International Game Technology PLC
Q2 2011 Earnings Call Transcript

Published: 22 Apr 2011

[Operator:]

[Operator Instructions] I'd like to turn the call over to Mr. Matt Moyer, Vice President of Investor Relations. Thank you, sir. You may begin.

[Matt Moyer:]

Thank you, and good afternoon, everyone. And welcome to IGT's Second Quarter Fiscal Year 2011 Earnings Conference Call. On the call with me today are Patti Hart, President and CEO; Pat Cavanaugh, Chief Financial Officer; and Eric Tom, Chief Operating 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, our expectations for the economy in general, and the gaming industry in particular, expected interest expense reductions from the new credit facility, recent interest rate swaps and our strategic operational and product plans. Actual results may differ materially from the expected results and reported results should not be considered as indicative of future performance. Potential risk 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, April 21, 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 with the Form 8-K which we furnished today to the SEC. With that in mind, I'll turn the call over to Patti.

[Patti Hart:]

Thanks, Matt, and good afternoon, everyone. The results that we reported today are both a reflection of the advancements we have made in improving our profitability and internal processes and evidence of progress made towards strengthening the financial health of IGT. We continue to leverage and diversify what we believe to be the best business model in the industry. While at the same time, we continue to capitalize on the inroads we have made in markets around the globe. Our revenue is beginning to better reflect the progress we have made in improving game performance by leveraging the capability of new platforms, both in gaming operations and in product sales. Looking ahead, visibility remains limited, and we expect continued pressure from the macroeconomic environment in the second half of the year. With that said, we are focused on the assets of our business that are within our control, keeping our customers and our partners at the core of every decision we make. We expect our current trends of moderate revenue and earnings growth to continue for the remainder of this year and into fiscal year 2012. I recently returned from a trip to Asia, and I can tell you that I am quite enthusiastic about our international business opportunities. We are beginning the deployment of resources closer to our customers and expect to make significant progress across all dimensions of our International business, games and systems in Asia, Latin America and the Caribbean. We are working hard for you, our shareholder, in every corner of the globe. With that, I would like to ask Pat to provide you a few more details on our financial performance. Pat?

[Patrick Cavanaugh:]

Thanks, Patti, and good afternoon, everyone. Our second quarter earnings from continuing operations totaled $70 million or $0.23 per share versus $26 million or $0.08 per share on last year's second quarter, the details of which are provided in this afternoon's press release. This quarter, there wasn't much noise in the numbers, and we are seeing improvements in many areas. Generally speaking, we saw improved revenues in margins. We had better game ops -- game performance in our International business, especially in gaming operations, was a nice contributor. Our total revenues for the second quarter increased 1% to $492 million, of which 56% were generated by gaming operations and the balance came from product sales. Gross margin for the company was 59%, up about 300 basis points year-on-year, mainly due to improved geographic and product mix. We had another improving quarter in our Gaming Operations business with sequential improvement in both the installed base and yield. Gaming operations revenue were $278 million in the second quarter, which was up 7% versus the first quarter and down only slightly year-on-year. Sequentially, we saw moderate growth in the installed base and a higher mix of MegaJackpot games. Gross profit and margin were flat compared to last year. We generated an average of $53.62 in revenue per unit per day, which is up $2.66 compared to last year's quarter and up $3.24 versus the immediately preceding quarter, due to an increased mix of newer, higher-yielding gains, higher play level and expected normal seasonality. Our yield should continue their modest sequential improvement assuming normal seasonal trends continue. IGT's installed base ended the second quarter at 57,100 units, up 400 units versus the first quarter and down 1,600 units versus a year ago. Year-over-year, decreases were largely related to the charitable bingo facility closures in Alabama and lease unit conversions to for-sale in Mexico. These were partially offset by international installed base increases. Approximately 82% of our installed base is comprised of variable fee games that earn a percentage of machine play levels rather than a fixed daily fee. For the remainder of the year, we expect our gaming operations in installed base to continue its moderate growth. Consolidated product sales revenue increased 4% to $215 million for the quarter, compared to $207 million in the second quarter of last year, primarily driven by stronger non-box sales, particularly Network Systems. Worldwide, we recognized the sale of 10,200 machines during the quarter, up 9% quarter-on-quarter and down 1% from last year's second quarter. North American machine sales revenue were up 5% over the prior-year quarter to $78 million on an increase of 500 units. North America's average selling price was down 4% year-on-year and down 8% from the first quarter, reflective of the current promotional environment. North America's product sales gross margin was up 600 basis points year-over-year but down 200 basis points sequentially. The average selling price reduction was the primary factor on the lower gross margin, but lower nonstandard costs such as obsolescence and rework drove margin improvement over the same quarter last year. Given the current selling environment and volume levels, we expect the average selling prices to rebound modestly from this quarter's level, mainly due to mix but margins to be under pressure for the remainder of the year. International product sales revenue totaled $80 million on volume of 4,500 units recognized for the current quarter compared to $83 million and 5,100 units in the prior-year quarter. In our International core business, excluding the lower-priced pub and tavern market, we had a record second quarter for revenues. In addition, we also had an all-time record core profits -- product sales gross margin and total gross margin. Internationally, the average selling price was up 10% year-over-year to 13,000 due to favorable geographic mix, specifically higher shipments into Argentina and Australia. Worldwide non-machine revenues mainly from the sales of systems, conversions and intellectual property fees grew 8% to $78 million for the quarter or 36% of product sales, compared to $72 million and 35% of product sales in the prior year. Second quarter operating expenses were $161 million, up 4% compared to last year's quarter, excluding the $53 million Alabama impairment and roughly flat with last year's percentage of total revenues. Total SG&A was up 10% in dollars and 100 basis points as a percentage of revenues due to the expansion of our interactive gaming initiatives and higher variable compensation. We expect a modest upward trend in SG&A for the remainder of this year as we invest in people and processes necessary to take advantage of new business opportunities. Cash equivalents and short-term investments, inclusive of restricted amounts, totaled $373 million at March 31, 2011, compared to $249 million at September 30, 2010. Contractual debt obligations totaled $1.7 billion at the end of the quarter. In the second quarter, we generated $161 million in operating cash flow, up from $108 million last year, mainly due to higher earnings. Subsequent to the end of the quarter, we entered into a new $750 million, five-year credit facility with a syndicate of banks replacing our previous $1.25 billion credit facility. The new, unsecured facility provides a lower, all-in, drawn interest rate, extends the maturity to April 2016 and allows for additional capacity and structural flexibility. We currently have no outstanding borrowings under the credit facility. The new facility will reduce interest expense, including deferred offering cost amortization by about -- approximately $13.5 million on an annual basis. Additionally, in April, we entered into arrangements to swap fixed rate interest for variable rate interest, which is expected to save an incremental $7 million on annual interest expense at today's rates. This concludes my prepared remarks regarding our second quarter. Thanks for your time and attention, and back to you, Patti.

[Patti Hart:]

Thanks, Pat. At the beginning of our fiscal year, we set out with a clear plan

[Eric Tom:]

Thank you, Patti. We are taking advantage of our diverse revenue sources by leveraging our industry-leading Gaming Operations business, improving our product sales and systems products, building overseas opportunities and growing our Interactive business. We participate in just about every facet of the industry where IGT can provide differentiated products. This helps us produce more consistent financial results when any one area in the industry is lagging. While Patti highlighted some of the strides we have made in areas of strategic focus, I thought I would drill down a little deeper into key drivers that are enabling these initiatives. First, in gaming operations, our quick changeover platform based on the new G23 box, including our exclusive 3D Multi-Layer Display technology, is demonstrating its expected value. We can deploy new games onto the platform onto the floor in just a few hours and it significantly reduced our conversion cost. This keeps the unit on the floor more days in the quarter, which keeps the capital on the floor and earnings with no interruptions. The placements of the G23 boxes are up 16% year-to-date, and we have over 3,000 additional units on order. The Wheel of Fortune franchise continues its long history of positive returns. We have been deploying the Wheel of Fortune Triple Spin onto the Center Stage platform, and in many instances, seeing meaningful increases in daily play levels versus older versions. Sex and the City continues to perform well, and we have the big Diamond sequel coming behind it soon. We are anticipating the upcoming releases of the Hangover, Ghostbusters, Dark Knight and Dirty Dancing, which is being placed on floors as we speak. In our domestic Wide Area Progressive business, while overall coin-in was down 4% year-over-year, reflective of the lower installed base, the coin-in per machine per day was up nearly 15%. We are committed to having a strong pipeline of games, and I know our studios are busy creating the next string of big hits. In product sales, the new Universal Slant Top is designed and engineered to help our partner customers upgrade their floor with a product that can be all things to all players. This singular box can be ordered with video poker or stepper or video reels with Multi-Layer Display and subsequently converted to any one of the other game platforms with ease. Casino operators like the box because of its ease of service, its refined harnessing and improved ventilation. Early in the second quarter, we began selling our much awaited G23 version 2 platform, an improved version of our MegaJackpot slot machine. On a macro level, we are still very much in a promotional environment for the Replacement business and it may become more so in the coming quarters. To-date, we have had some well-received promotions that, generally speaking, have increased our ship share and generated sales in other areas as we bundle our offerings. To help offset these promotions, we continue to gain efficiencies in our manufacturing processes. In the quarter, we had a meaningful drop in non-standard costs due to lower inventory obsolescence and rework. Over the past two years, we have removed significant amounts of cost previously embedded in our business by simplifying and standardizing our products and processes. It is a testament to our people that we are meeting or exceeding previous profit margin levels on much lower historical volumes. Increases in our intellectual property revenues were also a positive contributor to the margins in the quarter. All that said, for the remainder of fiscal year 2011, we see very limited opportunities for new and expansion shipments in the For-Sale business. For fiscal year 2012, there is more optimism but still no certainty. Included in our product sales, our Systems business is also performing well. Year-to-date, our consolidated systems revenues have grown in the high single-digit range. We are recently awarded or have installed our sbX system not only in many locations throughout the U.S., but also in places like Macau, Malaysia, South Africa, the Philippines, Portugal, Mexico, the Bahamas and Chile. We currently have 65 sbX contracts in our sales funnel from all over the world, indicative of potential future revenue opportunities. This is another area of our business that we anticipate seeing earnings leverage as the overall gaming environment improves. We anticipate continuing to grow globally. For example, we had a record second quarter for our international product sales in the core casino market, led by Latin America and Australia. In international gaming operations, our installed base grew and now represents approximately 30% of our consolidated base of games. While these games typically have a low overall yield, they do generally produce strong margins and returns. The geographic reach of our international operations is a competitive advantage, and we are definitely gaining momentum. Overall, in the second quarter, we took positive strides towards our 2011 objectives, and while the future is especially uncertain right now and visibility continues to be limited, we anticipate leveraging our diverse revenue base and making smart investments in the right places that should produce consistent financial returns over the long term. With that, I'll turn it back over to Patti for her closing comments.

[Patti Hart:]

Thanks, Eric. And I agree, setting our sights on our long-term performance is in the best interest of all of our stakeholders. We remain cautious on the outlook for the remainder of this year due to possible increased macroeconomic and market pressures. That said, we're always prudent and conservative, focused first on managing what is within our control. For the current fiscal year 2011, we are raising our earnings guidance to $0.84 to $0.90 per share, excluding the $0.04 of special items for the first quarter. In summary, we are generating strong operating cash flow. We are improving our Gaming Operations and Product Sales businesses. We are harvesting opportunities around the globe, and we continue to execute against our mission of becoming a global, full-service partner in the interactive space. With that, we thank you and we'd like to take your questions.

[Operator:]

[Operator Instructions] Our first question comes from Mark Strawn with Morgan Stanley.

[Mark Strawn:]

Just a quick question on the game ops installed base. You mentioned you have a higher mix of MegaJackpot games in the mix now. Could you just talk broadly about your WAP mix, and if you're seeing that stabilize across the base domestically and then just a quick follow up to that.

[Patrick Cavanaugh:]

Sure, we have, Mark. I won't comment on specific numbers but directionally, we have seen the WAP installed base start to stabilize and improve slightly in terms of the installed base. Performance obviously is much better with a new line of both great performing games and a little help from the macro environment. I think, on the margin, we see consumers freeing up a little more money.

[Mark Strawn:]

Is it really the new game content that you're seeing drive the increased coin-in on the WAP footprint?

[Patrick Cavanaugh:]

I think that's probably the biggest driver, Mark, but I think we have, over the last couple of quarters, seen a return to more normal seasonal trends which we haven't seen and going on in 2 1/2 years, probably.

[Mark Strawn:]

One final question. As you look at the installed base again, are you seeing an impact, again, just across the base generally from your competitors, pricing participation games with fixed fee components? And if so, are you responding to that in any way or doing any promotional items to maybe offset the impact there?

[Eric Tom:]

Mark, we are seeing -- this is Eric, we are seeing our competitors compete with lower caps. We found that if we continue to build the right type of games, the games that really draw the player into playing them, we think we can compete really on profitability because our games would just take more coin in. We aren't planning any significant promotional activity to respond because we do believe one of the advantages we have as a business is that, you know, 82% of our MegaJackpot base is free to grow with the market growing, with the economy growing. So we like that advantage and we want to hold on to it.

[Mark Strawn:]

Great. Thanks a lot.

[Operator:]

Our next question comes from Carlo Santarelli with Wells Fargo.

[Carlo Santarelli:]

Two questions. The first one is, kind of, when I look at the domestic footprint for the quarter, for the March quarter, in terms of expansion, it looked very barren and obviously, you guys posted a significantly bigger number than you did -- than last year's calendar 1Q. I was just curious, was there any one or two orders that were somewhat meaningful or was it a lot of kind of small off-the-radar things? And then a follow-up on margins, if you don't mind.

[Patti Hart:]

Carlo, are you asking specifically about the new and expansion part of this...

[Carlo Santarelli:]

Yes, just the 1,500 new and expansion units, exactly.

[Patrick Cavanaugh:]

Yes, I think Gun Lake was probably the most notable one.

[Carlo Santarelli:]

And then obviously, you guys put up great margins in the quarter, especially in the product sales segment. And based on your comments, I kind of get the sense that maybe we should not expect to see that level repeated going forward towards the end of the year. Is there incremental that you could add to that and maybe comment on how we should be thinking about R&D and stuff going forward as you pursue some of the International business Patti had mentioned?

[Patrick Cavanaugh:]

Sure, Carlo. First on the margins and product sales, I would assume, you know -- I think you're probably safe if you assume a run rate domestically of say 52%, somewhere in that, plus or minus, probably seems like a good range. And then on -- as far as R&D spend, I think, you know, we're working hard to try and keep that relatively flat so I shouldn't assume a big ramp-up there.

[Patti Hart:]

Yes, I think one of the things in the R&D space, one of the activities that we went through this past quarter was a redeployment of some of our system's R&D efforts from the U.S. to China. Difficult choices, right, when you have to reduce your workforce in the U.S, but just really continuing to mine the R&D efficiency in a way that allows us to reinvest that R&D in new parts of the business. So we are continuing to hold in the $200 million the year, $51 million, $52 million a quarter range, and expect that we can accomplish what we have in front of us with those kind of numbers by mining our own efficiencies.

[Carlo Santarelli:]

Great. Thank you very much. Nice quarter.

[Operator:]

Our next question comes from Chris Woronka with Deutsche Bank.

[Chris Woronka:]

Can you comment a little bit about the North American pricing and how that tracks through the quarter? Just kind of curious as to whether you saw any changes in some of what your competitors did as the quarter ended or what you may have done differently throughout the quarter?

[Patti Hart:]

Let me comment first and then you add your comments. So I'm going to comment first, and then I'll let Eric and Pat add theirs. In the quarter, the ASPs that we experienced were a combination of promotional activity and mix. We're expecting our mix in the back half of the year to be much more -- have much more of a representation of our MLD product. I think the MLD product was down at about 37% or so this year, and we had about -- I can't remember, I'm going to guess the number, 1,500 units that slipped from lease ops. Is about that number? Yes. So we had about 1,500 units that slipped from lease ops in the product sales at very low ASPs. So the ASPs are a combination of those things so we would expect that we'll see those come back a bit in the back half the year. The competition is doing what the competition is doing, and we respond where we think it's responsible to respond, but we don't respond in areas where we feel like it's not in our shareholders' best interest. So we always balance the need to maintain our real estate on the floor with what we think is returning to our shareholders' value. So that and we'll continue to make our decisions that way.

[Patrick Cavanaugh:]

And to add to Patti's comments -- so we are seeing some of our competitors' price lower than our for-sale games are in the market at. What we find is our promotional activity is very disciplined. And we stick to a particular formula. We really look to promote our best games and discount at a reasonable level. Even though our competitors might be substantially lower than that, we find that our customers resonate with the value proposition of quality games at a fair price. So we don't feel like we have to compete to that level. But as Patti says, we'll do what's responsibly necessary to compete and stay competitive because it is a very competitive environment.

[Chris Woronka:]

Okay. That's helpful. And then just a question on online gaming, and I'm not really overly focused on the U.S. piece of it, but globally, how do you see your spending tracking there? You know, are you -- can you kind of share with us directionally what you're doing and how much -- how significant that's going to be as a part of your overall CapEx plan?

[Patti Hart:]

Yes. So it's not a big part of our CapEx plan because it's primarily R&D which we expend. And you know, if -- we have been redirecting R&D spending from other parts of our business into the online space so that we can increase the quality and quantity of product coming to market, which we have successfully done, I think you can expect that now to start floating a bit with revenue. So as the revenue opportunities come, a lot of our efforts come coincident with that. So if we have it our way, it will be a bigger part of our R&D spending in 2012 than it is in 2011 as new markets open and present themselves to us, and we have an opportunity to grow our top line as a result of product development. So I would say, it's not in a significant category in the overall, but it is a significant part of the growth in R&D.

[Chris Woronka:]

Okay, great. Thank you very much.

[Operator:]

Our next question comes from Joe Greff with JPMorgan.

[Joseph Greff:]

I'm sort out-of-pocket and I was a little bit late so I hate to ask a question that's already been answered, but the incremental EPS and the full year guidance range, Patti, that was attributable to what? I didn't quite get that. Is that lower interest expense associated with the new credit facility?

[Patti Hart:]

The increase in guidance generally, Joe? Is that what you're asking?

[Joseph Greff:]

Yes, and my question is, is it revenues-related? Is it margin-related? What exactly is that related to the recently revised EPS guidance for the year?

[Patti Hart:]

Yes, I would say it's a little bit of both but probably more driven by margin expansion than revenue growth. And it's a combination of product margins and just managing costs in line and part of that cost is the credit facility, but it's not all of it.

[Joseph Greff:]

Great, excellent. Nice work, guys. Thanks.

[Operator:]

Our next question comes from Steven Kent with Goldman Sachs.

[Steven Kent:]

Two questions. One, Patti, you said you just got back from Asia, I believe. Could you just talk about the competitive environment in that market, and what you're doing differently to re-enter into that market? And then separately, I thought that somebody said something about that you were spending more of your -- maybe your systems expense to invest in China? Is it that you are targeting the Macau market with more R&D? Or is it that you're moving your R&D on systems into China, just a move of your expense and your people?

[Patti Hart:]

Sure. So your second question is, it is just increasing our resources in our China R&D center. We went through a workforce reduction in our U.S.-based systems development group and redirected that work to our R&D center in China. So that's really what that is. As far as the competitive environment in Macau -- I mean, I'm not telling you anything you all don't know, it's just a very different competitive environment. You know, you're competing more with tables, you're competing with junkets, you're competing with a very different business model. So a couple of things we're doing, I think, to readdress that market, we're working on some more localized themed product, which we expect to introduce to the marketplace, number one. And number two, we're taking a look at some of our systems feature functionality derivatives, is the way I would describe it, to make certain that it encompasses the Asian marketplace and the needs of the Asian marketplace. So I would say, we're not moving towards focusing on the table games market again. We're more focused on themes. The competitive environment is so different there because we're fighting from a lower place in the market shares stack so we think there's actually more room for us there than there is in some of the markets where we have more outside market share. So we expect to put together a plan in 2012 for our Asia group and expect that they will pick up market share in 2012.

[Steven Kent:]

And Patti, is that -- are you just talking about Macau or are you talking about broadly, Japan -- the Japanese market and maybe some of the other Asian markets?

[Patti Hart:]

Not Japan but I would say Singapore, Malaysia, Macau, generally speaking.

[Eric Tom:]

Philippines.

[Patti Hart:]

Philippines, yes. Definitely the Philippines for us, so yes.

[Steven Kent:]

And in those markets, you face some of the same challenges or are there those markets do you feel more comfortable with where your position is?

[Patti Hart:]

We'll never be comfortable, Steve, but we definitely have a different market position in some of them we have in Macau. Macau, we probably have a little more room for market share growth but we have a lot room for market share growth in Singapore and Malaysia, the Philippines and we're mining all of those.

[Steven Kent:]

Okay. Thanks.

[Operator:]

Our next question comes from Steven Wieczynski with Stifel, Nicolaus.

[Steven Wieczynski:]

A question for you, Pat. The SG&A, you said that's basically going to be ramping up here, or basically going up a little bit over the next couple of quarters. Can you just give a little bit more detail in terms of what that's going to be directed towards?

[Patrick Cavanaugh:]

Yes, it's like -- some of its unfortunately due to slightly higher professional fees in the area of litigation, a lot of lawsuits unfortunately going on out there. But the other is just natural as the business improves, we all get compensated but these give us variable comp. And most of that flows to SG&A, so that's largely what that reflects.

[Steven Wieczynski:]

And then is it fair to say, going forward -- I mean, you guys are generating some pretty solid free cash flow. Given this environment, is that still basically going to be going mostly back towards reinvesting in the company at this point versus continued debt repayments or even share repurchases?

[Patrick Cavanaugh:]

I think we continue to look at our capital deployment very thoughtfully with, the first, in best uses been putting it back into the business, particularly, any place we can find to grow or improve the Game Operations business, or go out and if we can acquire technology or talent or intellectual property that's helpful to our efforts. And then I think to the extent we have excess cash left over after we've addressed those things, then we're looking at how best to get it back to the shareholders. But obviously, share buyback's been one of a couple of ways.

[Steven Wieczynski:]

Okay, great. Thanks, guys.

[Operator:]

Our next question comes from Cameron McKnight with Buckingham.

[Cameron McKnight:]

First of all, Pat or Patti, your unit shipments, or specifically, your domestic replacement shipments in the quarter were pretty good, especially compared with some of the possible results from some of your competitors. Do you think that you've taken -- possibly taken share this quarter?

[Patrick Cavanaugh:]

Hard to tell, Cameron. My gut would say I feel like that but we'll know in a few weeks when everybody's reported and we go through the same exercise. I'm sure you do that and see what that looks like.

[Patti Hart:]

No, I was going to say -- and I don't mean to cut you off, Pat. I was going to say, I think it's so important for us that we focus on revenue share as much as we're thinking about unit share because you can count units, but units at a lower ASP don't matter as much or lower margins don't matter as much. And so we've been very focused on units at a reasonable price and I think we'll continue to be focused on that. So we feel good like maybe this time, we had a little bit of a pickup -- that doesn't mean that it's sustainable, so you have to really keep your head down and focus on the business.

[Cameron McKnight:]

And as far as guidance is concerned, you've take guidance up by $0.04. So is it fair to assume that, that implies that the trends you've seen in this quarter are not one-offs and not simply sales brought forward from either third or fourth quarters?

[Patrick Cavanaugh:]

Yes, I think if you go through the guidance, Cameron, I think what you're going to quickly realize is, what basically we're saying right now, where we sit, the back half looks like a lot the first half.

[Patti Hart:]

Yes.

[Cameron McKnight:]

Got that, that's great. And then finally, Patti, as far as your R&D spend is concerned, it's been roughly constant in dollar terms for the last few years but the way in which you're spending it has changed considerably. Could you give us some color there on how you're looking to direct those -- direct that spending?

[Patti Hart:]

Yes. So I think that's actually been one of the changes that our key technology officer has been very successful at accomplishing, which is really looking at R&D dollars is more fungible than we had historically looked at them, moving them on a dynamic basis around the business to match market opportunity. So we don't manage our R&D in its high as silos [ph] to it was once managed. So I do think that it's probably more about gaining efficiency -- we've been very, very successful at moving the common platforms, common tools, seed to market of the products, seed through casting, seed through compliance, much better than it has been. And all of that stuff, chews up R&D money, it's not necessary. So we've been able to, I think, gain some efficiencies. We've been able to treat it more fungibly and move it around so that it matches more closely with opportunities, manage it a little bit more dynamically and we'll continue to do that. I think as we move forward, you'll find us moving more R&D spending to the online world. You'll also finding us moving more R&D spending into applications. So in order to really leverage our past R&D investments in our infrastructure systems, really now is about delivering localized interesting entertaining content and applications. So we'll continue to move it around, and I think we've gotten much better. There's still some more room to go there.

[Cameron McKnight:]

Great, thanks.

[Operator:]

Our next question comes from David Katz with Jefferies.

[David Katz:]

You may have commented on -- it looked like the ASP on your unit sales domestically was a little bit lower than what we had, and it looked like it was down a little bit. And I have what, you know, might be an odd question about pricing. We've seen demand be kind of weak for a number of years now and yet pricing has held up, I think, surprisingly well or remarkably well. Is there not a moment in our future where pricing does start to come down a little bit if, particularly given Patti's commentary about the idea of not focusing so much on units, but really generating total profit, right? Is there a possibility that lowering price would induce some more demand at this stage?

[Patti Hart:]

I mean, we don't think -- we've tested, we think we've tested the price elasticity as have our competitors. And so, we think it continues to be rational so again, to go back to our ASPs, I mean, the reduction is a combination of some promotional work and mix because the MLD component this quarter was lower and much lower than we expect in the forward quarter. And we're always looking at the combination of opportunities in low-yielding markets from a box perspective. I mean, our ASPs frankly, internationally, were up in the quarter, quarter-on-quarter and year-on-year. So it's really about striking the balance. And so I don't think one quarter indicates a trend. I think it indicates the reflection of that particular quarter. And next quarter, I think it will move in the other direction slightly based on our projection of MLD.

[Eric Tom:]

I'll add that the bulk of the customers continuously -- a natural desire in their part is that the overall industry have ASP decline. But when you really look under the covers, what they're really looking for is the right value equation, because at the end of the day, they're looking for the right game to buy. And so if we continue to put out the right games that are attractive to the marketplace, we continue to believe we'll be able to hold that pricing. And we believe our customers value that much more than another $2,000 on a game.

[David Katz:]

Thank you very much.

[Operator:]

Our next question comes from Robin Farley with UBS.

[Robin Farley:]

And I may have missed a few talks about this more specifically earlier on the call, but could you talk about your expectations for replacement sales for the remainder of the year and how that may or may not have changed? And then also, you mentioned that MLD and with the lower portion of sales this quarter than what you'd expected, and how do you expect that to trend in the next -- do you expect that to continue or is this just an anomaly in the March quarter?

[Patrick Cavanaugh:]

Robin, as it relates to replacement sales, I think if you look at our guidance, at the low end, it assumes kind of flattish to the first half. At the higher end, it assumes some uptick there but it also assumes at the higher end, some uptick in both the units and the play levels in the Gaming Operations business, but still, I think, relatively modest. It's still probably the area of least visibility in our business so...

[Robin Farley:]

Is that product sales or the game ops?

[Patrick Cavanaugh:]

Product sales.

[Patti Hart:]

Replacement sales in particular.

[Patrick Cavanaugh:]

Yes, particular replacements. And of course, the back half of the year, we'll have, by definition, less newer expansion opportunities. So -- I apologize Robin, I forgot your second question already.

[Robin Farley:]

The MLD as a percent of sales in this quarter was lower than expected. It sounds like it was down year-over-year, it was lower than expected. I'm just kind of trying to understand if that was just something unique to the quarter.

[Patrick Cavanaugh:]

Yes, I think that was more a function of just -- you know, to Eric's earlier point, we tend to be very disciplined around these promotional activities that we have. And I think in our fiscal Q2, the focus wasn't quite a much on MLD as it probably will be going forward.

[Robin Farley:]

So as a percentage of sales, that will probably grow a certain level?

[Patrick Cavanaugh:]

Yes, that's our view right now.

[Patti Hart:]

Yes, we expect it to be up in the back 2 quarters. And again, it's a result of -- promotional activity drives the mix, right? So you see our promotional activity resulting in the mix we had in this quarter and it will result in the mix we have in the next quarters.

[Robin Farley:]

Alright, great. Thank you.

[Operator:]

Our final question comes from Dennis Forst with KeyBanc.

[Dennis Forst:]

Patti, you had just come back from the Far East, and my question was regarding electronic tables in the Far East. They seem to be quite popular in Singapore, getting more popular in Macau. This has been kind of a niche business, at best, for you in the past. Are there any plans to increase your activity in that regard? Or is there not a big enough market to attract your attention?

[Patti Hart:]

You know, Dennis, I think that there is so much opportunity for us there to take share on the slot floor, which is our core product and what we do best, but that's probably where we're going to focus first. I don't feel a need to increase our participation in a niche market when I feel like we're underrepresented in our core. So we'll continue to focus on taking more share in the core slot market in Asia. And when we feel like we've exhausted that at some point, which should be a nice problem to have, then I think we think about other ways to grow in that space but probably not at this stage.

[Dennis Forst:]

Given that you've got so much room to grow there, maybe not as much room to grow in the U.S. and to have seen some of your electronic tables, the roulette over -- I think I saw it at the Wynn, is the U.S. more likely to see you make an effort in the electronic tables?

[Eric Tom:]

Well, I think in the U.S., Dennis, the -- it's a good product to have. It fills up our product portfolio. Our customers like the Roulette. It's probably the most popular version of table games, but I'm not sure it's something that we push. We don't usually drive promotions around it. It fills the portfolio.

[Patti Hart:]

It fills the portfolio but we're not going to lead with it.

[Dennis Forst:]

Okay, thank you very much.

[Patti Hart:]

Okay. Well, listen. I want to say thank you very much for joining us. Thank you for your great insightful questions, and thank you for your continued support of IGT.

[Operator:]

This concludes today's conference call. Thank you for attending. Thank you for attending today's conference.