Gaming equipment major Bally Technologies Inc. (BYI) announced better-than-expected fiscal fourth-quarter results yesterday after market close. The company posted net income of $33.2 million or 58 cents per share compared to $31.3 million, or 54 cents in the year-ago quarter, and beating the Zacks Consensus Estimate by 3 cents or 5.5%.

Bally Technologies is a leading gaming systems company, which designs, manufactures, operates and distributes advanced gaming devices, systems and technology solutions worldwide. The company’s product line includes reel-spinning slot machines, video slots, wide-area progressives and class II, lottery and central determination games and platforms. The company also offers casino management, slot accounting, bonusing, cashless and table-management solutions, and also operates the Rainbow Casino in Vicksburg, Mississippi.

The Las Vegas-based company’s sales slipped 17.1% year over year to $205.1 million. The decline was caused by a weak North American gaming machine replacement market as customers battered by recessionary conditions continued to reduce discretionary spending.

Revenue from Gaming Equipment dipped 31.2% year over year to $78.2 million as new gaming device sales declined 31.5% to 5,043 units, partially offset by a 6.9% rise in average selling price (ASP) to $14,245. Gaming Operations revenue grew nearly 3% year over year to $70.8 million, primarily driven by higher sales of premium revenue units. The Systems segment decreased 12.6% to $47 million on relative softness in technology-related capital expenditure decisions by casino and gaming operators.

Bally’s gross margin expanded 490 basis points (bps) year over year to 60.6%, primarily driven by higher rental and participation revenue growth and lower costs in the Gaming Operations segment. The margin also benefited from higher ASPs, lower material costs, increased conversion kit sales and lower international goods and service tax related to the Gaming Equipment segment.

Meanwhile, operating income contracted 8.9% to $51 million, while operating margin grew 220 bps to 24.9%. The operating margin growth was driven by improved gross margin coupled with a 14.4% decline in SG&A expenses to $47.1 million as a result of company’s cost control efforts, partially offset by a 6.2% rise in R&D expenses to $18.8 million.

The company ended the quarter with free cash flow of $130.8 million, compared to $49.8 million in the year-ago quarter. The robust growth in free cash flow was primarily the result of healthy earnings performance coupled with liquidation of inventories, which reduced by 43.8% year over year to $52.9 million at the end of the quarter. The company also stated that it repaid $50 million on its revolving credit facility and $5 million of capital-lease obligations, while buying back 266,000 shares of its common stock for approximately $7 million.

Meanwhile, larger rival International Game Technology (IGT) reported second-quarter earnings of 22 cents per share last month, topping the Zacks Consensus Estimate by 22.2% amid indications of stability in the sector. Another rival, WMS Industries Inc. (WMS) also reported better-than-expected quarterly earnings of 49 cents per share last week, 2 cents ahead of the Zacks Consensus Estimate.

Moving forward, Bally expects performance to be affected by the downturn in North American gaming machine replacements. Accordingly, Bally anticipates earnings to range between $2.25 and $2.50 per share. The guidance is in-line with the Zacks Consensus Estimate of $2.36 per share, which has edged down a penny over the past week as 1 of 7 covering analysts lowered expectations.
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