International Game Technology PLC
Q4 2007 Earnings Call Transcript

Published: 1 Nov 2007

[Operator:]

Welcome and thank you for standingby. At this time, all participants are in a listen-only mode. (OperatorInstructions) Today's conference is being recorded. If you have any objections,you may disconnect at this time. And now, I will turn today'smeeting over to Pat Cavanaugh, Vice President of Investor Relations. Thank you.You may begin.

[Pat Cavanaugh:]

Thank you, Candy, and goodmorning everyone. Thank you for joining us for IGT's fourth quarter and fiscal2007 conference call. Joining me today on the call are T.J. Matthews, ourChairman and Chief Executive Officer, and Danny Siciliano, our Chief AccountingOfficer and Treasurer. Before I go over the financialhighlights for the quarter and year, and before I turn the call over to T.J.,I'm pleased to be able to share with you the Safe Harbor language. Accordingly, before we begin, I'dlike to note that during this Earnings Call, certain statements and responsesto questions may contain forward-looking information, including forecasts offuture financial performance and estimates of amounts not yet determined aswell as our future prospects and proposed new products, services, developments,or business strategies. Actual results could differmaterially from those projected or reflected in our forward-looking statements,and reported results should not be considered an indication of futureperformance. IGT's future financial condition results of operations as well asany forward-looking statements are subject to change and to inherent known andunknown risks and uncertainties. IGT does not intend and undertakes noobligation to update our forward-looking statements including any commentsregarding our earnings expectations, future events, or circumstances. All forward-looking statementsmade in this conference call reflect IGT's current analysis of existing trendsand information, and represent IGT's judgment only as of today. You should notassume later in the quarter or year that the comments we make today are stillvalid. Actual results may differ materially from current expectations based ona number of factors affecting IGT's businesses, including unfavorable changesto regulations or problems with obtaining needed licenses or approvals, adecrease in the popularity of our reoccurring revenue gains, or unfavorablechanges in player and operator preferences, slow growth in a number of newcasinos or the rate of replacement of existing gaming machines. Failure tosuccessfully develop and manage frequent introductions of innovative products,more information on factors that could affect IGT's business and financialresults or cause us not to achieve our forecast are included in our most recentannual report on Form 10-K and other public filings made with the Securitiesand Exchange Commission. During this call today,references may be made to non-GAAP financial results. Investors are encouragedto review these non-GAAP financial measures as well as the reconciliation ofthese measures to the comparable GAAP results in our 8-K filed with the SECtoday, a copy of which can be found on our website at IGT.com. This call, the webcast, and thiscall and its replay are the property of IGT and is not for rebroadcast or useby any other party without the prior written consent of IGT. If you do notagree with these terms, please do disconnect now. By remaining on the line youagree to be bound by these terms. With that said, I will now go over thefinancial highlights for the quarter and year just ended. Today, we reported results forthe fourth quarter and fiscal 2007. We not only realized another record quarterfor our game and operations business, but we also posted record results fornon-machine sales and cash flows from operations. For the year, IGT deliveredrecord results on nearly every financial measure and returned a significant amountof capital to our shareholders. We generated over 70% of our revenues,operating income and cash flow without shipping a single unit. Financial accomplishments forfiscal 2007, all of which our records include, revenues of $2.6 billion drivenby results of gaming operations and non-machine sales; gross profits of $1.5billion with a consolidated gross margin of 56%; gaming operations revenues of$1.4 billion, and an installed base of gaming operations assets of 59,200 up19% from the prior year; non-machine revenues of 384 million representing 30%of total product sales; operating income of $800 million, of which ourinternational division generated 20%. Just five years ago, the internationaldivision contributed 5% of operating income. EBITDA of $1.1 billion, cash flowfrom operations of $822 million, up 32% from prior year; net income of $508million or $1.51 per diluted share. These accomplishments coupledwith the strength of our balance sheet allowed IGT to return $1.3 billion toshareholders in the form of share repurchases and dividends in fiscal 2007.During the fourth quarter, IGT bought back 13.5 million shares at a total costof $507 million at $37.47 per share. For the year, we repurchased 28.2 millionshares at a total cost of $1.1 billion. Moving on to our businessdiscussion

[T.J. Matthews:]

Thankyou, Pat and good morning to everyone. Before opening the line to questions, Ihave a few comments regarding our business and the outlook for IGT. In2007, we achieved record results, despite relatively few new casino openingsand flowing market-wide demand for replacement machines. IGT not only achievedfinancial success in 2007, but we made significant strides towards developingthe innovative products, which are expected to drive market growth in thecoming years. Wecontinue to produce all returns for shareholders. Despite the increasedcompetition among gaming suppliers and the moderate growth of theslot-installed base, over the last five years, IGT has generated a 15%compounded annual growth rate in our earnings per share. This ismade possible by the efforts of all 5,400 IGT employees worldwide who keep thecompany in the vanguard of the marketplace. Daily operational execution andinnovative products assure that IGT's future prospects remains solid. Ourgame operations and our non-machine product sales contributed nearly 70% of thetotal revenues in 2007 and we expect that we'll have continued growth fromthese higher margin sources in 2008 and beyond. These reflect our efforts toemphasize our software and service businesses, which deliver value to IGT'scustomers through higher revenue realization and IGT shareholders through increasedfinancial performance, thus continuing to reduce IGT's reliance on the sale ofgaming machines. Lookingforward, the install base of game machines is expected to enter a new growthphase with numerous casino openings and expansions. One prominent Wall Streetinvestment bank has projected 114,000 new machines in the United State being added over the next three years. In addition, theyestimate 177,500 additional gaming machines across a large number ofinternational markets. Ourdiversity and the depth of our innovative products, combined with the worldwidesales and distribution capacity, will allow us to compete for significantmarket share in this coming expansion of nearly 300,000 games. Some ofthe expected expansion may come from political action, which has also picked upin recent months. In Massachusetts, the governor has proposed legalizing three resortcasinos. And early polls indicate public support for the proposal, which likelywill be a key legislative issue in 2008. In Maryland, the governor has just called a special legislativesession to address a $1.7 billion budget deficit. His plan to reduce thatdeficit includes the legalization of 15,000 gaming devices and likely be put toa public referendum in November 2008. In California new tribal gaming compacts were signed, which willeventually lead to the expansion in the number of machines in that state byover 22,000. And all these compacts may face the referendum in 2008, they pointto a willingness of tribes and the state to expand machine counts in return forsome form of revenue sharing. In Kentucky, the election for governor will be held next Tuesday.Leading the polls is Steve Beshear, who supports the public vote on expandinggaming in the state. In addition, we feel the political environment is stillripe for expansion in states like Alabama, Florida, Illinois, New Hampshire, Ohio, and Texas, and you'll see debates take place there over the next fewyears. Theincreasing financial contribution of international markets was demonstrated in2007 as our international operations generated 20% of IGT's operating incomecompared with just 5% five years ago. Many countries see gaming as a key driverof foreign tourism, which favors resort casino developments like those commonlyfound in North America. Asia remainsa key in casino market focus for IGT. Macau, Singapore, Korea, and the Philippines are all expected to contribute meaningful sales from newlyexpanded casinos over the next three years. Japan and Taiwan have also begun political discussions for legalizingcasino gaming. InChina IGT continues to believe our previously announced alliance with ChinaLotSynergy will provide us future access to serve this evolving market. IGT isin the process of creating that partnership to deliver product and servicesinto mainland China, but, the timing in that market still remains unclear. We arecommitted to delivering industry leading products and service to our globalcustomers. We will continue to plan on spending over $1 billion during the nextfive years to develop new technology. And while we consider our R&D effortsworthwhile long-term investments, we are especially excited about the returnswe anticipate in the next few years as our server-based technology is rolledout. At theupcoming G2E, we will be showing our newest machines and game themes thatreflect the full diversity of our product lines worldwide. Many of the machinesdisplayed will feature the AVP platform, which allows for the higher qualityvideo and game play experience. Most of IGT's game developments are now shiftedto the AVP platform, which will allow us to serve as the delivery portal theconnection to server-based gaming environments. Inaddition, new AVP versions of video poker and spinning real slot will also beon display at G2E to help customers round out their gaming floors inpreparation for the coming of SB. During2007, IGT made meaningful progress with our SB efforts and remain on target tobegin commercializing this product in 2009. At G2E,we plan to illustrate our business for the slot four in the not-so-distantfuture, complete with connectivity to gaming machines from multiplemanufacturers. We will demonstrate how a casino will be able to manage spot mixand price points from a central server, as well as, marketing a wide range ofservices offered on property directly to the player. Most ofthe products will be comprised of earlier versions of SB that have existed invarious forms. So, the most important addition will be the network and itscapability. In the end, SB is all about building connections to guests whereverpossible. Tofurther the SB development in an open network environment, IGT will soon openour new $10 million global technology center. This facility will be open to allproduct providers for SB environment including systems away from the gamingfloors of hotel management and point-of-sale systems to conduct compatibilitytests of the GSA protocol-based products. Products will receive IGTcertification, giving customers greater comfort that any non-IGT products theyinstall will work, as intended, alongside IGT's product lines. Lastly,on the topic of guidance

[Operator:]

(OperatorInstructions) Thank you. We have our first question from Bill Lerner, DeutscheBank. Your line is open.

[Bill Lerner:]

Thanks,guys. How are you doing?

[T.J. Matthews:]

Goodmorning.

[Bill Lerner:]

Twoquestions

[T.J. Matthews:]

Sure.You are right about there having been some large shipments that moved from Q4to Q1. Palazzo was the most notable of those. In Japan, we sold about 30,000 machines this last year. We haveanother 3,000 machines that are in our rental program. We have expectationsthat we'll exceed those numbers next fiscal year and so, although disappointedin what has become a much smaller install base, we actually think that some ofthe delays in the market will allow for longer-term sustained growth into thatmarket. So, we're glad for that. One ofthe big things that we think about our business is you kind of take a look athow we're shifting away from boxes into software solutions was really focusinga lot on those non-machine sales. And to give you a little more color of those,those included this last year 24,000 convergence and existing install base. Thatgets lost sometimes when people are thinking about units, because those reallyare units with very high margin percentages, slightly lower margin dollars. Andwe also installed 83 systems this year. Now, have an install base over 700,000systems. Had the opportunity to have additional sales to another 135 systemsthat were upgraded over the course of the year. That also was going to be agrowing part of our business and really, I think, predicts fairly well ourability to continue to start expanding that install base with SB products.

[Bill Lerner:]

Thanks,T.J. So, just a follow-up, just to clarify

[T.J. Matthews:]

Most ofthose 3,000 rental units happened in this last quarter.

[Bill Lerner:]

That'sincluded in the 7,200?

[T.J. Matthews:]

That'snot included in 7,200. We do not count those as sale units.

[Bill Lerner -Deutsche Bank:]

Okay. A little more than10. Thank you.

[T.J. Matthews:]

Youbet.

[Operator:]

Thankyou. Next question David Katz, CIBC. Your line is open.

[David Katz:]

Hi,good morning. Two questions

[T.J. Matthews:]

Sure.If you take a look at the composition of machines shipped this last year,there's no doubt that we were the beneficiary of a resurgence in real slots,particularly in some replacement opportunities and expanding to five reels asnew properties open, being able to maintain shares in excess of 50% because ofthe strength in real slots and poker, all bode well for us and what this futureexpansion has before us. That world of video remains very competitive. I thinkthe good news for us is that, we have moved towards an IGT branding strategy,so we have a common interface to the players, some recognition of our gamesacross the casino floor then, that if you take a look at individual titles andask casino operators

[David Katz:]

Right.And if I can just ask one more to the degree that you can help. If we look atNorth America and IGT's slot machines that are out in the field at this point

[Pat Cavanaugh:]

Sure,David. This is Pat. If you look, we introduced AVP for sale, I believe, it wasin early calendar '06. So, we've only been selling that platform for a year andnine months now. First, probably three quarters, the mix of AVP probably wasless than 20% of product sold. Andit's now picked up in '07. For '07, it represented 26% of the units we sold in North America.So, if you do the math on that for the last year and nine months, you're goingto come up with the number. My guess is somewhere around 50,000 or 60,000 AVPunits in the market. There's still a fairly good opportunity out there forunits that are non-AVP. And AVP really just means PC based with a hard drive init.

[David Katz:]

Okay.Thanks very much. I'll give someone else a chance.

[T.J. Matthews:]

Okay.Thank you.

[Operator:]

Thankyou. Next Robin Farley, UBS, your line is open.

[Robin Farley:]

Thanks.A couple questions

[T.J. Matthews:]

No. Ithink that the search remain along the lines of the same parameters that wepreviously discussed that we're looking for adding somebody to the organizationthat has international experience that can help us with completion oftransactions that it can act as an ambassador of the company to externalentities, including the investment community, of course, but also including ourcustomers, our peers, our partners and competitors at times, since we havebusiness relations with them. And we, of course, expect that we should be ableto have a very high standard of the kind of person that we're able to attractto the company. Absentour ability to do that here, probably with not too much more time to pass,since we are approaching a one-year anniversary and we really don't want to gopast that time. Absent our ability to do that, we of course have been verycomfortable with the internal makeup of our finance and accounting capabilitiesand so, we have a number of people that have expanded their responsibilities. Dannyhas taken on the CAO role and become the Principal Financial Officer. Pat hasexpanded his responsibilities not only with the Investment Community, butinternally by overseeing some of the forecasting and transactional activitythat we have. Peoplelike Eric Vetter and Sandy Shoals, manage the day-to-day operation, either onthe internal finance side or on the accounting side extraordinarily well. And so,I think that we can be fairly deliberate here and making sure that we still getthe right person that fits from a personality perspective. But werealize that a lot of time has passed, and so probably have a deadline onourselves, at the very latest a deadline on ourselves by our shareholdermeeting that would take place March 1st. And I would be surprised if it takesthat long.

[Robin Farley:]

Okay.Great, thanks. And then, I wanted to clarify two other things. You commented inyour outlook for the first quarter in the game ops that the number of unitsprobably would not go up sequentially in Q1 because of some units beingreplaced or removed. Can you just clarify what that is?

[T.J. Matthews:]

Sure,Robin. We have from time-to-time customers that remove product, as they areremodeling, etcetera and just coupled with where we're at Mexico. We probably garnished most of the low hanging fruit. Andnow we're moving into the second phase of that.

[Robin Farley:]

Okay. So,is there is it mostly one property where they are being removed?

[T.J. Matthews:]

No. Ithink it's a couple.

[Pat Cavanaugh:]

Thereare a couple things going on. It however, is not really cause for concernrelative to the performance in that area, but it is going to flatten as aresult the growth for this first quarter.

[Robin Farley:]

Okay.Great. And then, also then the other clarification that's just your commentsabout the market in Japan, and maybe the fourth quarter, coming in a little bit lessthan maybe where you expect a quarter ago. Can youtalk about what kind of unit expectations you have for Japan in '08? And, I guess

[Pat Cavanaugh:]

Yes.Probably similar expectations for Q1 to what you saw in Q4, Robin. Thedifficulty in Japan is you've got an entire market that's been forced to go througha change. And so I think the entire market is still feeling its way throughthis. And soit's probably going to take a period of time for it to digest these changes. Andso the honest answer is, I think, from everybody in the market is it's still alittle unclear.

[Robin Farley:]

But, so--

[Pat Cavanaugh:]

So, wewould anticipate that you'd probably see units start to pick up as we movethroughout fiscal '08 that I would keep expectations modest.

[Robin Farley:]

So, you'recomfortable that they won't go down sequentially in the December quarter?

[Pat Cavanaugh:]

It'shard to say. They very easily could. I mean, it really is an unpredictablemarket at this point.

[Robin Farley:]

Okay.Great. Thank you.

[Operator:]

Thankyou. Your next question, Joe Greff, Bear Stearns. Your line is open.

[Joe Greff:]

Goodmorning, T.J. Good morning, Pat.

[T.J. Matthews:]

Goodmorning, Joe.

[Joe Greff:]

I washoping, Pat or T.J, you can help us kind of quantify the AVP opportunity. As wesee it, it's fairly significant particularly with the 8960 platform. What isthe installed base for the 8960 platform in North America?And maybe you can kind of describe it in two ways, non-video poker and videopoker?

[Pat Cavanaugh:]

Well,Joe, if you look at the Game King is an 8960 platform and then we also have aplatform called the iGame, the iGame is the one that's generally speakingdedicated to video slots. And that platform, I believe, if my memory serves meright, at the time of our last census, we had 82,000 or 83,000 of those out inthe field. Those are probably the most susceptible, because the video poker hasa much longer life so down in the Game King platform, so probably, somewhere inthat 80,000 unit range.

[Joe Greff:]

Great,excellent. And what's the share count at quarter end, Pat?

[Pat Cavanaugh:]

316million.

[Joe Greff:]

Okay,great. And then my final question is, I think, the initial results ofguaranteed play at some of the station local's properties, I guess you coulddescribe weren't exactly great. Can youjust comment on some of the changes that you're making there and how you arelooking at that product?

[T.J. Matthews:]

I thinkthat test was just that; a test for us to see

[Joe Greff:]

Great.Thank you, guys.

[T.J. Matthews:]

Thanks,Joe.

[Operator:]

Thankyou. Next Steve Kent, Goldman Sachs, your line is open.

[Steve Kent:]

Hi. Ithink it was Pat, who mentioned that the gaming ops at the margins were goingto improve. It sounds like to the range of 60 to 62 from 58 to 61. Can youjust talk a little bit about that? Was it mix change? Is it expenses? Is itsome other driver that's out there?

[Pat Cavanaugh:]

Yes,Steve, it's largely mix. If you look at where we're growing, a lot ofnon-jackpot varying installations both in central determination market, soClass II, New York, places like that. Also, the MLP business is all non-IGTjackpot varying those all carry higher margins.

[Steve Kent:]

So,then this should, this trend of higher margins should continue. I guess, I'mnot sure why it should be a continued evolution to higher margins of that lineof the business, I'm assuming over the next few years?

[Pat Cavanaugh:]

To adegree, there's a limit to the margin on those items. But I think that 60% to62% is probably a safe range for the next year or so.

[Steve Kent -Goldman Sachs:]

Okay. And then justfinally on server-based, you're going to be introducing lots of product to G2E.Is that also going to include a discussion on pricing on server base and howthat would roll out?

[T.J. Matthews:]

Myguess is that, pricing will remain a private conversation that we're havingwith a number of prospective customers. It remains the same as we remarkedbefore in terms of the composition that there's going to be an opportunity forus to ship hardware. There'sprobably going to be some change in the way that we price game applications, sothey're worldwide as opposed to individually box driven as they've been in thepast. Certainly,there's the opportunity for us to deploy networks and charge for that as wellas their ongoing maintenance, an opportunity to introduce worldwide applicationsto that same floor, maybe even manage services in some instances. Andintellectual property is going to be required for certain other providers to beable to provide access to certain features. And so, I think, all of those arestill in the mix. Weremain, very much targeting some of the new properties that we anticipate beingpart of that big growth of '09 and '10 that's been identified that with thoseproperties. We actually have a much lower hurdle rate of adoption, becausethey're already going to be in the business of buying new gaming devices, newsystems. And actually our product is fairly cost competitive with what is thetraditional buy that they would be facing today in a non-SB environment. So, wefeel fairly comfortable that the pricing is going to sort itself out in a wayin which the operators feel as if they're paying for something that truly gainsthem efficiencies and increases the activity on their casino floor and at thesame time is fair to us for bringing what is really such an expensiveinnovation to the industry.

[Steve Kent -Goldman Sachs:]

Okay. Thanks.

[Operator:]

Thankyou. Next Celeste Brown, Morgan Stanley. Your line is open.

[Celeste Brown:]

Hi,guys. Good morning.

[T.J. Matthews:]

Goodmorning.

[Pat Cavanaugh:]

Goodmorning.

[Celeste Brown:]

T.J.,you mentioned that you thought you could break out of the range in the secondhalf of fiscal 2008, yet, you kind of are expecting lower replacementsthroughout the year. Can you tell us how you could break out what would drivethat, please?

[T.J. Matthews:]

Sure. There'sgoing to be a couple things that are game operations are going to continue togrow within our overall business. (inaudible) with the year-over-yearcomparisons up plus 9,600 units over this last year. But also the idea that webelieve that we're going to grow those unit count for the Q2 through 4 of thisyear as well. So I think that that's one area of growth. I think that you'regoing to continue to see growth and strength in our non-machine sales. There'sstill an opportunity for to us sell a lot of convergence in that existinginstall base. Intellectual property licenses to others are still a big sourceof relatively high margin dollars. The systems business continues to grow. Andso, we're going to grow there. You are going to see growth internationally aswe continue to expand our footprint in a number of new markets, especially,some of the emerging areas that are exciting in Asia and Latin Americaand us paying attention to what other new markets might exist. And thenyou're going to see, I think, an up tick in new unit demand in that back halfof the year. And not just in the back half of '08 but carrying through '09 andinto '10 because of what has been that identified expansion in North America,which quite frankly might be modest. I mean, the 117,000 units that have beenidentified in that one instance didn't include a lot of markets that are underconsideration, places like Florida wherecompact negotiations are taking place and a vote takes place at the beginningof the year, compacts in California, which have yet to be ratified by a popular vote. Thedebates are taking place in Maryland and Massachusetts, expansion that might take place in Illinois. So, there's a lot that could still happen that increasesnew machine demand even further. So,really, we're in pretty good position these days to have decent visibility toan improved outlook, but it's still not ready to declare like to get throughthese next couple of quarters, which are going to look probably a lot like thelast few quarters have looked. And then we'll be ready to really talk aboutwhat is potentially a breakout from that range.

[Celeste Brown:]

How doyou think about share buybacks from here? You would be opportunistic?

[T.J. Matthews:]

I thinkon both, just like the past, that we still are going to have a fairlydisciplined approach to returning some dollars to the shareholders kind ofirrespective of the share price just as we try to recalibrate our capitalstructure so that we optimize the weighted average cost of capital. But, at thesame time, there is a big opportunistic aspect to our share repurchase; you sawthat this last quarter. We purchased $507 million worth of shares in Q4, did soat an average price of $37.50. So, I mean, gives you a pretty good idea ofwhere we would get much more aggressive. Certainly, as we get greatervisibility, that threshold increases with time of where we would get aggressiveand so we will continue to monitor that as well. Therewas some thought that the share repurchase benefited this quarter. The Q4activity really didn't. The Q4 activity, of course, will benefit '08, but mostof the share count reduction that you thought was realized in Q4 was the “productof share” repurchase activities in Q1, 2 and 3. So, I think that's still partof what we do here. Thething that we feel very good about in our business is that at these low unitcounts, I mean, to the extent that we really want to move away from the boxed-shippedmetric as a company, given that so much of our revenue and profit is generatedotherwise, it's still a big metric. 41,000 units in North Americawas a disappointing one. Anddespite that, we still had record revenues, that we are able to produce 40-pluspercent margins at the EBITDA line, 30-plus percent margins at the operatingincome line, would have been at 20% operating income or at pre-tax margin hadit not been for our change in other income due to our share repurchaseactivity. So, we feel very good about where we in terms of the efficiency ofthe P&L. When wehave a revenue uptick, you're going to see dollars flow to the bottom much moreeffectively than maybe they even have in times past of kind of big revenueuptick. So, we feel pretty good about where we are. We're glad about thevisibility that we have and usually that kind of confidence bodes well in sharerepurchase activity

[Celeste Brown:]

Okay.Great. And then just one final question

[T.J. Matthews:]

That 4%to 8% range seems to be really where we still are that, earlier on that's goingto be so hit driven. We have one pretty good game this last quarter, but weprobably been a couple of quarters now since we've had a top-performing game. So,we're looking forward to a couple of new games being introduced in Q1. Andwe'll have pretty steady game introductions throughout the year, so that wehopefully can have top performers. But I think that 4% to 8% range is where youcan expect us to be.

[Celeste Brown:]

Okay.Thank you.

[Operator:]

Thankyou. Next SteveWieczynski, Stifel Nicolaus. Your line isopen.

[Steve Wieczynski:]

Hi.Good morning, guys.

[T.J. Matthews:]

Goodmorning.

[Steve Wieczynski:]

Onequestion for you

[Pat Cavanaugh:]

Possibly.But I think for '08, that's probably a good range to be in.

[Steve Wieczynski:]

I'mlooking down in like '09 and 2010 you could see that pushing more towards say themid-50s?

[Pat Cavanaugh:]

Possibly.I think

[Steve Wieczynski- Stifel Nicolaus:]

Okay. Great. Thanks,guys.

[Pat Cavanaugh:]

Thankyou, Steve.

[Operator:]

Alright.Thank you. Next Adam Steinberg, Morgan Joseph, your line is open.

[Adam Steinberg:]

Yeah,hi. Just two real quick questions

[Pat Cavanaugh:]

Correct.Adam, there were 2 million machines at the end of calendar '06. Some of thosewere Reg 5 already. So, in install base there was 2 million. It's now weestimate it's about 1,200,000. That is an estimate, but it's somewhere in thatrange.

[Adam Steinberg:]

Alright.And do you think all of those machines are going to eventually become Reg 5 orsome of those machines kind of lost to that market with close down to some oftheir facilities?

[Pat Cavanaugh:]

Well,what we see, and you saw, the market shrank by literally 800,000 machines orthere about. That's largely due to the uncertainty about the performance ofthose devices. So, as operators get more comfortable with the earnings of thosedevices, then hopefully you'll see that market start to grow again.

[Adam Steinberg:]

Alright.But do you think it'll get back to 2 million or is it going to be some fractionof there now?

[Pat Cavanaugh:]

I think

[Adam Steinberg -Morgan Joseph:]

Okay. And then, regardingyour international operations

[Pat Cavanaugh:]

It'sprobably about $4 million in currency. And the rest would be, its reallybroad-based growth across all areas, as you know, three years ago, we had veryfew, if any, game operations assets in the international market.

[Adam Steinberg:]

Right.

[Pat Cavanaugh:]

And nowwe've got an install base there that's probably close to 10,000 units. And thatwill continue to grow. Most of the opportunities that we see internationallywith new markets like Latin America and Asia, lot of those are game operations type opportunities.

[Adam Steinberg:]

So

[Pat Cavanaugh:]

Well,it is. But it is also mix. Keep in mind, so lighter units into Japan obviously favored the margin. And we've had very strongnon-machine revenues internationally as we start to see more and moreticket-in-ticket-out game conversions and the like. Those all carry highermargins. So, those are all benefiting the margin.

[Adam Steinberg -Morgan Joseph:]

Okay. Thank you.

[Pat Cavanaugh:]

Youbet.

[Operator:]

Allright. Thank you. The last question, Bill Lerner, Deutsche Bank, your line'sopen.

[Bill Lerner:]

Thanksguys, just one more follow-up. So, just want to try to understand something fora second. So, three of your four businesses -- international, game ops, non-boxsales are strong. That obviously continues into the next cycle. Domesticreplace and new unit expansion in the pipeline looks good, the domesticreplacement as you would and we would have expected is weak, maybe, new openinglike you say perhaps Palazzo timing pushes that out a little bit. So that sortof colors this quarter. And the stock is down 5-6%, whatever the number isright now. So, the market must be concerned that, that last prong, new domesticreplacement units aren't going to happen going forward would be my guess. Thatsaid

[T.J. Matthews:]

Sure. Ithink one of the things that's weighing on replacement sales over at least inour own internal forecast is the idea that there is so much new technology kindof waiting in the wings. And that unfortunately freezes the market a little bitin terms of pursuing decisions. Despite the fact that, all the products thatwe're selling now are clearly compatible with an SB environment, and I thinkthere is a wait-and-see mindset exist that will be clarified for most when youstart seeing announcements of customer commitments. And we anticipate thatcertainly in this fiscal year that we will have more than one customercommitment to SB gaming, that it is through technology that we can stimulatefuture replacement activity that at G2E you have an opportunity to see theinterface for 3.0, and I think that people will be very impressed becausehistorically people have measured us by the quality of our games. And people willwalk through that show or gone into other environment and try to predict what gamesthey think would be best and try to determine as a result which vendor might bebest situated for the coming period. I amvery comfortable with the fact that when you come to this show this year,you're going to see that we are the clear technology leader. You're going toleave that environment thinking that we are best-in-class in terms of beingable to develop new technologies. Theuser interface is going to come across as a very intuitive interface and bemuch like the interfaces that you're familiar with and a whole host of otherfavorite products that exist in other industries. And I think that doubt maybelingers as to will floors be networked and what kind of applications will bedelivered is going to be a debate for only a little bit while longer here. Ithink that maybe even as early as the next call but certainly maybe by the endof our Q2 call. That today is going to be largely called because people aregoing to see in the field 3.0 working on a test and I think starting to havethe opportunity to get excited about it because of firsthand viewings asopposed to hearing us talk about it so much.

[Bill Lerner:]

Allright. Thanks, T.J.

[T.J. Matthews:]

Thankyou, Bill. Well, I think that was our last question of the morning, so I wantto thank all of you for joining us on this call. This was a big year for us. Wehad all those records that we got to remark on and yet more importantly, havethe opportunity for us to achieve those records all over again in fiscal '08and beyond. And sowe're looking forward to that challenge and giving you continuous updatesthroughout the year. Thank you very much.