Bally Technologies, Inc. (BYI)

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Bally Technologies, Inc. (BYI)

F2Q12 Earnings Call

February 1, 2012 4:30 p.m. ET

Executives

Richard Haddrill - Chief Executive Officer
Neil Davidson - Chief Financial Officer
Ramesh Srinivasan - President and Chief Operating Officer

Analysts

Todd Eilers - Roth Capital Partners

John Moraz - JP Morgan

Darnel Bentz – Keybanc

Kelly [Libo] - Deutsche Bank

Ryan Worst – Brean Murray
Barry Jonas - Wells Fargo

Bill Lerner - Union Gaming


Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter Fiscal 2012 Bally Technologies Conference Call. (Operator instructions) As a reminder, this conference is being recorded for replay purposes.

At this time, I would like to turn the call over to Mr. Richard Haddrill, Chief Executive Officer. Please proceed, sir.

Richard Haddrill

Well, thank you and welcome, everyone, to Bally Technologies' second quarter fiscal 2012 earnings call. Today's results mark the fourth consecutive quarter of year-over-year revenue and earnings per share growth. And the second consecutive quarter that we raised the bottom end of our guidance range.

This quarter all three of our businesses increased revenue. Recurring revenue increased to 57% of total revenue supporting improved visibility. We have set revenue records in each of the last four quarters for gaming operations driven by significant investments we have made in our game development studios over the past few years.

These investments combined with key platform and hardware innovations are starting to pay off in our gaming equipment sales as we believe we eclipsed 20% ship share in the quarter. We're also doing well on new openings with Revel in Atlantic City allocating over 20% of the floor to Bally products.

Finally, our iVIEW and DM strategy is continuing gaining traction. In fact, we are completing the largest floor installation of iVIEW DM at Mohegan Sun. Later this month we will help one of our customers as they plan for their global record for the world's largest slot tournament using our flexible tournament application and iVIEW DM across over 1,000 gaming devices from multiple vendors. It is an exciting time to be at Bally.

For today's call, Neil Davidson will cover our overall financial results, Ramesh Srinivasan will operating highlights and then I will have some overall comments before we open it up for questions.

Neil, over to you.

Neil Davidson

Thank you, 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. 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 speak only to this date, February 1, 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.

Today we reported our financial results for the quarter ended December 31, 2011 and raised the bottom end of our expectations for the remainder of fiscal 2012. Overall, net income was $24.3 million which resulted in earnings of $0.54 per fully diluted share for the three months ended December 31, 2011 on revenues of $211 million.

As Dick mentioned, this marks our fourth consecutive quarter of both year-over-year revenue and earnings per share growth. After adjusting last year's second quarter diluted earnings per share for a $0.05 benefit related to the reinstatement of the U.S. Research and Development tax credit, our diluted earnings per share grew 23% year-over-year.

Revenue from game sales were $70.2 million for the quarter, up 19% from $59.2 million in the prior year. Based on 2,734 units sold in North America during the quarter, 531 of which were opening expansion units, we believe our ship share exceeded 20% in the quarter.

Our North America placement unit sales were up 22% over the same quarter last year, which marks the second consecutive quarterly increase in replacement sales for value. In fact, we estimate that North America industry replacements were up 5% to 10% during the second half of calendar 2011 while our replacements were at 23%.

Average selling price for the quarter set a record at $17,201 driven by shipments of our newer Pro Series cabinets, which made up 80% of sales. During the quarter, sales of the Pro Curve exceeded our expectations, which contributed to the higher than expected ASP, but impacted our gross margin percentage. We do not expect similar growth in ASPs over the next few quarters due to anticipated product mix.

Game sales margins declined slightly to 43% from last quarter. However, as a result of strong ASPs generated from the Pro Series cabinets, the dollar margin contribution per unit from domestic sales have increased in each of the last four sequential quarters. We continue to expect margin percentages to improve slightly over the balance of this year. Although this expectation is dependent on product mix. Based on forecasted reductions in material costs on each of the Pro Series cabinets, we expect to approach 48% to 49% over the next several quarters.

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