Bally Technologies, Inc. (BYI)

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Start Time: 16:30

End Time: 17:26

Bally Technologies Inc. (BYI)

Q2 2010 Earnings Conference Call

January 27, 2010 4:30 pm ET

Executives

Richard Haddrill - CEO

Robert Caller - CFO

Gavin Isaacs - COO

Ramesh Srinivasan - EVP of Systems

Analysts

Todd Eilers - Roth Capital Partners

David Katz - Oppenheimer

David Bain - Sterne Agee

Bill Lerner - Union Gaming

Joe Greff - JPMorgan

Steve Kent - Goldman Sachs

Justin Sebastiano - Morgan Joseph

Ryan Worst - Brean Murray

Presentation

Operator

Good day ladies and gentlemen, and welcome to the second quarter 2010 Bally Technologies Incorporated conference call. My name is Tisha and I will be your coordinator for today's call. [Operator Instructions]. At this time, I would like to turn the call over to Richard Haddrill, Chief Executive Officer. Please proceed, sir.

Richard Haddrill

Thank you, Tisha. And welcome everyone to Bally Technologies' second quarter fiscal 2010 earnings call. We reported another solid quarter despite difficult economic and industry conditions. We set several quarterly and all time records, including record systems revenue of $58 million and a record gaming equipment margin of 53%.

For today's call, Robert Caller, our CFO will cover our overall financial results. Gavin Isaacs, our COO, and Ramesh Srinivasan, EVP of Systems, are joining us from the IGE show in London and will discuss the highlights of each of the games and systems business units.

Finally, I will have some overall comments, and then we will open it up for questions. Over to you, Robert.

Robert Caller

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

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 30th, 2009 and other public filings that 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, January 27th, 2010.

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.

Now for our financial results. Today, we reported our financial results for the three and six months ended December 31, 2009, the second quarter of our fiscal 2000 year. Overall, we reported diluted earnings per share for the quarter of $0.58 on $213.5 million of revenue as compared to $0.59 on $233.3 million in the comparable quarter of the prior year.

In the prior year's quarter, we recognized a $3 million gain or $0.03 per share from an insurance settlement. For the six-month period, we reported diluted earnings per share of $1.11 on revenue of $410 million as compared to $1.11 per share on revenue of $470.7 million in the same period last year.

Revenues from sales to international customers set an all time record at 18.6% of total revenues for the quarter, evidencing our continued growth as a worldwide gaming technology company. Our operating margin during the quarter was consistent with previous quarters at 25.5%, and our recurring revenue increased to 46% of total revenue as compared to 41% in the comparable prior year quarter.

Revenues from game sales were $78.8 million for the quarter, reflecting the lower number of new openings and expansions in the quarter, combined with a continued sluggish replacement cycle. Game sale margins set an all time record at 53% for the quarter compared to 49% in the comparable prior year period and reflect continued improvement in manufacturing and purchasing efficiencies and inventory management.

The second quarter is seasonally the weakest quarter for gaming operations. However, revenues from gaming operations for the quarter increased by $2.2 million over last year to $68.6 million despite the frigid weather in many parts of the United States during December, which negatively impacted our results.

Systems revenue also set an all time quarterly record at $57.6 million. The margin on systems revenue was 71% for the quarter, within our target range. Maintenance revenue set an all time record at $14.7 million, a 20% increase over the prior year period.

Selling, general and administrative expenses decreased to $55.6 million for the quarter as compared to $58 million in the prior year quarter, a decline of 4%, and represented 26% of revenue. In the second quarter of last year, we recorded $3 million in insurance proceeds from Hurricane Katrina, which was recorded as an offset to SG&A. Adjusting for this item, our SG&A declined 9% from last year. SG&A declined primarily as a result of cost savings initiatives, including lower legal and professional fees. SG&A in the second quarter includes approximately $3 million on G2E spend.

In December, the dollar strengthened against most foreign currencies, resulting in a $1 million negative foreign currency adjustment for the quarter. Our effective income tax rate for the quarter was 34%. We now expect an effective tax rate for the year between 34% and 36% due to higher income in lower taxed international jurisdictions.

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