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GTECH Announces Q2 2001 and Year-To-Date Results

Commenting on the quarter, GTECH CEO and President Howard S. Cohen said, ``In a turbulent and difficult economy, we achieved results and exceeded expectations in terms of revenue growth, operating profit contribution, earnings per share, and free cash flows. We remain confident in our ability to deliver performance in line with our full year guidance.''

GTECH Senior Vice President and Chief Financial Officer Jaymin B. Patel said, ``We delivered strong earnings for the second quarter of $0.55 per share on a fully diluted basis. This was higher than our previous expectations, and substantially ahead of the $0.18 per diluted share that we reported in the second quarter of last year, excluding the impact of special and additional charges.''

Operating Results:

Revenues for the second quarter of fiscal 2002 totaled $236.6 million, an increase of 3.9% over the $227.6 million of revenues in the second quarter of fiscal 2001. Net income was $16.6 million, or $0.55 per diluted share, compared with net income of $6.3 million, or $0.18 per diluted share in the second quarter of last year, excluding the impact of special and additional charges. The results for the second quarter of last year included a special charge of $40.0 million, or $0.70 per diluted share, in connection with certain contractual obligations and a value assessment of the Company's business operations, and additional charges of $5.2 million, or $0.09 per diluted share, which principally related to the Company's Restricted Stock Plan. After the special and additional charges, the net loss in the second quarter of fiscal 2001 was $21.3 million.

Revenues for the first six months of fiscal 2002 were $471.5 million, compared with revenues of $469.6 million for the same period last year. Net income was $35.7 million, or $1.16 per diluted share, compared with net income of $26.5 million, or $0.76 per diluted share last year, excluding the impact of special and additional charges.

Second Quarter:

Service revenues were $209.6 million in the quarter, representing a 2.6% increase over the $204.2 million of service revenues in the same quarter last year. This increase was driven by growth in same store sales in the domestic lottery business, along with the effect of the recent multi-state jackpot activity, partially offset by the weakening of several major foreign currencies against the U.S. dollar and the expiration of certain electronic benefits transfer contracts.

Had last year's average exchange rates prevailed throughout the most recent quarter, the Company estimates that service revenues would have increased by approximately 8% compared to the second quarter of last year.

Service gross margins improved from 30.2% in the second quarter of fiscal 2001 to 31.5% in the second quarter of fiscal 2002, primarily driven by higher multi-state jackpot activity, partially offset by start-up losses on new lottery system installations in Ukraine and Colombia.

Operating expenses in the second quarter of fiscal 2002 were $37.0 million, compared to $42.1 million of operating expenses incurred in the second quarter of fiscal 2001, excluding the prior year special and additional charges, principally driven by the continued execution of the value assessment initiatives and increased emphasis on improving productivity and efficiency.

Year to Date:

Service revenues for the first six months of fiscal 2002 were $420.2 million, representing a 1.6% decrease from the $426.8 million of service revenues in the same period last year. This decrease primarily reflects the weakening of several major foreign currencies against the U.S. dollar, which were partially offset by higher multi-state jackpot activity.

Had last year's average exchange rates prevailed throughout the first six months of fiscal 2002, the Company estimates that service revenues would have increased by approximately 3% compared to the same period last year.

Product sales in the first six months of fiscal 2002 were $51.4 million, an increase of $8.6 million from the $42.8 million in the same period last year, primarily driven by the sale of terminals and software to the United Kingdom.

Service gross margins declined to 31.4% compared to 33.1% in fiscal 2001, primarily driven by start-up losses on new lottery system installations in Ukraine and Colombia.

Product margins improved to 15.1% this year from negative 6.2% last year. Prior year margins were negatively impacted by cost over-runs on system installations in New South Wales and Israel.

Operating expenses in the first six months of fiscal 2002 were $75.7 million, compared to the $89.2 million of operating expenses incurred in the first six months of fiscal 2001, excluding the prior year special and additional charges, principally driven by the continued execution of the value assessment initiatives and increased emphasis on improving productivity and efficiency.

The Company's effective income tax rate was 38% for the first six months of fiscal year 2002.

``We expected the second quarter and half-year to be challenging and it was,'' said GTECH CEO and President Howard S. Cohen. ``In spite of that, there is good news to report. The results for second quarter and year-to-date performance demonstrate the continued strength and value of our underlying business,'' continued Cohen.

Cash Flow and Investments:

During the first six months of fiscal 2002, the Company generated $187.2 million of cash from operations. This cash, together with $181.0 million of borrowings under the Company's credit facility, was principally used to fund the purchase of $118.1 million of systems, equipment and other assets relating to contracts and to repurchase $186.3 million of the Company's common stock.

At the end of the fiscal 2002 second quarter, the Company had $252.0 million of revolving credit available under its $300.0 million credit facility.

Financial Outlook:

For the fiscal year ending February 23, 2002, the Company now expects total revenues to grow 7% to 8%, compared to fiscal 2001. Service revenues are expected to decrease slightly compared to the previous year, reflecting the continued depreciation of certain foreign currencies. Product sales are expected to be in the range of $165 to $175 million, with approximately 70% expected in the second half of the year.

For the full fiscal year, the Company continues to expect service gross profit margins in the range of 32% to 33% and product sale gross profit margins in the range of 20% to 22%.

The Company continues to believe that it can deliver earnings per share in line with previous guidance of $2.70 to $2.75 per share.

For the third quarter of fiscal year 2002, the Company anticipates year- over-year total revenue growth of 20%, driven by product shipments to the United Kingdom. The Company expects earnings per share to be in the range of $0.71 to $0.73, compared to $0.53 for the same period in the last fiscal year.

Highlights:

During the quarter, GTECH announced that Lottery Technology Services Corporation (LTSC), a joint venture in which GTECH is a 44 percent equity partner, signed a contract with Taipei Bank to operate the National Lottery in Taiwan under a five-year license. ACER, Inc., a leading computer manufacturer and information technology company in Taiwan, holds a 56 percent equity stake in LTSC.

In addition, the Company signed a contract to provide online lottery and instant-ticket services with Loterie Nationale in Luxembourg and successfully launched a new online lottery in Jamaica.

Also in the quarter, GTECH announced that it had been selected by the Texas Lottery Commission to enter into negotiations for a new lottery operations and services contract for the Texas Lottery's integrated online and instant-ticket games. The Company also signed a two-year contract extension with the Wisconsin Department of Revenue (Wisconsin Lottery).

Since the close of the quarter, GTECH was the sole bidder for a new video- lottery central system in Rhode Island.

``We are properly focused on regions of the world to capture value-creating opportunities,'' said Cohen. ``We have strengthened our commitment to growing our lottery customers' revenues through focused and disciplined marketing programs.''

``Our primary mission remains securing growth in our lottery transaction- processing business. It also includes tapping into new markets where emerging economies can make use of our infrastructure assets and capabilities to process financial transactions. Our expectations in this area are reasonable, achievable, and will become meaningful to the Company over the next three to five years,'' concluded Cohen.

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