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Bally Technologies Inc. (BYI)

F1Q10 Earnings Call

October 29, 2009; 4:30 pm ET


Richard Haddrill - Chief Executive Officer

Robert Caller - Chief Financial Officer

Gavin Isaacs - Chief Operating Officer

Ramesh Srinivasan - Executive Vice President of Systems


Bill Lerner - Union Gaming

David Katz - Oppenheimer

Steve Altebrando - Sidoti

Todd Eilers - Roth Capital

David Bain - Sterne



Welcome to the first quarter 2010 Bally Technologies Incorporated conference call. My name is Canus and I’ll be your coordinator for today’s call. At this time all participants are in a listen-only mode. We will conduct a question-and-answer session after management remarks. (Operator Instructions)

At this time I’d like to turn the call over to Richard Haddrill, Chief Executive Officer. Sir, you may proceed.

Richard Haddrill

Thank you, Cantus. Welcome everyone to Bally Technologies first quarter fiscal 2010 earnings call. We are pleased to report a very strong start to fiscal 2010. We set several quarterly and all time records and we continue to see growth in the real earnings and cash flow power of our company. In addition, this is the ninth quarter in a row that we have either met or exceeded analyst estimates for diluted EPS.

For today’s call, Robert Caller, our CFO, will highlight our financial results. Gavin Isaacs, our COO; and Ramesh Srinivasan, EVP of Systems, will then discuss each of the games and systems business units and finally I’ll have some overall comments and update our guidance for fiscal 2010.

We will then open it up for questions. Robert.

Robert Caller

Thanks, Dick. Quickly let me review our Safe Harbor language. Today’s call and simultaneous webcast contain forward-looking statements about Bally and our future business. These forward-looking statements are based on currently available information. Actual results could differ materially from those anticipated in the forward-looking statements and reported results should not be considered an indication of future performance.

More information on factors, 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, 2009 and in 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 speak only as of this date, October 29, 2009.

Today’s call and webcast may include non-GAAP financial measures within the meaning of Regulation G. A reconciliation of all such non-GAAP financial measures to the most directly comparable financial measure calculated and presented in accordance with GAAP can be found in today’s press release. Today we reported our financial results for the three months ended September 30, 2009, the first quarter of our fiscal 2010 year.

Overall we recorded record fully diluted earnings per share for the quarter of $0.53 per share on $196.5 million of revenue, as compared to $0.52 in the comparable quarter of the prior year. Our operating margin during the quarter set an all time record at 26% as compared to 23% in the comparable prior year period. We have the highest operating margin in the industry and we are well positioned to capitalize on revenue growth.

Cash flows from operating activities increased to a first quarter record of $39.9 million, a 59% increase over the prior year period. Revenues from gaming operations also set an all time record during the quarter at $71.3 million. Revenues from game sales were $62 million for the quarter reflecting the lower number of new openings and expansions in the quarter combined with a continued sluggish replacement cycle.

We believe our ship share was in the 20%, 20s and consistent with the past year. Our game sale margin was 48% for the quarter compared to 44% in the comparable prior year period, and reflects our increased ASPs and continued improvement in manufacturing efficiencies and inventory management.

Systems revenues were $54 million. The margin on systems revenues was 67% for the quarter as compared to 68% in the comparable prior year quarter. As a result of increasing services revenue, cost of services are now included in cost of sales instead of SG&A. We reclassified prior year amounts for consistent presentation. In addition, the margin was lower than our target range due to the hardware and software mix, and associated costs, as well as some expediting cost related to a very busy September for go lives.

Maintenance revenue set a first quarter record of $13.5 million, a 10% increase over the prior year period. SG&A expenses decreased to $46.9 million for the quarter as compared to $57.2 million in the prior year quarter, a decline of 18%, representing 23.9% of revenue. SG&A declined as a result of lower payroll and incentive compensation, legal and professional fees, and other cost saving initiatives.

While we do expect SG&A to rise in the second quarter, the successful resolution of our legal matters and the elimination of all previously reported material weaknesses in our internal controls should enable us to effectively manage our legal and accounting spend in future periods. The effective income tax rate for the quarter was 35.8% and was within the expected range for the year of 35% to 37%.

Turning to the balance sheet, as of September 30, 2009, we had unrestricted cash of $84.9 million, an increase of $20.3 million from June 30, 2009. In addition, we have $75 million available under our revolver. Our leverage ratio continues to remain comfortably under one turn. We are using our excess working capital to prudently assist our customers in selected financing transactions, pursuing acquisition opportunities and repurchasing stock. As forecast, our trailing 12 month DSOs increased marginally at September 30 to 104 days.

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