Brightstar Lottery PLC (BRSL) Q4 2011 Earnings Report, Transcript and Summary

Welcome to International Game Technology's Fourth Quarter and Fiscal Year 2011 Results Conference Call. [Operator Instructions] This call is being recorded. If anyone has any objections, you may disconnect at this time. I would now like to turn the call over to Matt Moyer, Vice President of Investor Relations. Sir, you may begin.

Thanks, Kim. Good afternoon, and welcome to IGT's Fourth Quarter Fiscal Year 2011 Earnings Conference Call. With me today on the call are Patti Hart, CEO; Eric Berg, President; and Pat Cavanaugh, Chief Financial Officer. Before we begin, I'd like to remind listeners, our discussion will contain forward-looking statements concerning matters such as our expected financial and operational performance, including our guidance for fiscal 2012, our expectations for the economy in general, and the gaming industry in particular, and strategic operational and product plans. Actual results may differ materially from the results predicted, and reported results should not be considered as indicative of future performance. Potential risks and uncertainties that could cause our business and financial results to differ materially from our forward-looking statements are included in our filings with the SEC, including our most recent annual report on Form 10-K and subsequent quarterly reports on Form 10-Q. All information discussed on this call is as of today, November 8, 2011, and IGT does not intend, and undertakes no obligation to update this information to reflect future events or circumstances. In addition, on today's call, we may discuss certain non-GAAP financial measures. Reconciliation of these non-GAAP measures to the GAAP measures we consider most comparable can be found in today's earnings release, which is posted on the Investor Relations section of our website, www.igt.com and included as Exhibit 99.1 to the Form 8-K we furnished today with the SEC. With that in mind, I'll turn the call over to Patti.

Thank you, Matt. And good afternoon, everyone. The fiscal year 2011, we set out, at IGT, to drive higher revenue, grow our gaming operations, improve profitability, leverage our strong cash flows, and increase our interactive presence. We delivered results in line with the commitments we made to our stakeholders by driving improvement across every aspect of our business. Our products are better than ever and our revenues are growing. Total fourth quarter revenues increased 14% year-over-year to $540 million. This represents our highest revenue quarter since the first quarter of fiscal 2009. We launched several of the most successful participation for sale and interactive games in the company's history. Nearly 50% of our newly introduced core games are performing at least 1.5x the floor average, that's up from 33% just 3 years ago. Gaming operations continue to expand. We grew our average yield by 9% over the prior year quarter, and our domestic installed base was up for the year, for the first time since 2007.Our profitability is improving. Full year consolidated gross profit margin increased 100 basis points to 58%, with strength in both product sales and gaming operation's gross margins. Our cash flows are unrivaled. We returned over $120 million in capital to our shareholders, decreased our borrowing cost and grew our cash position to over $500 million. Our interactive business is advancing, with the addition of Entraction, we have added poker, bingo, and sports betting to our industry-leading online and mobile portfolio. Over the past 2 years, we have nearly doubled the earnings performance of the company. In 2009, with $2 billion in revenues, our GAAP EPS from continuing operations was just $0.50. This year, with similar revenues, our GAAP EPS from continuing operations is $0.97. We have added considerable earnings leverage to our business and we expect this momentum to accelerate in 2012. I'd like to take a minute to express my gratitude to those who have made these results possible, our employees. 2011 is a testament to the collective effort of our global workforce, and I want to thank our employees for delivering financial results that remind us of the power of IGT. I'll now turn the call over to Pat for the financial details. Pat?

Thank you, Patti. And good afternoon, everyone. Our fourth quarter adjusted earnings from continuing operations grew 44% to $73 million or $0.24 per share versus $51 million and $0.17 in last year's fourth quarter. The growth in adjusted earnings was driven by higher product sales revenue coupled with strong margin performance. Both periods presented in this release have been adjusted to classify the Barcrest Group and discontinued operations. For the fiscal year, adjusted earnings from continuing operations grew 13% to $280 million or $0.93 per share versus $248 million and $0.84 in the prior year. Our total revenues for the fourth quarter increased 14% to $540 million year-over-year, a result of stronger product sales in North America and higher International Gaming operations. For fiscal 2011, total revenues grew 2% to $1.96 billion. Gaming operations revenues were $283 million in the fourth quarter, up 8% versus last year on higher MegaJackpots performance and increases in our international installed base. For the quarter, we generated an average of $58.08 in revenue per unit per day, which is up 9% compared to last year's fourth quarter. The strong performance of our domestic wide area progressive games positively contributed to this increase in yield. IGT's consolidated installed base ended the fourth quarter at 53,900 units, up 1,000 units from a year ago, and 600 units sequentially. Reported gaming operations gross margin was 57% in the fourth quarter, down from 58% to the same quarter last year. And intellectual property settlement and changes in interest rates reduced our gaming ops' gross margins by 240 basis points and 80 basis points, respectively. Consolidated product sales revenue increased 20% to $257 million for the quarter, compared to $213 million in the fourth quarter of last year. Globally, we recognized 11,300 units in the quarter, up 38% from last year's fourth quarter, primarily driven by higher domestic replacement. In the quarter, we recognized 5,000 North American replacement units, the highest quarterly level in 4 years. We estimate our North American replacement share grew again and was 40% to 45% this quarter when including the 5 largest suppliers. North America's machine sales revenues were up 115% over the prior year quarter to $101 million or an increase of 3,800 units. North America's average selling price in the quarter was flat compared to last year. North America's product sales gross margins were up 500 basis points to 56% due to lower nonstandard costs, lower discounts, and increased intellectual property fees. International product sales revenue decreased to $96 million on volume of 4,200 units recognized to the current quarter, compared to $101 million on 4,900 units respectively in the prior quarter due to new opening. International average selling price was up 4% year-over-year, primarily due to favorable foreign exchange rates. Worldwide, non-machine revenues, mainly from the sale of the systems, conversions, and intellectual property fees declined 2% to $85 million for the quarter with 32% of product sales compared to $87 million or 41% of product sales in the prior year quarter. The decrease in domestic diversion kit sales was partially offset by a significant increase in domestic intellectual property revenues. Fourth quarter operating expenses were $182 million or 34% of revenues compared to $169 million and 36% of revenues in last year's fourth quarter. This year's fourth quarter operating expenses included $16 million related to various asset impairments. SG&A excluding bad debt was $99 million, down slightly as a percentage of revenues. Cash equivalents, short-term investments inclusive of restricted amounts, totaled $552 million at September 30, 2011, compared to $249 million at September 30 of the year ago. Contractual debt obligations totaled $1.7 billion at the end of the quarter. For fiscal year 2011, we generated $612 million in operating cash flow, up 4% compared to last year. Also in the quarter, we repurchased 1.6 million shares of common stock at an average price of $15.30 per share. In summary, 2011 was a good year for us in nearly all financial metrics. We are generating sustainable efficiencies throughout the company and improving our profitability. Thank you for your time and attention. And with that, I'll turn it back to Patti.

Thanks very much, Pat. While we were pleased with the results we delivered in 2011, we remain committed to growing our business and increasing our returns. Varied improvements we've driven over the past several years, globalizing the business, instilling a customer first approach from top to bottom, and deploying our research and development dollars in an efficient yet dynamic manner, have uniquely positioned IGT for a very bright future. For 2012, our core objectives will remain consistent as we look to grow revenues, build on the momentum of our internal improvement, leverage our income statement and energize our interactive business. We plan to enhance the velocity of our top line growth by driving increased penetration in new and existing international markets and by growing our non-box revenues. We will deploy sales and service personnel closer to our customers, introduce a robust portfolio of localized content and leverage our world-class product portfolio in an effort to increase our international shipments and revenues. We anticipate further improving our operating margin by growing our gaming operations installed base globally, increasing the profit per unit within that installed base, and expanding our global process efficiencies. Given our return-oriented discipline, we expect our research and development investment to remain constant at about $200 million in 2012. Our strong cash flow serve as an unmatched competitive advantage, one that we will continue to leverage by investing in future growth opportunities, judiciously returning capital to shareholders, and preparing for future debt maturities. We plan to strengthen our interactive business by enhancing our poker platform's capabilities, sustaining our poker liquidity, and augmenting our product verticals with global partnerships in both sports betting and bingo. We remain committed to building out a full suite of casino products as we extend the thrill of gaming in all legalized jurisdictions across the online and mobile world. I will now turn the call over to our President, Eric Berg.

Thank you, Patti. And it's great to join you on my first IGT earnings call. I'm now in my fourth month and I couldn't be happier of being part of the IGT team. Our employees are embracing the notion of ongoing change, making IGT stronger every day. Externally, I spent a great deal of time with our global customers. They're recognizing our commitment and this partnership is showing up in improved operating performance. For example, our manufacturing operations team has changed their measurement system to track performance against customer requested delivery date, has improved to significantly exceed 90% every month. Additionally, we recently announced a partnership with Holland Casinos, involving the modernization of their systems with IGT's casino management tools across all of their Netherlands properties. This partnership is truly a win for both organizations. And the response we received to G2E exceeded our expectations. We received initial orders for over 2,000 G23 machines from customers located all over the globe during our 3 days at the show. We demonstrated in every product line from gaming operations, to for-sale games, to systems that we can provide a premier world-class full floor solution. Over the past 4 months, I've been learning our business from the front line to back, spending time with customers and with our frontline employees, learning the core value delivery processes within IGT, understanding what needs to be preserved as well as what needs to be improved. To achieve the 2012 goals that Patti articulated, I wanted to highlight a few of our focus areas. We will be driving a tightly integrated operating model. This includes identifying our winning strategy in each area of the business, clarifying operational ownership, documenting key performance indicators, setting targets and driving an execution plan to improve performance and achieve results. We will be accelerating our path to operating as a truly global organization as this agenda will enable us to capitalize on IGT scale advantages. This agenda encompasses sales, service delivery, procurement, manufacturing, marketing, IT, product management, and every other aspect of our business. We are benchmarking against the best in the world. We will stay focused on delivering region-specific, localized product into every corner of the globe as efficiently as possible, and provide our sales and service leaders the tools they need to grow our business. At IGT, we will always continue to put our customers first. Our growth opportunities will be designed to move our customers and our industry forward. For example, we recently entered into a multiyear, first look agreement with Sony, where we will have unique access to Sony's iconic film and television library as part of our predictable, efficient framework for providing innovative leading-edge content and experiences to every player around the world. I'm tremendously enthused to be part of the winning team at IGT, and I look forward to speaking with all of you more over the coming weeks and months. With that, I'll turn it back to you, Patti, for your closing remarks.

Thanks, Eric. In summary for 2012, we expect to increase the pace of our revenue growth, further improve our operating margins, leverage our strong cash flows and energize the interactive business. Given that there is a lot of volatility in the capital markets, we are assuming a benign macroeconomic environment for the next 12 months. In some areas of the industry, we see expansion, and in others, we see uncertainty. Our differentiated business model and diverse global footprint should continue to help mitigate the impact of any large unforeseen events around the world. Our customers are responding positively to our high-performing products and we believe we are well positioned to sustain and enhance our financial returns. For fiscal year 2012, we would like to offer adjusted earnings guidance from continuing operations of $0.93 to $1.03 per share. This guidance assumes a 37% tax rate and a share repurchase program consistent with the last 2 quarters. With that, we thank you for your time and we'd like to take your questions, please.

[Operator Instructions] And our first question comes from Felicia Hendrix with Barclays Capital.

This is for either Patti or Pat. I was just wondering if you could give us a little bit more color behind the assumptions in your guidance. It was obviously lower than consensus and what we were expecting. So just wondering if there's some conservatism in there, maybe what your assumptions work for the gaming ops and product side, maybe something, a comment about margins, anything would help.

Sure. Yes, I mean, I think you're getting to know our management team leans towards the conservative side, I think, when we run our business. And mainly so that we keep our expenses in line, we're always managing the company conservatively so that expenses don't get out ahead of us. When you think about the low end, Felicia, of the guidance, it really thinks about fiscal '12 looking similar to fiscal '11 from a replacements perspective, a bit of an uptick in the installed base for gaming operations and a bit of an uptick in yield on that base but nothing for Canada, Illinois or Ohio VLT, the VLT portion of Ohio. So we're not counting on any of that coming in, in the year. We think that's upside to the plan but it's not in the low end. The high end assumes that the replacements uptick a bit and installed base in yield, but still no Canada, Illinois or Ohio. So as the year goes on and we see more certainty around those markets opening, we'll adjust as necessary but given the current uncertainty, we haven't included any of that in the guidance.

Patti, are you willing to give us a sensitivity if you included Ohio in your guidance, what it might look like?

We actually haven't run it at the specific level. I mean, we're looking at VLTs, potentially, in Illinois and Ohio and Canada. We know it's going to go, we're not just sure when it's going to go. So we haven't run them specifically. We've run them only as a group.

Your next question comes from Steve Wieczynski with Stifel, Nicolaus. Steven Wieczynski - Stifel, Nicolaus & Co., Inc., Research Division: This follows on to Felicia's question. I guess, how are you guys thinking about your share over the next 12 months?

Yes. Well, the current quarter, best we can tell in looking at the share numbers, we came in kind of in the mid-40s% of replacement, it looked like. We think that's something we would like to continue but is an anomaly if you look at the past 8 quarters or so. So I think, we think about share kind of in the high 30s for us on a replacement basis, closer to 50 on new openings. Steven Wieczynski - Stifel, Nicolaus & Co., Inc., Research Division: Okay, got you. And then maybe a question for you, Patti. I guess, walking away from G2E. I mean, you talked about that a little bit, but what were your customers saying? What games were they most excited about? Just kind of the big picture thoughts on G2E to share.

Yes, and I'll let Eric add his thoughts to it, he was a bit closer to it than I was. But I would say, what I heard, generally, from the customers I spoke to was back to the breadth of products from IGT, that we really weren't banking on one product line but very, very strong themes, very strong brand in both our game ops business but also a nice big pick-up in the for-sale product as far as the quality and quantity of choices. Reinvestment in the poker product which is good, and systems, and some new features. So a lot on the interactive front but I would say primarily, it's really about getting back to making sure that we have breadth and depth in every product line. And that's basically was my feedback. Eric, anything to add?

I think that's consistent with what I heard. I mean, the customers -- I mean, several of our customers went into our Horizon suite where we kind of gave some perspective on our future direction. I think they're continuing to be enthused by how we're reinvesting and trying to lead the industry on the systems front. And I think the other piece was kind of a return of the investment to our stepper product. I think they -- and you really saw that as a big advantage versus the last couple of years. That continues to be hanging in there as a major part of the installed base, on our operators' floor, and they like putting money behind that. So those are the couple of things that really stood out for me.

Your next question comes from Robin Farley with UBS.

Just following up on your guidance because you talked about in your comments, increasing the pace of revenue growth next year and further growth in margins, you mentioned R&D would be flat. So even at the high end of your EPS guidance, it's a lower EPS gross rate than what you had this year. So I guess what's the -- what is it you're seeing maybe worsening a little, because it seems like your comments in your results would suggest ahead of the range you've given.

Yes. Again, Robin, I think we're always going to be a bit conservative here so that we can be -- something you can take to the bank, we think it's a really important track record that we've built and we want to keep. So I would -- at the high end of our range, we're just 10.5% or so, earnings expansion, which we think in that double-digit range is what we're going to target as a company. Some of the unpredictability of some of the new openings and some of the new jurisdictional movements even outside the United States that impact growth in our interactive business are things that we're not in a position to put in the bank yet. So until I can put them in the bank, I really don't want to put you in a position of pounding on them. That's how we think about it. We think you'll see expansion, product margin expansion, gross margin expansion, and operating margin expansion next year, and some revenue pickup. And it's really the clarity about where it's going to come from exactly, that we're still not there yet.

Okay. And then also I wonder if you could give a little bit of color around a couple of things in the results. One is the North American ASPs, you mentioned product mix. Could you give a little more color on how product mix is causing ASPs to be down? Also, non-machine sales are down. Just a little bit of color there. And then the third thing is gross margins on the game ops side. Even if we adjust for the litigation and the, I guess, the 240 basis points from that and the 8 basis points from -- well, it still seems like it's trending a bit lower than -- you had been above 60% in the last 3 quarters. Even with those adjustments, it seems a bit lower. Just wondering what else is going on there.

Yes. So I'll add a few comments. And then, Pat, why don't you add yours in as well. I'll just comment briefly. On the ASP front, I mean, when you look at the ASPs year-on-year all-in, international, and domestic, they're flat, really, for all intents and purposes. So the U.S. down about 1%, the international group up about 1%. So we saw ASPs in the company hold flat in a highly promotional market, so actually, I think a great accomplishment to hold ASPs flat while you're picking up 10 share points in a year, so -- I mean, quarter-on-quarter. So we feel good about where the ASPs are coming in. We're comfortable with that. You want to comment, Pat, on the...

Sure. Just another thing relative to ASPs, and this goes right to the mix question, Robin, is in Q4 we had a slightly lower mix of the MLD product versus in Q3, so on a sequential basis. And I think also, if we looked at last year's Q4 compared to this year's Q4, we had a big push in Q4 of a year ago to move the MLDs, so that's purely just price point. And the other 2 points, Robin, I'm sorry, I'm getting old, my memory is -- I can only handle one concept at a time.

Sure. It was on the gross margin for game ops. Even if we adjust for the intellectual property settlement and the interest rate impact, even adjusting for those, it's still a bit lower than your margins had been in the other 3 quarters of this year. And so just wondering if there was some other factor there.

I think the only other thing it would be, Robin, is the wider progressive business, which is arguably lower margin business even though our absolute margin dollars are greater, performed much better in Q4 versus Q4 of a year ago. And if you look at that coupled with the IP settlement and the interest rate impact, you're at north of 60% gross margins, which is right normally where that business runs.

Okay, now that's great. And then just about the other thing I had asked was on the non-machine sales in the product sales line. The decline in non-machine sales. Just looking for some color around that.

Yes, and that was almost exclusively due to lower parts and conversion sales. Which is also reflective of, we've got more new box out in the field, so people aren't buying as many new games as they once did when we had a much bigger footprint of older equipment.

Your next question comes from Joe Greff with JPMC. Joseph Greff - JP Morgan Chase & Co, Research Division: I was just hoping you can remind us or revisit how you see Entraction contribute to revenues and earnings next year, and to what extent Entraction contributed to revenues and profits in the fiscal fourth quarter.

Sure. In Q4, it was neutral, Jeff. Really no contribution. Slightly to revenue but at the operating income, pretty much 0. It's still a very small business. I would say that Entraction is, at this point, it's somewhat financially irrelevant but highly and strategically very important. It was really an acquisition about getting our hands on the right platform, to build that business from, so now we have a complete product offering so we can go in. And we don't anticipate that, near term, it's going to be all that significant of a contributor. But in the same respect should not be a drag on the business. Joseph Greff - JP Morgan Chase & Co, Research Division: Great. And within your fiscal '12 guidance range, can you talk about CapEx related to your gaming operation segment, what's that range?

I think it's going to be similar to what you saw in this current fiscal year, Joe. We continue to tightly manage that. And I think you saw us '11 versus '10 down, slightly on CapEx, as we do a better job managing that footprint in the installed base so that we can get a longer life, hopefully, out of that assets over time. We should, over time, reduce CapEx annually.

We're budgeted in, Joe, to run about consistent with last year. We'll have quarterly movements around because of the big New York -- deployment in New York that we'll have. Joseph Greff - JP Morgan Chase & Co, Research Division: So if I look at your fiscal '12 guidance and imply from there what I think sources and uses of cash flows and what EBITDA is, what you're spending on the dividend and repurchases, and capital investment, you're still going to have several hundred millions dollars of excess free cash flow. How do you see using that? Or, Patti, is there much out there that you think is worthwhile buying, whether or not that contributes to earnings in '12 or '13, but strategically helps you?

Yes. So I mean, I think we're still with the same strategy that we've had. I mean, we returned $120 million to shareholders this past year. Absent another use for the cash, we plan to meaningfully increase that next year. The uses of cash that we've talked about would be if we had an opportunity to accelerate, we change out of the final old platforms and game ops, we would choose that probably top of our list so that we had better performing product out that had some legs on it. So we would probably go there first, putting it in the business. Secondly, we would look at any kind of access to resources, access to technology, access to markets that we're not serving through investments, acquisitions, strategic partnerships. And then, short those 2 things, any kind of significant R&D effort that we might have, we'd only really think about it to the extent we thought the existing R&D was being used sufficiently, and we're not using the most efficient destination yet on our R&D spending. And then short of that, it really is revisiting share buybacks and dividends. So that's the way we think about it currently. I think that's the way we'll continue to think about it. So absent any other use for the cash, you should expect to see a meaningful increase in return to shareholders, in the next fiscal year.

So I would just add one thing to that too. It's, keep in mind, that we have those converts coming due in 2014. And so we probably will accumulate some amount of cash on the balance sheet just so our friends, the bankers, don't get too concerned that we're going to use the credit facility as the sole source of repayment.

Your next question comes from Mark Strawn with Morgan Stanley.

I had a quick question on SG&A. Picked up meaningfully in the quarter. You didn't mention that in your guidance going forward. Is that something -- is this kind of the new run rate, the high $90 million level, or is that something that was a seasonal or a one-time spike? And how does that factor into your fiscal '12 guidance?

Yes. So the SG&A up, sequentially up year-over-year, was really attributed to 3 main things. One was around variable compensation, as we adjusted toward the end of the year to what the actual year end numbers and the compensation associated with that was one. The second was all about investing in international resources, whether it's people on the ground permanently or getting people moving around the world to fuel-inject that business, the international business. And then the third would be transaction expenses associated with the transactions that we completed towards the end of the year.

And Mark, I think we continue to think about total OpEx, as a percent of revenue, as being in that 31% to 33% range. So I guess we're very focused on managing OpEx, including SG&A. And so if it rises, you're going to anticipate that it's rising because we're growing the top line and expanding margins.

Okay, appreciate that. Is there any -- does your fixed OpEx vary depending on your guidance range, at both the high end and the low end, or does that remain relatively fixed in a tight range just from that...

I think, given where we're at, the fixed portion of OpEx should be pretty flat, given the guidance range we've laid out. So the things that will float will be the variable components. Compensation being the biggest.

Okay, I appreciate that. And then, also in guidance, one last question. On the international side, what kind of assumptions have you made, maybe both in European and Asian market share type of gains? Are you still -- maybe more so in Asia, still kind of in investment mode in that market?

I would say still in investment mode. We are assuming that we pick up a bit of share in this next coming year. It's not -- the Asian market isn't at the highest margins that you would like to see always but we do expect to pick up a bit of share. Probably not picking up as much share in Europe yet. In the Asian markets where we're rolling out Asian-themed games and we've been very focused on that market, Europe is running a bit behind. So I would say not expecting to pick up significant share in Europe in '12.

Your next question comes from David Katz of Jefferies. David B. Katz - Jefferies & Company, Inc., Research Division: Just following that up. Specifically, internationally, the ASP has jumped around quite a bit and, frankly, has been a harder number for us to model. Can you maybe give us a little bit of sense of what is reflected in your outlook, in there pricewise, ASP-wise internationally?

Yes. So our international, if you look at this quarter that we're just closing, right? Our ASPs were up about 4% or so from the prior year quarter and about 2% or so from the sequential quarter. It has been floating in that same range for quite some time, right? It floats within $1,000, $1,500, one way or the other. So not swinging wildly. We've made an assumption on ASPs and international, that they hold flat about to the fiscal year average that we had in 2011. Focused more on market share recapture and market share gains than pure pricing increases. David B. Katz - Jefferies & Company, Inc., Research Division: Right. And then if I can just go back on one issue that surprised me. I think if I heard correctly, replacement units in the quarter was about 5,000. And I guess your total domestic unit sale count was greater than what we were expecting. Is that 5,000 number -- contain some lumps or some pent-up demand and is not a sustainable number? Because, I guess, I'm probably the seventh or eighth person to raise it. If I start carrying that kind of number forward, I wind up with earnings estimates higher than what you're guiding to.

Yes. So again, I think that the focus for us is on the annual number, right? Things move around quarter-to-quarter and timing from one month to the next when you actually recognize a particular unit shift. So what we're really focused on is the annual number that we have for the year, which came in on a replacement basis, North America at 16,400, which was up about 26% from the year before. So that's probably more realistic of a number to think about on an annual basis as opposed to taking a quarter and annualizing it. So I think that the full year gives you a better look at seasonality in puts and takes, on timing. So if you think about the 16,000 number-ish is probably more realistic going forward. David B. Katz - Jefferies & Company, Inc., Research Division: Right. And if I can just follow that up. If we were to take that number, and then we're certainly aware of the number of new properties that should at least start to open, right? That should turn into some new sales. Again, it starts to pile up into some units that drives a little better earnings than what you're guiding to. And if I'm hearing the message, and I'll leave it there, it sounds as though you're half expecting a lot of us to wind up modeling earnings that are higher than what the guidance is and allowing you to grow into it throughout the course of the year.

I mean, I think what we're expecting, what we're doing inside, is modeling what we have clarity on. And as far as openings, as far as jurisdictional openings, casino openings, we're modeling what we have visibility in, and we're not counting on the things we don't have visibility to at this point. So and I think that brings you in, on a replacement basis, at around 15,000 for the year is what we feel comfortable with, which would be flat year-on-year in North America.

And I think, David, if you also look at new or expansion opportunities in '12 versus '11, again, we see a relatively flat this year. David B. Katz - Jefferies & Company, Inc., Research Division: Yes. Got it. And if I can just ask one last detail. In the past, I think you have given us, within game ops, the percentage of variable versus fixed. And I apologize if I missed it in your comments, Pat. Is that still a percentage that you give out?

Yes, it is. And it's remained pretty consistent over the last several quarters at 82% variable.

Your next question comes from Carlo Santarelli with Deutsche Bank.

Just a quick question on your gaming ops CapEx, in a little different wrinkle than what was asked earlier. If you guys look at fiscal 2010, you kind of increased gaming ops CapEx by about 20% and then it looks likes it's been trimmed this year by about 10% to 15%. Have we seen some of the incremental upside from that incremental spend in fiscal 2010 or is there a longer lag time to that and maybe we'll see that continue in fiscal '12?

Well, I think where you're seeing it, Carlo, is in yield improvement. We believe the increase in product performance is attributable largely to the content, obviously, but we're also finding that the form factor does play an important aspect in it. It's just I think we're now starting to get -- we were starting from a very old installed base of old platforms, which we've converted over, a good portion of those now. And so we think that the CapEx spend going forward, we should be able to control within a relatively tight range, about $190 million this year.

$190 million. Okay, great. And if I could follow-up to that, as it relates to your ops base. Do you guys see kind of an outsized growth this year in fiscal '12, of your installed base versus North America -- sorry, international versus North America, with international kind of outpacing that growth somewhat significantly, or will it be a little bit more balanced in fiscal '12?

No, I think you're going to continue to see international be -- outpace domestic. Just given the number of opportunities that we see internationally, given that our game ops business is a relatively new business, for all intents and purposes, outside of North America. And with the North American market becoming quite mature and, obviously, quite competitive, it's all about maintaining the best games too. So I think our view is maintaining North America installed base and trying to grow it wherever we can, but the real opportunities for outright growth, I think, are international.

Your next question comes from Dennis Forst with KeyBanc.

I had a couple of housekeeping questions for Pat, and then I had a couple of philosophical questions. First, Pat, it looked like the game op depreciation and depreciation as a whole spiked up. I assume that had a lot to do with new games going into the game op division. But I wanted to get some detail on that, it just seems like there was an outsized increase of total depreciation was $60 million and the corporate depreciation was $18 million, that's over $42 million of depreciation for the game op division, which is $4 million, $5 million higher than it's been in the last 4, 5 quarters.

Yes. It probably picked up during the quarter but, actually, on a year-on-year basis -- year-to-date, Dennis, total depreciation is down about $10 million. Most of that is attributable to the game operations business.

Okay. But then going forward, is that $40-million-plus number something that we could use?

Yes, I think that's consistent. You should think about a run rate of about -- we burn off the CapEx, burns off at about a 1:1 ratio, meaning depreciation should be pretty close to annual CapEx for that business. Let's say, $200 million.

Okay. And that's total depreciation or is that game op depreciation?

That's just game ops.

Game ops, okay. And then I think you mentioned that SG&A was $99 million excluding bad debts in the quarter.

That's correct.

So that would indicate that bad debts was less than $1 million in the fourth quarter.

That's correct. It was $1.1 million.

It was $1.1 million, okay. It's a little over $1 million. Then, also, I think you said the operating expenses, normal range 31% to 33%. Did I hear that right? I thought it's more like 21% to 23%.

No, total OpEx, including bad debt and R&D, and SG&A.

Yes. So it would be SG&A, R&D, and corporate depreciation?

That's correct.

Divided by total revenues?

Correct.

Okay. I'll have to maybe get back to you on that because my numbers don't add up. Then for Patti, you had mentioned that New York deployment of machines is going to accelerate. Can you give us a little granular explanation of where you're going to be deploying machines, where your contracts are, where the opportunities are?

Yes. I mean, the one I was referring to is specifically the Aqueduct as it comes online. So that is a big capital chunk for a significant number of machines that will come in one particular quarter. So again, when you look at it on an annual basis, think slightly less than $200 million into the game ops base but it doesn't come in consistently quarter-to-quarter because of some of these kinds of anomalies.

Okay. And what was your shipment on the first phase? And what it'll it be on the second phase?

It was about 36%, 37%, in each phase.

Okay. So that's a very high percentage of the available, given that Bally gets 50%.

Yes. It's actually the highest of the owned titles.

Okay, great. Lastly, I wanted to ask Eric on the Sony deal for their licensing on their whole library. Is that -- when you say it's exclusive, they can't license anyone else, but are you allowed to go to other studios to seek licenses?

Yes, it's a first look arrangement, which means we get the first -- we've got a right of first refusal. And we also have the opportunity to go to other places as well.

Okay. Are you likely to sign a similar deal with any other studios this year?

We always look at that as a very important part of our game development process, and we're looking at all sorts of different opportunities but we're not ready to announce any at this point.

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

A couple of quick questions. Wanted to ask if you guys recorded any of the deferred ARIA casino gains and systems revenue in the quarter? And if so, how much that was? And if not, when do you expect to record it?

Yes. We recorded most of it as anticipated in this fiscal year, in Q4, Todd. We don't disclose the amount for competitive reasons, not because we like to keep you in the dark. But I think, in the normal course, if you get our deferred balance, we have things rolling in and out of it quarterly. I don't foresee it as a big anomaly.

Okay. And then second question is with regards to the Mexico market. One of your competitors, when they reported, had written down from receivables. Can you maybe talk a little bit about Mexico in light of some of the casino shutdowns recently? I guess, how many games do you have in that market? And any receivables? And have you taken a look at possibly reviewing your assets there? And would you need to write anything down similar to what your competitor did?

Sure. I think right now, we have about 6,500 to 7,000 games are there on a reoccurring basis. Currently, we don't see any perceivable exposure, but that might change. I mean, I think one of the uncertainties that Patti mentioned or alluded to in our guidance range, Mexico is, obviously, is prominently figured into that, given -- and added uncertainty is probably going to exist, unfortunately, throughout all of FY '12 until the elections are held next fall down there. It's turned into kind of a political football. But right now, we're monitoring the situation closely. But as we sit here today, we have not identified any immediate exposures.

Okay, great. And then just last question. On new shipments to, I guess, new openings and expansions. Can you give us a sense for maybe what new openings were included in this quarter? Did you ship to the 2 Kansas casinos? And I guess, there was a new opening -- or there is a new opening coming in Miami, did you ship to that one? Just any kind of color on that will be helpful.

Yes, I don't believe we shipped to the high line in Miami but we did ship both Kansas orders. One on them had some deferred revenue, given that it has a tier one sbX associated with it. So that component would have -- and the units associated would have been deferred into, probably, Q1 or whenever the property goes live.

And can you review maybe what the ship share was on the 2 Kansas openings?

I apologize, Todd, I don't have...

Yes. It was low 40s.

And our last question comes from Ryan Worst with Brean Murray. Ryan L. Worst - Brean Murray, Carret & Co., LLC, Research Division: I was just wondering if you could provide some more color on the replacement sales in the quarter. It seems like you said that there's probably some unusual activity. And I was just wondering what drove that activity. Was it a promotion that you're discontinuing or specific products that you were able to sell more of this time around?

Yes, I don't -- I mean, it's a very promotional market, as you know. We've really delivered market share gains without sacrificing ASPs and by expanding gross margins year-over-year. So it's not a result of anything other, I believe, than just really good product and some timing issues. So again, if you look at the full year, the 26% increase year-on-year on replacement units from 13,000 to just over 16,000 is probably a more realistic expansion number than just annualizing the one quarter.

And you asked for some games, I mean, just some of the names. Our videos, some of our top video sellers, Golden Goddess continued to be a big performer. Black Widow, Dangerous Beauties, Siberian Storm, those were all strong. On the steppers side, our Hot Rolls theme worked well. Our Cash Coaster, Pirate Bay. So we had -- I think it's just a reflection of continued strength in the product portfolio, both in the video and the stepper side. Ryan L. Worst - Brean Murray, Carret & Co., LLC, Research Division: Okay. And then I know you touched upon the margins, on the gaming ops side. But on sales side also, we saw a decline sequentially despite higher sales both domestically and internationally. So could you talk about what drove that? And also, could you provide any used game sales that were included in this overall sales number, if there were any at all?

Yes. So the gross margins, on a consolidated basis, down slightly, sequentially flat year-on-year, and up for annualized. So again, I'd just encourage you to think about the quarter as the quarter, and it's one part of the full year. So for the year, our product gross margins -- let me find them here. In the U.S. product used margins up year-on-year 328 basis points. Game ops gross margins for the full year up 85 basis points. So sequentially, slight adjustments in gross margins in both places, we've talked about the gross margins and the game ops side of the business. The gross margins in product sales, most of the time, are a result of mix in the quarter. And as Pat indicated earlier, we had our MLD as it represented in the mix, was down sequentially from just under 50% to kind of 36%. So you see a mix change quarter-to-quarter.

Yes. And the other point I would make, Ryan, is Q3, the prior sequential quarter, was a pretty tough comp given that we had, I think, near record margins in that quarter. It probably wasn't a good baseline to... Ryan L. Worst - Brean Murray, Carret & Co., LLC, Research Division: Okay, that's fair enough. And then was there a big FX impact on the international gaming ops revenue?

I'll get back to you on that one.

We just don't have it right in front of us, sorry. Okay, great. Well, thank you for joining us today. We're pleased that you've taken time to hear our progress report. We also would just remind you, if you have not, to RSVP to the annual investor conference that we'll be holding in New York on December 7. I think you'll find the day to be filled with excitement and a lot of insight into what we're doing at IGT to deliver expanded returns to all the shareholders. So thank you again. Thanks for your continued interest in IGT.

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