Brightstar Lottery PLC (BRSL) Q1 2014 Earnings Report, Transcript and Summary

Welcome to International Game Technology's First Quarter Fiscal Year 2014 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 Kate Pearlman, Vice President of Investor Relations and Treasury. Thank you. You may begin.

Thank you, Kim. Good afternoon, and welcome to IGT's First Quarter Fiscal Year 2014 Earnings Conference Call. Leading our call today will be Patti Hart, our Chief Executive Officer; and John Vandemore, Executive Vice President of Emerging Businesses and Chief Financial Officer. Before we begin, I'd like to remind listeners that our discussion today will contain forward-looking statements concerning matters such as our expected financial and operational performance, including our guidance for fiscal 2014; our expectations for the economy in general and the gaming industry in particular; and our 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 quarterly report on Form 10-K. All information discussed on this call as of today, January 23, 2014, 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'll discuss certain non-GAAP financial measures. Reconciliations 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 IGT's investor relations website, www.igt.com/investors, and included as Exhibit 99.11 to the Form 8-K we furnished today to the SEC. We'd also like to remind you to download the IGT Investor Relations app where you will be able to access our earnings release and other information about the company. Finally, all references to 2014 refer to our fiscal year 2014. Now I'll turn the call over to IGT's Chief Executive Officer, Patti Hart.

Thank you, Kate, and welcome, everyone. This afternoon, we published our first quarter 2014 financial results. The quarter presented us with numerous challenges and greater-than-anticipated industry headwinds, which is evident in the results. That being said, we are focused on our business initiatives and preparing for several promising opportunities that lie ahead. As I mentioned last quarter, we continually evaluate the market and the industry and we'll adjust accordingly, while maintaining our focus on operating the business as efficiently as possible. A few notes from the first quarter. Revenues were $541 million, up 2% over the first quarter of last year. Adjusted operating income was $124 million, down 10%. GAAP earnings per share increased 29% to $0.31. Adjusted earnings per share was $0.25, down $0.03 from this quarter last year. Social gaming revenue was $65 million, a 57% increase over our first quarter of 2013, and up 6%, sequentially. We completed our $200 million accelerated share repurchase. We increased our dividend for the fifth consecutive quarter, and in the quarter, DoubleDown was GAAP-accretive. This quarter's results have prompted us to take stock of the alignment between our internal activities and the opportunities that exist in the market. Is there room for us to reduce operating expenses? Yes, there is, and we will do that. It's not a singular expense management solution. In certain regions of the world, we must work with the regulatory bodies to speed the compliance process and to provide clarity and stability to the rules and regulations that govern our business and our products. In other geographies, we are addressing government restrictions that limit our ability to satisfy market demand for our products. We, of course, must and will inspect our gaming quality and performance. Our customers will be our partners as we collectively address the decline in general gaming trends. The consumption of gaming products is shifting and is fragmenting geographically and by product type, and we must adapt our business to these changes. Our first quarter was impacted by ongoing declines in gross gaming revenue with weakness in most of our domestic casino markets. As has been reported, December saw broad declines in gross gaming revenues, with many markets experiencing double-digit reductions. Are our results based solely on these declines? No, of course not. But these trends have certainly contributed to our situation. As we absorb the impact of our first quarter performance, we will continue to invest in the segments of our business that do support growth and we'll remain disciplined about the allocation of our capital. Last quarter, I shared with you the 3 priorities that we have set for 2014: Enhancing content; expanding distribution; and maximizing shareholder returns. From a content perspective, we are pleased to report that some of the new core game titles that we introduced at G3 in September are showing strong performance out of the gate. While the returns are early, we are encouraged at this point. In the face of declining gaming operations, we have begun placing many of our new games and are enthusiastic about our performance finding Avatar outperforming the legendary Wheel of Fortune in some properties. We have deployed our enhanced content products and have received approval in Nevada, New Jersey and South Dakota for our PowerBucks multi-jurisdictional jackpot link. In October, Monopoly Plus was the most successful game ever launched at DoubleDown, only to be eclipsed later in the quarter by the launch of IGT's own Golden Goddess. DoubleDown ended the year at the top of the leaderboard in both social casino games and in Facebook's Hall of Fame. Turning to distribution. We launched real money online wagering in New Jersey in November. We currently offer approximately 20 of our high-performing slot and video poker games through 8 casino partners. We expect that this new business model will grow on a measured basis, but is an important new distribution channel for our content library. Additionally, in our international business, we had large gains in our Asia Pacific region, with 21% increase in unit volume over last year. However, these gains were offset by a 53% unit decline in Latin America, where we continue to be challenged by importation restrictions. And of course, mobile, where we are repurposing more and more of our portfolio. We have seen rapid customer and consumption growth in both social and real money wagering in the mobile format, which comes as no surprise, given the dynamic growth of entertainment consumption on mobile devices. And finally, our effort to create even more value for you, our shareholders. During the quarter, we completed our accelerated share repurchase, which John will discuss in a bit more detail later, and we increased our dividend for the fifth consecutive quarter, another vote of confidence for the cash generation characteristics of our business. Before I turn things over to John, I want to take a minute to thank our employees. They have been resilient in this market and we have confidence that they can move IGT forward in times like these. And with that, I'll turn the call over to John. John?

Thank you, Patti. I'll begin with product sales where revenues increased 4% year-over-year, driven primarily by a 33% increase in North American unit sales, as we delivered the remainder of our video poker units to Caesar's Entertainment, and drove new unit placements, primarily in Ohio and California. Internationally, lower unit sales in Latin America were partly offset by improved sales in Australia, the net effect of which was a 3% decline in revenues. A higher proportion of video poker sales, as well as foreign currency pressures, negatively impacted our average sales price year-over-year. However, sequentially, a lower proportion of video poker sales resulted in an increase of $1,600. Gross margins declined slightly to 52%, as the first quarter of 2013 benefited from an intellectual property settlement. A number of our core games are delivering strong performance, including progressive games like Goddess of Gold, which builds on the popularity of Golden Goddess, featuring 2-level symbol-driven progresses. We are also pleased with our player demand for Fire Pearl, an exciting high volatility game with a choose-your-own-volatility bonus. Fire Pearl was designed for Asian markets, but has already been successful in the U.S. In gaming operations, our results reflect the challenges felt across the industry in the quarter. Lower gross gaming revenue drove a 4% year-over-year decrease in average revenue per unit to $44.99 in the first quarter. Yields declined sequentially in line with seasonal trends. Install base was down 1% sequentially, primarily due to a decrease in the MegaJackpots install base. The results of lower yields in the lower install base was at an 8% year-over-year decline in revenues. Lower yields also pressured gross margins, which declined to 61% but remain above our historical average. We partly offset the impact of this decline in gross profit by effectively managing cash flows through lower capital expenditures. As I discussed at the investor conference, we are focused on managing this business for returns on invested capital and cash flow generation to help offset pressures from declining industry trends. And just as a reminder, higher interest rates will have a positive impact on our jackpot expenses, such that a substantial increase in rates will dramatically improve our margins. As Patti mentioned, James Cameron's Avatar is off to a strong start, and Wyland has also been captivating players with its bright and vibrant color renditions of the artist's famed marine life paintings. Like our customers, we are looking forward to the upcoming release of exciting games like Sex and the City Platinum, which is not only one of our hallmark franchises, but also is next in line in our enhanced game content portfolio. Given lower gross gaming trends, we now expect that achieving flat year-over-year yields will be more challenging. However, to help offset some of these pressures, we will vigorously manage capital expenditures, which we now anticipate will be lower year-over-year. In our interactive business, revenues increased 41% year-over-year, driven by higher social gaming revenues at IGT's DoubleDown Casino. Gross margins also improved from 58% to 63%, as we grew the business profitably. DoubleDown continues to monetize at exceptional rates. Average bookings for daily active user grew sequentially to $0.42, or twice that of our nearest direct competitor, while daily active users increased 1% sequentially to over 1.7 million. As Patti mentioned, we had several popular game launches in the quarter, and we also introduced new game variants, like Wild Action Poker, that offers fast-paced dynamic play to our poker players. These new games, along with an improving customer experience, drove a 6% sequential increase in total revenues and an 8% sequential increase in mobile revenues. Also as we anticipated, DoubleDown was GAAP-accretive in the first quarter and it generated EBITDA margins that, when adjusted for acquisition-related payments, are consistent with our consolidated EBITDA margins. Looking forward, we remain confident in DoubleDown's growth potential, propelled by a continuously improving customer experience, higher mobile revenues, international expansion and enhanced product offerings. In our online real money product at IGTi, gross profit increased 5% year-over-year, despite a 16% decline in revenues, primarily due to lower royalty expenses. North American interactive revenues benefited from the launch of real money online wagering in New Jersey across multiple platforms. We are optimistic that the New Jersey casino style model will become a successful example for other states to follow. IGT is uniquely positioned to capitalize on this opportunity, given the breadth of our premium product portfolio and our proven track record in real money wagering outside the United States. Our first quarter adjusted operating expenses increased to 35% of revenues versus 32% a year ago, primarily due to higher advertising at DoubleDown, and higher research and development expenses. Selling, general and administrative expenses, excluding bad debt and unusual items, represented 20% of revenues. This quarter's results benefited from a $30 million audit settlement with the IRS related to prior tax years. While some of you may choose to ignore this in our quarterly results, this settlement provides a direct cash benefit to IGT shareholders and represents fully $0.12 of incremental earnings per share in the quarter. It's a fantastic result. At quarter end, cash and short-term investments, inclusive of restricted amounts, totaled $648 million. In the quarter, we generated approximately $76 million in operating cash flow, an $18 million decline compared to the first quarter of 2013, due to the timing of some foreign tax payments and other working capital fluctuations. During the first quarter, the company received 8.2 million shares related to our previously announced share repurchase. The total number of shares repurchased under the program was 11.6 million shares, at an average discounted price of $17.22 per share. This represents approximately 5% of the total shares outstanding when the program commenced. The company also paid $26 million in dividends, resulting in a total of $226 million in direct returns to shareholders. We remain committed to disciplined capital deployment as we prioritize investments for growth, along with accretive returns to shareholders. Given recent trends, we now see the low end of our previously announced guidance range as more likely, with potentials for further downside risk. We are currently implementing a wide variety of measures including cost reductions to mitigate this risk. I'll now turn the call back to Patti.

Thanks, John. I'd like to close by just reminding you that we are, here at IGT, working hard every day to stay ahead of the game. We are diligently pursuing improved game performance because we cannot stand still, we must elevate our products through the application of tools, technology and people, and we must apply more rigor to our processes. In our DoubleDown business, we are monetizing our existing game library across all platforms, but consumption is moving increasingly towards mobile. We have responded to this by incorporating the mobile requirements of our products on the front end of the development process. And internationally, we feel that Asia is poised for growth over the next 2 to 3 years. Macau, Philippines, Singapore may provide higher-than-average growth for the industry and we will attack this market like never before with products, with partners and with content. This market shift can create unexpected opportunity and we will be positioned to capitalize on these events for the benefit of all of our stakeholders. So I just want to say we truly appreciate your support, your interest, your time today, as we continue to focus on our progress moving forward. And we'd now like to take your questions.

[Operator Instructions] And our first question comes from Cameron McKnight with Wells Fargo.

Question for Patti or perhaps John. In the outlook statement, you noted declining gross gaming revenue trends as a source of weakness. Were those comments pointed towards gaming ops or product sales? And could you talk to what you're seeing in each of those parts of the business?

I would say it's mostly gaming operations, that's where we feel the most significant immediate pressure from gross gaming revenue trends. In the products sales, I think, it really owes to operator health. What we've seen right now is probably a little bit softer than we would've expected at the beginning of the year.

Okay. And then, as a follow-up. At the Analyst Day and in your comments here, you referenced the focus on cash flow. Can you talk to some of the levers that you can pull to help free cash flow continue to grow in the top line environment?

After income, it's really about managing your working capital with diligence, something I think we've done a fantastic job of over time. You will get quarter-over-quarter fluctuations, but it's very diligent management of the working capital line. And then, for us, the next stop is in capital expenditures. So I think we've illustrated that in the face of declining revenue trends, we're very conscious about that capital expenditure. And as evidenced this quarter, we will manage that vigorously to ensure that we're not overextending our capital into environments that we don't think offer the right level of return.

And the next question comes from David Bain with Stern Agee. David Bain - Sterne Agee & Leach Inc., Research Division: If I could just follow-up on Cameron's question with regards to the new commentary on guidance. So the language is purely a result of your new view for worse-than-expected market, GGR and that impact on game ops until, to some extent, product sales, or was there any other factor that goes into that new commentary like new competition or AFP discounting, is there anything to think about there?

Primarily around the impact on gaming operations from some very disappointing gross gaming revenue trends. And then, as Patti alluded to, some of the difficulties we're experiencing in select international markets that have taken opportunities off the table that we would like to see come to fruition. But in terms of other factors now, it's largely around those 2. David Bain - Sterne Agee & Leach Inc., Research Division: Okay. And then, I was curious if you can briefly reveal capital allocation strategies, again, just completing the $200 million ASR, we've got the changing guide, we'll probably see a reaction tomorrow. Can you speak to the potential for further repurchases or are we going to wait for more visibility? And then, the dividend yield is well above the 2% benchmark, are we changing the benchmark? And any thoughts on the acquisitions?

Listen, I think, we reviewed the opportunity to repurchase shares regularly with our board at the board decision, same for the dividend policy. But I would not envision any change to the dividend benchmark. Keep in mind that, that 2% is a minimum for us, it's not a maximum. We will continue to review opportunities for share repurchases that balance both other opportunities we have organically to grow the business, as well as to repurchase shares at what we believe to be a pretty discounted fair value. As with acquisitions, we continually monitor the environment. We're looking at the marketplace and we examine opportunities on a case-by-case basis and remain abreast of all the dynamics in place. But we're not going to obviously comment on any specific opportunities at this point.

Yes, and David, I think, it's just worth nothing that we have -- we feel like we have sufficient room still in the share repurchase authorization to move opportunistically if we feel like we need to.

And our next question comes from Felicia Hendrix of Barclays.

Question for John, a question for Patti, and it could probably be for both of you. John, just wondering, I think you gave us some vague ideas, but you have said in the release and said in your prepared remarks, you're going to try to mitigate some of the lower GGR growth with cost efforts. Just wondering if you could elaborate there? And then, Patti, is there anything you could do strategically on the revenue side also to offset that sluggish environment? I know that you're frustrated with some issues in the international markets, but is there anything you can do to kind of stimulate some sales on the top line?

So -- I mean, quite frankly, Felicia, it's a little bit early to comment on specific efforts. In a sense, we're responding to some very realtime change but I don't think anybody would've anticipated the declines in gross gaming revenue we saw almost across the board in December. But I can tell you, we're definitely focused on it as an opportunity to mitigate the risks within our guidance. We also want to be sensitive to the fact that, that involves a lot of analysis internally that we want to act quickly on. So we want to act quickly and not overanalyze the situation for the benefit of our guidance.

Yes, I mean, I think, it's also, Felicia, important just to note that we have been very successful managing things above the product margin line. We have been rigorous around our materials cost, our labor, the application of capital to the market. And so, I think one of the things in these sorts of markets that you have to focus on is everything from the top line all the way down to the bottom, looking at every nickel and dime because it really matters how it comes out at the bottom. So I think stabilizing and actually improving in many cases the gross margin lines have been a result of, I think, very rigorous cost management. And I think, there's opportunities to continue that as you look at operating expense as well and we'll do that. So I think, from a revenue strategy perspective, we have a lot of things that we're looking at. I think, the video poker deal that we did with Caesar's in this past quarter, I think, is a very good example of in these sorts of market how looking at the breadth of our product portfolio really advantages us in the marketplace. So looking at everything from systems, our systems business has been very healthy, looking at leveraging that and looking at leveraging our products broadly, whether it's the transmitted real business which we still continue to have a very strong leadership position in our video poker. More difficult outside the U.S. today just because I think that some of the structural issues that we're managing through. But inside the U.S., I think, you can assume that our sales force and sales executives are hard at work strategically to bundle our products and find solutions for our customers because we do have to really work with the operators to help them address the current trends in gross gaming revenues.

Our next question comes from Steven Kent with Goldman Sachs.

A couple of questions. I'm struggling with your ability to reduce CapEx because, for the most part, at least historically, CapEx has been for participation games. So are you essentially telling us that you'll have less games out there, that's how you'll reduce CapEx? And then, the other, I thought you mentioned in the beginning that there were some legal issues, Patti, that maybe would hold you back from reducing expenses or I'm not sure what you're referring to. And then, finally, I'm not making a forecast without being able to provide guidance, don't you get orders that are 1 or 2 quarters out? I'm struggling with the inability to look out 1 or 2 quarters.

I mean, I'll take up the CapEx side of things. I think, if you look at what occurred in our install base, you'd see that the CapEx investment has decreased dramatically as compared to install base, so it's not fair to equate a reduction in CapEx with a reduction in install base. The idea is we leave the boxes on the floor for a longer period of time with rejuvenated content. It allows them to continue to yield but at a much higher margin because the boxes are living on the floor for a longer period of time. I would add that the visibility is absolutely not a couple of quarters in advance for most. And I think our sales folks would wring my neck if I indicated anything otherwise. We're seeing very realtime purchase decisions within quarters sometimes. So absent a large scale new opening, which is more contemplated, most of the buying decisions are occurring in a short window that is within a quarter. So a part of the challenge for us is assessing what the overall market will yield in a given quarter given that dynamic.

And I think, the other part of that, Steve, is that the lion's share of our game ops orders that come in are upgrades of existing hardware. So it doesn't require a manufacturing cycle to satisfy those orders. So those are flipped and turned very quickly most times with -- inside of a quarter of performance. So -- and the enhanced content that we rolled out in G2E was rolled out intentionally to put longer legs on the capital to increase returns on the hardware capital. So I think you'd continue to see us taking that approach to the market as long as we see the kinds of pressures on gross gaming trends that we're currently seeing. As far as -- I'm not exactly sure what you're referring to from an [indiscernible] perspective, I think, the couple of areas that I mentioned in my comments that are in addition to the gross gaming revenue is; one, is the work around stability and clarity of regulation of products and in the business. And that's something that we're working on hard with regulatory bodies around the globe but really providing that clarity so that as you're building a product, that you have clarity around the feature functionality requires you make its way through compliance and know they're not changing as your product mix is in the compliance process. And then, the second piece is just around the importation restriction that we continue to address in the South American market.

And is that what is hurting maybe your operating expenses? I think that's what I was trying to get at. It sounds like some of those legal issues, those issues you just noted, Patti, are weighing down on profitability?

Yes, I would say, I think, it's a good point. I think, it's -- I wouldn't say that they -- we've increased operating expenses to address the issues, but it is an area where it's a little more difficult to mine out operating expenses because you really do have to apply rigor to those sorts of issues because they go well beyond our industry, I think, in both cases. So it's difficult to mine out but I wouldn't say either of those things just cause an increase in operating expense. It has caused a reallocation from other projects.

And I would add, it is not leverageable. You have to have compliance costs in place for a market for 1 unit or 100 units. So as you see things like importation restrictions in certain market, it doesn't allow us to get the leverage we would normally receive out of those businesses.

Your next question comes from Shaun Kelley with Bank of America Merrill Lynch.

So I guess, my first question would just be on in terms of the guidance last quarter, you had given a little bit of color on some of your operating expense items, I think, particularly SG&A and R&D as a percentage of sales targets for the year. If we look at least at SG&A, you came in a little bit above that, that may be because of lighter sales. But are those targets still accurate or do those kind need to be reevaluated along with kind of everything else with where you stand right now?

They're still accurate. And actually, if you adjust for unusual items where -- I mean, quarter 1 is always 1 of our least leverageable quarters. So we're in the range that we gave for both categories. There are a few items we had some severance that rolled through there and we had a little legal settlement in there that impacted the numbers from a -- for a percentage standpoint through. If you adjust for unusual items, we're still within that range, and we think that range is still reliable. Obviously, to the extent we address opportunities in the operating expense category, that will be favorable to that guidance. But we still expect to be at least within that range.

Okay. That's helpful. And I guess, my second question would be, and just a little bit bigger picture, obviously, game ops is where you guys saw a good chunk of the weakness. For the last -- for the bulk of last year, it felt like you guys were seeing improving game ops gross margins as a slight offset to what you guys are seeing on the top line. But this quarter, you did call out that GGR is weak enough that you saw kind of declining margins as well. Is this kind of a new normal in terms of game ops gross margins kind of you're closer to like to 60%, 61% level? Or how would you kind of think about that going forward if sales don't rebound?

Yes, I mean, I think, what's interesting, if you look at our gaming operations performance from a cost standpoint, actually, there was favorability. But the flow through on the incremental revenue is so high that it did materially impact the margin to 2 percentage points. I'd expect it will hover within kind of the kind 60% to 63% range depending on the quarter, absent another meaningful shift in the market. I mean, we've looked and we have done a very good job, to Patti's point, of managing through that margin, gross profit. And we will continue to do that. But I would expect we'll be in this range. I don't know that it's a new normal on an annual basis, but it's certainly within the range you'd expect kind of quarter-over-quarter, depending on variability in a quarter. Again, keep in mind, this is our least leverageable quarter because you do have seasonal influences in the market.

Your next question comes from Steve Wieczynski with Stifel. Steven M. Wieczynski - Stifel, Nicolaus & Co., Inc., Research Division: So going back one more question on the guidance. I mean, I guess, if you're talking about coming at the low end of the range or even below that, why not shift at this point the whole range down? I mean, why at this point keep that top end up there at this point?

I mean, one, we don't traditionally evaluate that deeply in the first quarter, but we did see a sizable shift in the market, which, again, December was a pretty disastrous GGR quarter. We're still evaluating that impact, as well as what we're going to do to address it on the operating expense side. We will take action and we will make sure that when we have a revised perspective to offer, we will. Again, we see more downside risk to the numbers than we saw before and we believe that low end is more likely at this point in time. But we also have to go mine out some operating efficiencies. So those will help up, that risk will just -- in the process of evaluating and executing on those, that will impact our guidance going forward. Steven M. Wieczynski - Stifel, Nicolaus & Co., Inc., Research Division: Okay. And then, John, I don't know if you talked about this, but if you stripped out the poker sales, what would pricing have looked like on your core boxes? And can you talk a little bit about the competitive environment that's out there right now in North America?

I'll let Patti touch on the competitive environment. Overall, I would tell you that the quarter ASPs were definitely impacted by the discount of those boxes, it was just [indiscernible] it's not a new discount from the last quarter. And because you saw a lower proportion in the quarter of those poker units, you saw ASPs kick up sequentially. They will be higher going forward because we'll lose the tail on those boxes. I would say, just from a pure pricing standpoint, very competitive. But we don't see any material decline in pricing kind of on a box-to-box mix adjusted basis. Patti?

Yes. I would say, again, I think, the environment around pricing has not changed, unfortunately. I wish it had changed for the positive, but it has been fierce for a couple of years, and I think, it remains fierce. I would say that as we're making our way through early in the year and our discussions with operators and their budgets, that all goes into our thinking around how we feel like the year is going to fall out and what we think -- how we think we will we be represented in those budgets. So the gaming industry has been fierce from a pricing perspective for some time, and it moved, I think, to a real value-oriented purchase. It really has focused on return-oriented characteristics when our customers are purchasing products in the U.S., but I think, even outside the U.S.. It hasn't shifted significantly, Steve, I would say, one way or the other.

Our next question comes from Joe Greff with JPMorgan. Joseph Greff - JP Morgan Chase & Co, Research Division: A question for you on the outlook. In order for you guys to get to the lower end of your prior guidance range, do you need to make these new operating expense cuts in order to achieve it?

Well, that means tell me where GGR is going to be for the remainder of the year, I'll be able to answer that with certainty. What we expect is that it will be some combination of operating expense efforts, as well as we expect some of the recent product launches we put into place to help support the business. But again, it's somewhat beholden into the GGR trend. Again, I hate to keep pointing to December, but double-digit declines in markets is not something I saw anyone write about in advance. Many of you have touched on it after the fact. That's a pretty significant change to the dynamic and it really depends on how far through the remainder of the year that, that carries forward.

And I think, Joe, I think, we are working a bit in realtime. I mean, we don't have all of the statistics in from every jurisdiction yet and how they finished December, and we're really looking at the business and trying to understand how much of it was delivered to us, the downturn from the market and how much we can control until we're in that process. So I wouldn't say we have to take action in order to get inside the guidance, but we will take action. I think, it's prudent to take action not because we're interested in getting inside the guidance but because we're interested in operating the business as efficiently as we think we need to operate it. Joseph Greff - JP Morgan Chase & Co, Research Division: Okay. And so are you having -- acknowledging these challenges that are well beyond your control and given the limited visibility that you guys have referred to, does that give you pause in terms of further share repurchases? Can you talk about your interest level, given the environment we're in, near current levels for share repurchases from here?

No, I don't think so at all. I mean, our primary barometer on share repurchase is where's the value relative to the market. Obviously, we have fairly significant capacity on the balance sheet either way. But we also have confidence in the cash flows. It's a difficult environment, but it doesn't deteriorate, there's very strong cash flow characteristics of our company and our forecast for the year. So I'd say absolutely not. But we will make that decision in concert with the board looking at the valuation of the company and other efforts we have underway across the organization. Because as Patti mentioned, we will continue to invest in those businesses that are generating growth. We have some pretty fantastic opportunities before, particularly on the interactive side, but also in some other key markets that we'll develop later in the year. And we're not going to pause from going after those opportunities for the company because those will provide growth.

Our next question comes from Robin Farley with UBS.

First, you mentioned Monopoly being one of the more successful games for DoubleDown. Can you just remind us when you lose the right to Monopoly for social and online games? I know there was a 10-point transition to WMS, I just want to get some clarity on that. And then, secondly, just looking for clarity on the comments both in Patti's opening remarks and John, just your comments now about using your free cash flow for businesses that are growing like the interactive business, and you mentioned something about some key opportunities later this year. So should we be thinking about that as -- can small technology-related acquisitions for the interactive business is kind of what we would think of as your primary use for the free cash flow, I guess, kind of thinking about the comments?

Look, I'll just make a comment on the Monopoly license, and then, let John talk to you about the free cash flow, which we spent a lot of time talking about in the last week. As you would imagine, we don't normally disclose details of the contract. I would -- suffice it to say, however, that we feel like, first of all, the Hasbro brands have been good to us over the years and they served us well and we're thankful for that. We feel like we have more than sufficient time to walk through a transition on the online real money wagering side of the business and the social gaming business with the product and would probably choose to make a bit more investment in those ahead of the expiration of that So they've been good to us However, I will say, Robin, in that online wagering business and in the social gaming business, we've yet to really prove that big brands matter actually. The really, best-performing games for us that have legs for a very long time have historically been our in-house brand. So we're not sure. In the real money wagering, I would say the jury is out still on the real value of big brands in that space. So we'll see, we'll continue to test that. But I think we have a nice transition plan for the Hasbro titles that will expire in the future. But we have plenty of time to transition those and benefit from them in the meantime.

I will just add on that, I mean, as we mentioned, Monopoly was good on the social side, but our own content was even better. And we feel like we have a great library to utilize there and we understood all of this in the context of when we initially executed on the license. So it isn't even a surprise to us, but maybe to you guys but it's not a surprise occurrence to us. From a free cash flow basis, I would just say, we have a prioritization of use for free cash flow that we stick to, good times and bad. It always looks at opportunities internally that are high IRR first, and we will continue to do that. We then examine opportunities to return cash directly to shareholders when we think that it's accretive. And I think we've demonstrated over time a fantastic commitment to that. And then we do look at strategic opportunities. But I wouldn't say that, that prioritization is changing at all. That's how we'll continue to operate the business. But some of these deals allude to future opportunities relate to international markets. And the opportunities in the next couple of years in Macau are very significant. And for us, that will be evident in investments we make in localized content, which is something you've heard us talk about before. So it's a mix of the internal opportunities, again, shareholder-direct opportunities, and when appropriate, strategic opportunities. But that's always going to be the prioritization for us. And it will change a little bit by what's available in the market at a given point in time, but that's always going to be our priority use of cash.

So the comment about sort of potential acquisitions and opportunities later in the year, it sounds like that has more to do with localized content for box sales in Asia, and not necessarily related to the interactive business or what, just general...

Just to be clear, we're not making any comment on future acquisitions. We look at opportunities, again, across a spectrum that includes that, when appropriate, but also, again, starts with organic internal opportunities.

But I do think, Robin, as I indicated in my comments, I mean, this has been a quarter that, I think, has given us a great opportunity to take stock of where we are investing and investing broadly across the horizon, from R&D to licenses, to our employees and everything in between, and making certain that we are over-rotating those investments towards growth opportunities in the marketplace is really the effort that's underway.

Our next question comes from Carlo Santarelli with Deutsche Bank.

Could you guys comment a little bit, obviously, your convert is now a fiscal 3Q-ish, so you just plan around -- how you're thinking about that and how we should think about maybe the balance sheet going forward?

So we're well prepared to handle the maturity of the convert. It will be a Q3 event for us. We have cash on hand from the borrowing we executed in Q4 of last year. The balance of the maturity we'll handle on our line. No anticipated change to that. I would also -- keep in mind that we have a collar around the maturity such that we're protected well above the high 20s, low 30s from a dilution standpoint. So we're pretty confident that we're well-positioned right now to handle that maturity and I don't foresee any change.

And John, just to be clear, from a GAAP interest rate, obviously, the GAAP rates that flow through your income statement, meaningfully higher than the 3 1/4 that the note indicates, correct?

Yes, we have compute market rates for those instruments.

Okay. Great. And then, just quickly on SG&A and R&D. Generally speaking, we've seen sequential increases in both metrics as we move throughout the year. Is it fair to say that this 116 clean number in SG&A and I guess the R&D number around 60, is that kind of the starting point for you and as we go through the year?

Yes, I mean, I think, the right reference point I continue to give you from last quarter is SG&A in the 19% to 20% of revenues range, and R&D in the 10, 11 percentage range. Again, last quarter, SG&A was down meaningful sequentially because last quarter, we had some onetime items, there were a few small ones in this quarter. And this quarter is our least leverageable from an OpEx standpoint. But that's the range I would stick to. And again, efforts we will undertake internally for efficiency will only improve that. But right now, that's still our expectation, 19% to 20% on SG&A, 10% to 11% on R&D.

Our next question comes from Chris Jones with Telsey.

Just two quick questions. First, just confirm for us the tax benefit was not reflected in original guidance, was it?

No, it was not. It's something we contemplated. But when you actually get a ruling from the IRS, is not always within your control. We certainly are aware of it and knew of it. And I would stress that you consider when those tax dollars are coming out, we didn't get an extra $0.01 during the earnings. We treat them as an unusual item to give you visibility, and I think that's the right thing to do. But at the same time, that is a direct benefit to shareholders. That is $0.12 of earnings that we are delivering this year through the work of our brilliant tax department. And I'd just hate for that to be discounted because it's direct value to shareholders.

And the other question is just in the first of -- the guys who are core in the group, can you just sort of maybe reflect and perhaps give ideas from the gaming ops side, are we positive that this is sort of an industry-wide event and not perhaps maybe some concerns about sort of machine or other game performance in the marketplace for IGT?

Yes. I mean, we won't know obviously until they report. But I would say that I don't know anybody who wasn't surprised by the December results. In a way, obviously, we are the preponderance of the industry, in particular, the premium line. So no doubt we felt -- we feel everything more acutely than others. We'll have to wait and see what their results reveal. But again, if you look at GGR trends, it's hard not to conclude that there's a broad market hazard.

Right. I do think, Chris, I mean, what I don't want you to do though is go away thinking that we are not taking responsibility for the situation. We're taking responsibility for the situation. And gross gaming revenues are creating an enormous headwind for us. Whether it's creating it for others, I'm not sure. But in our size, in our gaming ops business, it's going to be very closely reflective of the market, that's just the size of the install base. However, it's our responsibility to get inside of those numbers and understand what it is we can do to move the needle on the cost line, on the revenue line, and we're doing that. So we're not hiding behind it. It's not -- it wouldn't be appropriate to do that, but it certainly is contributing. There's no question about that.

And our last question comes from Edward Williams with BMO.

Just a couple of quick questions. Can you comment within DoubleDown on the performance of the mobile platform as compared to Facebook? What's your transition you're seeing there? And staying within DoubleDown, can you give us a little bit color as to what you're seeing for kind of the CPIs, the marketing spend that you're incurring there?

Yes. So mobile has continued to outperform desktop, that's the transition that's broad. Everybody in the industry is experiencing it. And we were very pleased with our mobile performance. But make no mistake about it, we're still very well invested in the desktop and the desktop does exceedingly well for us. We love both ends of the business. But we realize that we'll continue to focus on the mobile growth opportunities because we believe those are faster-paced in the years to come. CPIs are rising. Now they do show some seasonality, so there's some variations you'll get quarter-over-quarter. I think the challenge for operators like ourselves becomes using those dollars effectively. And I think our marketing team up in Seattle has done a fantastic job of being very efficient and targeted, but we need to get better and we will get better. And that's the challenge before us. There's certainly a heavy element of marketing in this business that needs to be pulled off successfully to grow the way we have, and I think that's a testament to our ability. But it's a dynamic and challenging environment and we'll continue to evaluate opportunities to maximize our dollar spend in the advertising realm there.

I think, Ed, it's also just interesting to point out that CPIs will move around, I think, when you have a holiday season and a lot of devices making their way into the market, it's a little more of a fierce battle and maybe CPIs make their way up because you need to get in those new mobile stacks when they go out. But seeing that our bookings for daily active user continue every quarter to set new highs for the industry. So coming in at $0.42, I think, is another indication that what we have been focused on is the right thing to focus on, which is monetization. It's not about just driving MAUs and DAUs. We love to have visitors, but really want payers. And that's really what we've been able to drive through the efficient and effective marketing spend that our team is managing up in Seattle. So I think, a very nice uplift in bookings per daily active user in a quarter when around the holiday time, it was device purchases. It is a time when you need to be in the market.

Okay. And then, just a quick kind of housekeeping question. John, can you give us a sense as to what the diluted share base is now post the buyback that we should be using for the next few quarters? And also, what the tax rate should be that we're using on a normalized basis?

Well, I've challenged our tax team to replicate this quarter for the remainder of the year. They have not yet signed in blood on that. I think, our normalized tax rate, the guidance still holds. We're still expecting to be in that 34%, 35%. Diluted shares, I don't have the exact -- I mean, earlier guidance was $2.50 to $2.55, that still holds. But again, we just closed the ASR yesterday afternoon. So I'll update later if there's any change. But I don't anticipate there will be a material change from that. We're incredibly pleased with the buy, it was 5% of our shares outstanding. We've got some very competitive pricing and we're thrilled with the outcome.

Okay. I think, that ends our questions. So I want to thank you again for your time. We really appreciate the fact that you follow IGT and our progress. We look forward to further discussion. So thanks very much, everyone.

Thank you.

Thank you. This concludes today's conference. You may disconnect at this time.