the only thing new since our last call is we did hold the summary judgment hearings in the end of June and then one other one tailed off into early August. We would expect to hear on most of those summary judgment motions within the next three to four weeks, with the trial being set for late October now.

The one summary judgment ruling that was rendered by the judge was to deny IGT’s motion to drop the anti-trust claims, so those anti-trust claims will continue and they will be part of the overall case.

Aside from that, there’s been no development in the last three months and the summary judgment hearings could produce something of interest in the next three or four weeks; otherwise the trial starts in late October.

David Katz - Oppenheimer

Thanks very much.

Michael Gavin Isaacs

Do you want that breakdown?

Richard M. Haddrill

Go ahead, Gavin.

Michael Gavin Isaacs

Okay, so just generally, actually Washington isn't really in that figure at all. The bulk of it comes from Pennsylvania. Then there’s a bit in the Midwest. Nevada’s got just under 7,000 units coming online this year, and Oklahoma has about 5,000. So [going back to that], the East seems to be the biggest region that we see in the trackings that we do.

Richard M. Haddrill

And we know, we look at all the analyst reports, David, and we do our own bottoms up from talking to customers. We have I think pushed out some units from ’09 to 2010 based on talking to customers that perhaps some analysts haven’t, and that may be one reason why our 2010 number is slightly above our 2009 number.

Next question.


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

Todd Eilers - Roth Capital Partners

I was wondering if we could maybe spend some time on the deferred revenue. I don’t know if -- I don’t think I heard you guys give a number there but could you maybe give what that was, long-term and short-term at the end of the quarter? And then also, can you maybe break that down a little bit further? How much of that is related to your systems business and maybe how much of that might be related to Florida units, Washington units, Oregon units, just to get a better sense of kind of what’s included in that number.

Richard M. Haddrill

Yeah, and Todd, let us caution -- the investment community is spending too much time on this particular number. Just to go back, we recognize revenue when we should under the software recognition rules and technology company revenue recognition rules, and that means when we’ve completed our obligations to the customer.

And depending on when contracts are signed or when cash comes in, things can go into deferred revenue, and deferred revenue is up a couple million bucks again this quarter. But if you look at the margin, for example, in deferred revenue versus deferred cost of revenue, you are going to get a margin number that’s too low and if you look just at growth or shrinkage in deferred revenue, you may not get the true picture of what we really have in backlog.

So Robert will give you the numbers here but I would just caution you to spend too much time analyzing that. Just trust that we are comfortable recognizing revenues when we do. Occasionally we point out something like Oregon because investors are aware that we’ve shipped products to Oregon and they want to know when we recorded them. We’ve deferred all those for competitive and customer confidentiality reasons, we will not give that breakdown by individual customer.

But with that said, Robert, do you want to give them the total numbers?

Robert C. Caller

Todd, we have about $130 million at June 30th that’s in current deferred revenue, and ad Dick mentioned, that’s up only about $1.5 million from what it was the prior period and our long-term deferred stays about the same.

And we don’t disclose the breakdown between systems and games. What I would say, a high percentage of that are systems as opposed to games.

Todd Eilers - Roth Capital Partners

Okay, that’s fine. And then -- but I take it -- you guys also indicated that you expect now to recognize some of the, I believe the Washington revenue starting in the first half. I mean, I guess I’m just trying to more get a sense of when we should maybe see some of the deferred revenue from Florida, Washington, and Oregon. It sounds like maybe in the first half of ’09 is now the expectation. Is that right?

Richard M. Haddrill

Both Oregon and Florida, we would have some deferred revenue we would expect it the first half of ’09, but keep in mind we have lots of stuff in that deferred revenue and things keep coming in and going out but we will recognize revenue when we’ve appropriately earned it under the accounting rules. And to spend, again, too much time on the balance of deferred revenue, we would just caution against that. But both Oregon and some Florida revenue that’s been deferred, we do expect to begin recognizing that in the first half of ’09.

Todd Eilers - Roth Capital Partners

Okay, and then I think you guys mentioned how many iVIEWs you had under contract. Can you maybe give the number that had been sold, or I guess installed as of the end of the June quarter?

Ramesh Srinivasan

The total number of iVIEWs purchased or contracted to purchase, like I said, is about 120,000 and I would say about 70% to 75% of that has been installed [inaudible].

Todd Eilers - Roth Capital Partners

Okay, and then one last question -- for the quarter, R&D increased a little bit and I know you guys have a lot of new system products that you are working on, and some of that is expected to be commercial here in the very near future. Can you just maybe give us a sense directionally, kind of how we should expect that expense item going forward, maybe on a quarterly basis? Should we continue to expect that to increase a little bit? Or just a little more help on that area.

Richard M. Haddrill

We would see that SG&A expense dollars should begin to moderate and with respect to R&D, we are reasonably comfortable that around 7% of revenues is a reasonable benchmark for us. Obviously the direct employees we have in India gives us that $30 million, $35 million a year savings, which if you pro forma, that would be closer to 10% plus of revenue but we think 7% is a reasonable number for R&D over the next year or so.

Todd Eilers - Roth Capital Partners

Okay, great. Thanks, guys.


Your next question comes from the line of [Rushin Shah] with Morgan Stanley.

Rushin Shah - Morgan Stanley

Thanks for taking the question. Just a couple of very quick balance sheet questions. One, if you could provide the cash and debt balances at quarter end. And secondly, I know the revolver is coming due here. I was just wondering if there was any update as far as status of any refinancing? Thank you.

Richard M. Haddrill

On the refinancing, we are actively looking at doing that between now and the end of September. If not, we can always amend the agreement but I think our preference would be to go forward with a refinancing by the end of September and just take away any uncertainty in the capital markets.

Our guesstimate at this point is that we would refinance the debt at a 50 to 100 basis point increase in our current rates, despite a leverage ratio that’s gone from 4.5 times to 1.17 times, as Robert mentioned in his comments. But with the spreads the way they are, we are expecting a 1500 basis point increase when we refinance. We do expect to be able to pay down debt some during the years, so overall interest costs should still be quite manageable.

And Robert, do you have the --

Robert C. Caller

The cash balances were $66.6 million of unrestricted cash and cash equivalents, and our total debt, the term debt was about $290 million total.

Rushin Shah - Morgan Stanley

Thank you.


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

Steve Wieczynski - Stifel Nicolaus

Just two questions for you; first, probably a better one for Isaacs, but when you talk to the operators and the ones that are pulling the participation [leads] out in the field, what are their thoughts? And obviously we kind of know why they are doing it but when you talk to them, is it a short-term fix or is it something they just don’t have enough visibility on in terms of when they would put these games back in?

Michael Gavin Isaacs

I think it’s a bit of a mix, to be honest with you. Everyone has different reasons for doing it. People get remunerated different ways. They get measured on operating income. They get measured on their profit. Sometimes the revenues are in, sometimes they are out. Sometimes there are just too many of a particular title on the floor. Sometimes the CFO decides that we’re just not going to do it.

Richard M. Haddrill

And I think our own experience has been we estimate under 10% of the recurring revenue footprint in North America is Bally product, maybe as low as 7%. And with that, we believe we are experiencing less of that than some of our competitors because if you opened a casino today, you’d want a higher percent of Bally products than are represented on the floor, and so we just don’t see as much of it. We have seen some, clearly.

On the other hand, in other economic downturns, we’ve seen companies with capital constraints that have increased their share of participation games and rental games to avoid having the initial capital. So it is such a customer-by-customer experience that Gavin and his team are seeing that it is really hard to draw any conclusion, and I wish we could.

Steve Wieczynski - Stifel Nicolaus

Okay, and then second question, I’m not sure you are going to be able to help me on this one, but just trying to get a sense of all the litigation that is going on with you guys right now, is there any way you can kind of quantify where -- you know, what this is costing you, whether on a weekly basis or a monthly basis or a quarterly basis, just to kind of get a feel for what the drag is in terms of earnings?

Richard M. Haddrill

You know, we haven’t given any specific figures. What we have said is that between our need to invest in the accounting restatement issues that we have been through and are now getting behind us, and the need to invest in what we consider sort of an unusual litigious situation now, we always believe we’ll have some of this kind of litigation, the nature of our competitors in our industry. But we sort of estimate that over the last year, we’ve probably had in the range of $4 million to $6 million of extra expense and that once again is not assuming that our financial consulting fees go to zero quickly or immediately, nor does it assume that our overall legal expense goes to zero. But that we have about $4 million to $5 million or $6 million of extra expense over the past year.

Steve Wieczynski - Stifel Nicolaus

Okay, thanks, guys.


And you have no further questions at this time.

Richard M. Haddrill

Well, investors, again, thank you for your support and we look forward to continuing to work hard for you. The future is bright for Bally.


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

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