International Game Technology PLC
Q1 2012 Earnings Call Transcript

Published: 24 Jan 2012

[Operator:]

Welcome to International Game Technology's First Quarter and Fiscal Year 2012 Results Conference Call. [Operator Instructions] This call is being recorded. If anyone has any objections, you may disconnect at this time. I would now like to turn the call over to Matt Moyer, Vice President of Investor Relations. Sir, you may begin.

[Matthew G. Moyer:]

Thanks, Kim, and good day, everyone. Welcome to IGT's First Quarter Fiscal Year 2012 Earnings Conference Call. On the call with me today are Patti Hart, CEO; Eric Berg, President; and Pat Cavanaugh, CFO. Before we begin, I'd like to remind listeners our discussion will contain forward-looking statements concerning matters such as our expected financial and operational performance, including our guidance for fiscal 2012; our expectations for the economy in general and the gaming industry in particular; expected impact of the Double Down acquisition; 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 annual report on Form 10-K. All information discussed on this call is as of today, January 24, 2012, 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. Reconciliations of these non-GAAP financial measures to the GAAP measures we consider most comparable can be found in today's earnings release, which is posted on the Investor Relations section of our website, www.igt.com and included as an exhibit to the Form 8-K we furnished today with the SEC. With that in mind, I'll turn the call over to Patti.

[Patti S. Hart:]

Thanks, Matt, and welcome to everyone. I would characterize the first quarter as a demonstration of the strength of our global business model and the diversity of our profitability. While there was limited activity in the new and expansion market, we generated $100 million of operating income by leveraging the power of our gaming operations and our international businesses. We continue to benefit from the improvements we have made in our gaming operations. We have increased our installed base of MegaJackpot games for 3 straight quarters and we are seeing increases in the revenue per unit year-over-year. On a consolidated basis, our installed base is up 3,000 units compared to this year's first -- last year's first quarter. Internationally, we are making meaningful progress by positioning our sales teams closer to our customers and by equipping them with localized content. In the quarter, our international product sales revenues were up 21% year-over-year due to growth in both unit and average selling price. As anticipated, our North American product sales are off to a slow start in what is historically our softest seasonal quarter. We expect to gain momentum throughout the year given the planned increase in new openings and a more active replacement market. This quarter, our high-performing games are driving higher average selling prices on our premium price boxes, a result of our decision to drive business in market segments where we believe we have the most compelling differentiation. Overall, we remain on track to meet our fiscal year 2012 operating objective. With that, I'll ask Pat to share with you some of the financial details of the quarter. Pat?

[Patrick W. Cavanaugh:]

Thanks, Patti, and good morning, everyone. Our first quarter adjusted income from continuing operations were down 18% to $15 million or $0.17 per share versus $62 million or $0.21 per share in last year's, primarily due to decreased North American product sales. Total revenues for the first quarter decreased 1% to $446 million year-over-year. All periods presented in this release have been adjusted to classify the Barcrest Group in discontinued operations. Gaming operations revenues were $265 million in the first quarter, up 5% versus last year on increases in our interactive business and the installed base. For the quarter, we generated an average of $53.11 in revenue per unit per day, which is up 1% compared to last year's first quarter. IGT's consolidated installed base ended the first quarter at 55,600 units, up 3,000 units from a year ago and 1,700 units sequentially. Gaming operations gross margin was 61% in the first quarter, down from 63% for the same quarter last year, primarily due to unfavorable interest rate changes and jackpot expense. Consolidated product sales revenues decreased 9% to $181 million for the quarter compared to $198 million first quarter last year. Globally, we recognized 7,300 units in the quarter, down 12% from last year's first quarter, primarily driven by lower domestic new and expansion units. Total machine sales revenues were down 2% over the prior year quarter to $116 million as a 22% drop domestically was nearly offset by a 31% increase in international machine sales revenues. The North American decrease was attributable to a 25% drop in units, partially offset by a 5% increase in average selling price. The international growth was a result of 9% increase in recognized units and 20% growth in average selling price. Consolidated non-machine revenues were down 18% to $65 million, primarily due to a 35% decrease in domestic parts and conversion kit revenues. Product sales gross profit was $92 million, a 17% decrease from the $111 million recorded in last year's first quarter due to lower domestic volumes and product mix. First quarter operating expenses were $152 million or 34% of revenues compared to $149 million or 33% of revenues in last year's first quarter. Cash equivalents and short-term investments, inclusive of restricted amounts, totaled $587 million at December 31, 2011. Contractual debt obligations totaled $1.7 billion at the end of the quarter. Inventories were up $23 million sequentially as we ramp up production for new openings coming throughout the remainder of the year. In the first quarter, we generated $65 million in operating cash flow, down from $102 million in last year's first quarter on lower net income and higher tax payments. Also in quarter, we repurchased 263,000 shares of common stock at an average price of $16.74 per share for a total cost of $4 million. We anticipate being back to at least our normal repurchase pace for the remainder of the year. With that, I'll turn it back to Patti.

[Patti S. Hart:]

Thanks, Pat. Before we get back to the quarter, let's turn for a moment to our recently finalized acquisition of Double Down Interactive. We believe this is a responsible transaction. It closely aligns new forms of gaming with our industry history and with our core business. Based on a revenue-sharing model, we expect to participate in this fast-growing segment as we have in our gaming operations businesses historically. This acquisition adds new distribution channels for our game content, the first of which is Facebook. We respect and value the voice of our customers, most of which or most of whom have been supportive of this strategic decision to stay ahead of changes in the gaming entertainment landscape. Convergence is becoming a reality and our participation is no longer optional. In concert with our valued customers, we will seek to expose a new demographic of patrons to casino-style gaming in a way that acknowledges our history, celebrates the future of gaming and benefits all of our stakeholders. In the coming quarters, we anticipate providing you with more insight into the operating metrics of our growing interactive business. I'll now ask Eric Berg to share his comments.

[Eric A. Berg:]

Thank you, Patti. There are 2 things I want to cover today

[Patti S. Hart:]

Thank you, Eric. Amidst the inherent fluctuations that arise from serving a global customer base, we believe it is in the best interest of our stakeholders to strike the appropriate balance between short-term and long-term objective. We operate with the continuous improvement mindset at IGT every day, but we manage our business on an annual basis. While we are off to an expectedly measured start, we remain on track to achieve our 2012 operating target. In our conversations with customers, we continue to sense increasing optimism with respect to how they are feeling about our product and our customer-first operating principle. Our core objectives for 2012 remain consistent as we look to grow revenues, build on the momentum of our internal improvements, leverage our income statement and energize our interactive business. With our 2012 objectives on plan and making progress, we are reiterating our adjusted earnings guidance from continuing operations of $0.93 to $1.03 per share, not including any potential impact from the Double Down acquisition. With that, we thank you very much and we'd like to take your questions.

[Operator:]

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

[Mark Strawn:]

I have 2 questions. First, you could give us a little more detail on the game ops yields in the quarter. What really drove that mix shift and how you expect that to trend going forward. And then one follow-up to that is the larger-picture question, how are you viewing returning capital to shareholders at these levels? Should we expect any more acquisitions or should we expect the return of capital to start to accelerate?

[Patti S. Hart:]

Let me talk a little bit about the return of capital and then I'll have Pat share with you some of the details on margin. I mean our expectation is that we are in a planning mode of $100 million a year of share buybacks and we expect to move that back, Mark. We were fairly limited in the quarter given the transaction that we were negotiating to the days that we can buy back. So we -- I mean it was purely just a capacity issue for us in the quarter. It wasn't an intent issue about preserving cash. So the Double Down transaction will certainly absorb a portion of the cash, but the cash we have on the balance sheet, we expect to be back to more normalized levels in the quarter.

[Patrick W. Cavanaugh:]

And Mark, relative to a yield in the game ops business, 2 things are going on there. Most of the increase, both sequentially and year-on-year, came in the lower-yielding category, i.e., lease ops types of units like you have in New York being a big piece of that. But the primary driver of lower yields sequentially is just the normal seasonality in our business and it fell right in that range somewhere in the 8% -- 7% to 8% kind of range. So we would anticipate seeing sequential improvements in yield due to the seasonality of business as we move into this quarter and then June. And then September, generally is the seasonally strongest.

[Operator:]

Your next question comes from Felicia Hendrix with Barclays Capital.

[Felicia R. Hendrix:]

Patti, on the North American unit shipments in this quarter's results, you and Eric mentioned they were below planned but they should ramp. I was wondering if you could elaborate there and maybe help us think about the quarterly trajectory. And then just on Double Down, that acquisition was higher than your strategic outlays from -- that you mentioned in the Investor Day. Just kind of wondering how you view further acquisitions and also when we might get some guidance on the impact of Double Down.

[Patti S. Hart:]

Yes. So we -- on the guidance of Double Down, we would expect in April when we'll be consolidating their performance that you'll have a lot more visibility. I mean we just finalized the transaction last Friday, so we're just a couple of days into the work ourselves. But I think you can expect to hear from us in the April earnings season a bit more about what we expect as far as impact to earnings, but more importantly a bit more detailed visibility down into the performance of the interactive division, so that's kind of where we're headed on that. Eric, comments on replacement units?

[Eric A. Berg:]

Our sense is that there's -- we continue to have confidence that we're going to continue to maintain our share and grow share over the upcoming quarters. So there's nothing in the underlying performance that's telling us that there's any share issues. So I think we're just driven by the overall robustness of the market. And we think we're going to grow with the market, continuing to believe that we'll be in the 45% to 50% for new openings given the increase that we typically get for new openings, driven by our poker platform. And then given the historically longer length for replacement for poker, we tend to be in the mid-30s in the replacements share and that's what we continue to expect will happen in the upcoming quarters. I mean part of the shortfall we saw this quarter was we had -- if you look at our first quarter of last year, we had a big new opening of units recognized from The Cosmopolitan, which we didn't overlap this year. So it's kind of the lumpiness that we continue to see in new openings going forward.

[Patti S. Hart:]

Yes, I think, Felicia, last -- if you look at the same quarter last year, we were at about a 27% ship share on the replacement units in North America. We expect this quarter to be North of 30%, so we actually feel like a year-over-year comparison we picked up share. So it's really just being represented, I think, in softness generally in the replacement cycle.

[Felicia R. Hendrix:]

Okay, so nothing like shifted this quarter?

[Patti S. Hart:]

No.

[Eric A. Berg:]

And we continue to get very strong feedback from the marketplace on our products.

[Operator:]

Our next question comes from Robin Farley with UBS.

[Robin M. Farley:]

Two questions. One is just -- I just want to clarify, you mentioned Macau. That was an order that you got in the December quarter but not shipped, right? I just want to clarify that. And then also what your market share was in Macau? And then just in terms of domestic replacement sales, it was maybe a little bit below what we have been expecting for the quarter and it sounds like you're not expecting a share shift going forward. I guess just if you could give us some color on what gives you comfort that in terms of your visibility on domestic replacement sales that it will trend up from December quarter levels?

[Patti S. Hart:]

Yes, so I would say on the replacement -- and I'll ask Pat and Eric to add comments on Macau. On the replacement, Robin, it's really just all about looking at our backlog. And so what we are always looking at is forecasting out and looking at what the backlog looks like as we end the quarter going into the previous quarter or the future quarter. So I mean we're comfortable based on backlog and proposal rates and take rates and activity indications, indications of intent to purchase from customers, we're comfortable with where we're forecasting for the year on units that obviously drive revenue that then drives down to the earnings line. So we're comfortable with our annual number that we have been targeting for the year. And that's just based on feedback from the marketplace and actual orders on hand. So comments on Macau, Pat and Eric?

[Patrick W. Cavanaugh:]

Yes, I think on Macau, it was largely sales to LVS, Robin. It's all relative, right? 150 or 200 units is a big order internationally, generally speaking. And most all of the uptick in Asia Pacific was due to Macau.

[Robin M. Farley:]

I'm just trying to get a sense of your market share at the new property in Macau?

[Patrick W. Cavanaugh:]

In Macau, we still have relatively low market shares, sub 20%, but that's what we're working hard to change with the localized content, creative ways to bring our MegaJackpot product there to help them obviously drive greater slot revenues.

[Patti S. Hart:]

But on the replacement side of things in Macau, we're still running sub 20%.

[Robin M. Farley:]

And then, Patti, just circling back to your comment about domestic replacement sales and kind of looking at your backlog and intent to purchase and orders on hand and all that, would you say that what you're looking at for the March quarter versus what you saw at this time for the December quarter, you can see that there's going to be a significant uptick from December quarter levels?

[Patti S. Hart:]

We feel like it's headed North. I think it's a matter of the delivery always determines our revenue recognition. So as far as looking at our backlog orders in hand, proposals out, pending decision, we feel like it's headed north. I think it's a question of how far north and how fast.

[Eric A. Berg:]

Yes, and I think the way to think about it, Robin, in terms of the unit flow in total, on a consolidated basis is a nice step-up in the March quarter and then kind of consistent in the June quarter and then would appear that the fourth quarter, as is quite often the case, is going to be the strongest quarter, not due to any one thing other than just timing of openings and the like.

[Operator:]

Our next question comes from Joseph Greff with JPMC.

[James Omstrom:]

This is Jim Omstrom for Joe. Patti, you stated earlier on the call that for the most part of your casino operator customers have -- are supportive of recent Double Down acquisition announcement. Do you get any sense that some of your largest casino operators have initiatives and I guess ambition in the online gaming market will hold back or decrease orders going forward?

[Patti S. Hart:]

Well, I mean I think it's always hard to predict behaviors. I would say that what we see and I think it's really been underscored in the last week headed into ICE in London is that this notion of convergence is a reality. And I mean I think everyone who, today, enjoys gaining revenue whether you're a casino operator or you're a manufacturer, you're a distributor, you're a content developer is sorting out their role in the future world of gaming. And I mean we've seen more announcements of cloud-distributed content from competitors over the last week. So the notion of our core business is being redefined. It's being redefined by patrons and our customers and our competitors, both historic and legacy competitors and new competitors. And so I really believe we're in a transition period, honestly, where everyone is sorting out what their role is. I think we've been very clear from the beginning, which is our core competency as a company is game content development. That is our core competency. It has been our core competency. It is what we will leverage going forward and we view the Double Down transaction as one more distribution channel for our content, which actually creates more R&D efficiency for our Box business because we're able to spread the R&D across more distribution channels. So it's very good. It connects to our core business. I believe there are others that have historically not been in the game development business will -- that will elect to be in the game development business as they think about where the value will be extracted going forward in this business. That -- we have not changed our mind on what our core competency is and where we're going to derive value as a company.

[Operator:]

Our next question comes from Cameron McKnight with Wells Fargo.

[Cameron Philip Sean McKnight:]

Patti, can you talk about some your initiatives to increase capital efficiency and what more can we expect from you on that front and then I've got a follow-up.

[Patti S. Hart:]

Yes, well, I might let Eric and Pat add some comments. Eric's really more focused on improving our return on invested capital across the entire company, so I'll ask him to make some comments. And then we'll fill in where there is a void. Eric?

[Eric A. Berg:]

Yes, well, we're continuing to look at our Game Operations business because that's one of the places where we deploy a significant amount of our capital. So the whole idea is to get tremendously strong hardware out there in the marketplace that we think is going to have an enduring life in the marketplace. So for example, we have our Center Stage platform. We have a 103-inch 5-person display, we have a 70-inch, 4-person unit and we have a duo 2-person unit. And these games do have a half-life and what we've -- the strategy is essentially to get a 5- and a 4- and a 2-position unit in the major casinos. And then as the play kind of naturally atrophies in some of the new introductions, we move it from the 5-version platform to the 4 to the 2 over time. And then we continue to refresh, I mean once again, leveraging Patti's idea that our business is really around game development, we continue to refresh the pipeline of new games. So that's one major driver of the business. And then we're doing that across all the other sources of our capital expenditures. So our property, plant and equipment, we're just doing traditional operational excellence-type of initiatives to minimize the capital that we invest and sweat the assets so that we can preserve the capital to invest in the things that are really differentiating IGT in the marketplace.

[Cameron Philip Sean McKnight:]

Okay, great. And it's -- Patti, it sounds as though you believe the market was weak generally in the December quarter. Is that right? On the replacement side?

[Patti S. Hart:]

I mean, it's -- yes, I was going to say from a replacement -- from a North American replacement perspective. I mean if you look at the international part of our business both game ops and international product sales, we're strong. We really didn't see weakness in the product sales part of our business internationally. So it's very finitely focused on the North American replacement market right now. And yes, we saw weakness generally in our channel checks. I'm sure you all did your own as well. So yes, we feel like our share picked up year-over-year but on a weaker market.

[Operator:]

Our next question comes from Harry Curtis with Nomura.

[Harry C. Curtis:]

Two quick questions, Pat. First question is if you could talk a little bit more about the decline in your game ops margin by a couple hundred basis points. I was surprised to see it dropped as much as it did and you've explained it through the change in interest rates, so a little more explanation there would be helpful. And then Patti, a quick question on the Double Down acquisition and it goes back to why is roughly $100 million acquisition price the right price? What assumptions were you making about the size of the market, your share and margins?

[Patrick W. Cavanaugh:]

Harry, on the first question on margins in game ops, if you look at and normalize last year's Q1, so last year's Q1's margins benefited from an uptick in interest rates during the quarter. This year, unfortunately, interest rates were suppressing the margin, so it's really the combination of those. So that's taken into consideration, margins would be relatively flat year-on-year.

[Patti S. Hart:]

Yes, and on the Double Down acquisition and again I'll ask Pat to add some comments because his group did a lot of the work on the valuation with the banks, but -- it's a new market so we looked at a number of things. We first -- we obviously had to look at the comps in the marketplace, which there are limited number. You have Zynga trading publicly, you have the Playdom transaction that took place a year or 15 months ago or something like that. So we did look at public comps. It's a very different valuation methodology. It's really about looking at billings and then looking at the lifetime value of the customer once they're into the social network. So it's a very different valuation methodology than we would historically look at. We did our traditional discounted cash flow analysis. And Pat, you can share with them the detailed assumptions around that, what we looked at. I think, and we looked at really what kind of trading multiples that you're seeing in the marketplace today on businesses of this ilk with this sort of business model. So doesn't fit naturally into the way we value our core business, which is part of what's driving us to provide you a bit more information and transparency going forward so that you can understand how we're thinking about the business differently. So do you want to talk about the assumptions around the DCF?

[Patrick W. Cavanaugh:]

Sure, sure. I mean we took a typical DCF approach as one of many metrics that we evaluated when we did this. We obviously flexed that and did a lot of sensitivities. We used more aggressive discount rates given that it's a new space, comes with greater risk. But at the end of the day, it's a new space that's growing very rapidly. And so on a multiple of EBITDA basis, obviously it's -- we paid a higher multiple than it would for the core business, right? But if we shared with you the comp set that we compared that against, I think you would agree that we come in very favorably compared to that comp set, the most public of which is Zynga.

[Harry C. Curtis:]

Out of curiosity, did you make any assumptions about whether Internet poker is approved at the federal versus the state level?

[Patti S. Hart:]

Yes, we did not. So the transaction was valued assuming no approval of online gaming of any sort, wager-based -- real money wager-based gaming in the United States. So it stands on its own assuming that it's a social gaming play alone.

[Operator:]

[Operator Instructions] Our next question comes from Steven Kent with Goldman Sachs.

[Steven E. Kent:]

It's Steve Kent. So can you just talk a little bit about your R&D and SG&A? I think I'm -- it looks like it's been rising and I just wanted know where some of that cash is being spent, which specific areas? And also given the Double Down acquisition and given that looks like, by just about everybody's measure, that this quarter was lighter than expected, how did the board balance the potential for a very significant share buyback with lots of liquidity in the market today as the stock trades lower versus doing this transaction?

[Patti S. Hart:]

Yes, so I'll start off and let my fellow employees here add. I would say the tradeoff from the board's perspective is really driven by recommendations from management. So I mean we, as a management team, take responsibility. We obviously look for our board's support. But the tradeoff really, Steve, was really about time-to-market. I mean we completed this transaction. It happened to come in a tough quarter because we were in our year-end earnings. Our earnings came so late into November that it was tough to layer them on top of one another, but it really was about speed to market, having the opportunity with Double Down that likely would not have been an opportunity if we would have delayed it for 90 days. So it's balancing all of that and knowing that we can be in the market again this quarter, either back to our normal rates of buying and perhaps covering up the shortfall from last quarter at the same time. So it's really about looking at speed to market and balancing all of those things and assessing whether or not we felt like we would actually lose the opportunity for a transaction if we delayed it. So it's all of that information, but based on I think recommendations and assessments by the management team. From an R&D and SG&A perspective, R&D actually not up. I mean, R&D down sequentially, down year-on-year. We've been very, very focused, as you hear me talk about every quarter, on R&D efficiency. We continue to mind R&D efficiency to find ways to reinvest and things like our cloud products and in various new products and we do it by containing our R&D spending. So not up at all. SG&A, up primarily related to the Entraction transaction and absorbing the operating expense associated with Entraction, which, again, we expected. That was a platform purchase for us. We knew we were going to acquire a platform and eliminate a significant amount of the revenue that was in jurisdictions that we did not want to serve, but we made the acquisitions knowing that we needed a poker platform to round out our x U.S. online strategy. So that's really where it is. So R&D, I think trending really nicely given the output.

[Eric A. Berg:]

Essentially, the mission that Patti has me on is to drive efficiency across our operation and use that to create capacity to give back to the shareholders or invest in rebalancing the business. So for example, we're going to continue to drive efficiency in North America. We think there's big growth opportunities. Internationally. So as we globalize the country, there's going to be the some shifting of that savings to the international business to capture the growth that we think is out there. R&D is an example where you not only drive an efficiency within R&D, for example by driving towards you common platforms across our development studios, but we're also getting better market insights so we get better input into the process so that we have a higher hit rate for success. So we understand that the business is going to continue to be, one, we're going to have to drive efficiency in our core cost base and we're riveted and focused on doing exactly that.

[Steven E. Kent:]

But if I were to look, let's say, 5 years ago at your R&D budget and, I don't know, 50% was on -- focused on new replacement machines or participation games in the U.S. and 30% was international, maybe 20% was on new initiatives. Where is the split now versus then? That's what I'm trying to figure out especially given your -- go ahead.

[Patti S. Hart:]

No, I would say the split moves around based on the needs of the business. I think if we moved the clock back 4 or 5 years, we actually had R&D spending that had ballooned up above the $200 million range. So we're down significantly historically. We're flat at about $200 million a year. We have been flat for, I don't know, 3 or 4 four years, Pat, right? Three, 4 years. We move it around based on the needs of the business. So if we dial it up because we are getting some new systems release out, we dial it up on the system side. But we do that by adjusting it in other parts of the business so that it doesn't look incrementally. So it really is chopped up every quarter and we have stopped really thinking about it, I think, as finite as you're thinking about it and we really think about it as matching it up against the strategic plans of the company, whether that's in online or whether that's in our cloud initiative or whether it's in systems or whether it's in boxes for our product sales or whether it's in boxes for the MegaJackpot business, right? So we just don't think about it as finitely. We know we have things we have to deliver every quarter and every year and we have $200 million to deliver them and that's what we're focused on.

[Eric A. Berg:]

Yes, just to give you a little bit more color. I mean essentially, we understand how much R&D our P&L will support. And then against that level of R&D, we run our portfolio management approach where we look at the projects and we've got -- always have more appetite to spend than we have capacity to spend. So we make sure that we just draw the cut line at the $200 million and make sure that all of those projects have a significantly higher return on investment than our average whack. In that way, we're confident that, that accumulated, that investment is going to drive up our return to the shareholder. So that's kind of how we do it, a classical portfolio management approach. We're confident that, that forces us to continue to invest in the highest potential opportunities for the company.

[Operator:]

Our next question comes from Dennis Forst with KeyBanc.

[Dennis I. Forst:]

I wanted just ask about the sales of new machines during the quarter. Can you tell me which markets or which casinos got new machines so we have an idea of future quarters and when the new casinos opening around the world will hit?

[Patrick W. Cavanaugh:]

Sure, Dennis. Let me flip to the page where they highlighted that for me. So it looks like the larger ones that were more noticeable were the Miami High Line and the Northern Edge Navajo in New Mexico.

[Patti S. Hart:]

That was the bulk of it. There's 2 where the bulk have been new in expansion.

[Patrick W. Cavanaugh:]

Kind of onesie, twosies.

[Patti S. Hart:]

Yes.

[Dennis I. Forst:]

So Aqueduct, the second phase of Aqueduct, when was that?

[Patti S. Hart:]

Yes, that's all in our game ops, right? So we... Aqueduct has been in our game ops.

[Dennis I. Forst:]

And the Ohio casinos will be first -- will come up in the next couple of quarters?

[Patti S. Hart:]

Yes.

[Patrick W. Cavanaugh:]

That's correct.

[Dennis I. Forst:]

Okay. And international, were there any large pieces internationally?

[Patrick W. Cavanaugh:]

I'm just looking. So we mentioned the one to Macau, in LVS Macau. And then I don't have the specifics to the customers, but we had a number of units shipped into Panama, Argentina and Uruguay, Latin America. And then in Europe, it was just a small year-on-year increase with no fallout of the...

[Operator:]

Our last question comes from Shaun Kelley with Bank of America Merrill Lynch.

[Shaun C. Kelley:]

Just wanted to ask real quickly on the product sales side because I was a little confused in the quarter, and I apologize if you already addressed this. Trying to understand if ASPs were up 5%, just what rate on the mix to get gross margins? I think it looks like they were down -- they were a little bit below our expectations. So trying to understand the mix there and the level of promotional activity on those boxes because that was a little bit lower than I was looking for.

[Patti S. Hart:]

Sure. I think 2 things and I'll talk about one then I'll hand it to Pat. I mean one is that significant mix -- significant participation in the mix at the Universal Slant, which is just an early box. And early in their life, they just have lower margins until you really manage the cost out of the box, right? So a little bit lower margin. Higher-priced product, but a little bit lower margin in the Universal Slant as it's early in its life and as it gets a little bit later in its life and things have been amortized from the upfront, cost of margins rise on that. That's a very typical new product introduction experience. They go out a little lower margin and they grow in margin over time. Pat, anything else?

[Patrick W. Cavanaugh:]

Yes, and I think you have to consider last year's first quarter is a comparison that you're looking at. It would positively impact as we had certain of the promotional activities that we're running last year ending during that quarter. And so you're bringing those credits back off the balance sheet to the P&L. So last year's margins were probably positively impact so the delta's not quite as large as it looks at the high end. And then the other thing is we had lower parts and conversion sales during the quarter and on such a low number volume of units. That weighs on the margin as well, i.e. you don't get the contribution of those high margin -- as much high margins non-box revenue.

[Patti S. Hart:]

Yes, we also had the benefit last year in the quarter of significant sale into Mexico at margins in the 90 percentile range, which really benefited the margins. So your year-over-year comparison will be skewed a bit by that.

[Shaun C. Kelley:]

Okay, that's really helpful. And then I guess the second was actually just to finish up on R&D. It's actually, I guess, to your point, Patti, down 9%, it looks like year-over-year. So was just wondering is the $200 million target still the number so we would expect that to ramp up, I guess, as to kind of be matched more closely to new product sales? Or how should we think about that because it looked a little bit below the run rate that you guys have actually been running at relatively recently?

[Patti S. Hart:]

Yes, it has been running -- it did run a little bit lower. I don't expect that we'll bank a little bit of that, I think. And I think you can expect to pick it -- see it pick up a bit but not enough to make up for the shortfall in the quarter for spending. It was intentional. I mean we're spending, as Eric said, only on high-return projects in the company and really prioritizing that way. And we, I think, the team, the engineering team, has just done a remarkable job mining efficiency out of that R&D organization because the capacity output that is resulting from this spend is significantly above where it was a year ago or a year before that. So I mean we feel comfortable with this spending level right now given the capital that's flowing into the market to purchase product.

[Patti S. Hart:]

Okay, great. Well, listen, we want to thank you again for joining us early and most of you are live, late in our day's here in London. We're really pleased that you've taken time out to hear from us today. We enjoyed sharing the progress report, and we thank you for your continued interest in IGT. Thanks very much.

[Operator:]

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