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Gaming Guru

Rod Smith

Alliance Gaming Beats Wall Street Estimates

11 August 2004

Although Las Vegas-based slot machine maker Alliance Gaming Corp. beat Wall Street earnings projections in the second quarter, analysts said Tuesday the company, like other slot makers, faces faltering demand for the balance of 2004 and 2005.

"They beat a low number. I'd call the quarter just OK," Eric Hausler, gaming analyst for Susquehanna Financial Group, said.

Alliance posted net income from continuing operations of $15.3 million, or 30 cents per diluted share, up 8 percent from $14.1 million, or 28 cents per diluted share, a year earlier. Wall Street analysts had projected earnings of 24 cents a share.

Earnings before interest, taxes, depreciation and amortization increased to $38.1 million, up 16 percent from $32.8 million in the second quarter of 2003.

Revenues from continuing operations increased to $162.8 million, up 41 percent from $115.7 million in the same quarter a year earlier.

More important for understanding the company's performance, it cut earnings projections for fiscal 2005 from $1 a share from $1.20 a share to $1.30 a share, Goldman Sachs analyst Steve Kent said.

"The fiscal '05 guidance is also predominately back-end loaded with 75 percent of earnings expected to come in the second half of the year," he said.

Alliance officials said in a conference call with Wall Street analysts that it lowered projections for the coming fiscal year because it expects sales to remain stalled while the MGM Mirage-Mandalay Resort Group and the Harrah's Entertainment-Caesars Entertainment mergers go through regulatory approval.

"They've finally shaken up their numbers so they're realistic and achievable, but for the next few quarters, they're going to be uninspiring," Hausler said.

Deutsche Bank analyst Marc Falcone said there are still high levels of uncertainty about Alliance's future earnings, and those of the manufacturing sector.

Hausler said the same problems face all slot machine manufacturers, including a slower slot machine replacement cycle, substantial delays before gaming expands at racetracks in Pennsylvania or tribal casinos in California, and uncertainties about whether American Indian casinos in Oklahoma will be able to operate electronic bingo machines.

Hausler said Alliance is also likely to feel continued competition from International Game Technology, WMS Industries and Aristocrat.

"(However), we think we are near the bottom in shares of Alliance, which are now trading at 36 percent of their 52-week high. Investors probably have another three quarters of uninspiring results, while the new CEO starts to clean house in October and get Alliance moving in the right direction again," he said.

In July, Alliance announced board member Richard Haddrill would take over as chief executive amid concerns about a weak stock price and a spate of investor lawsuits. Haddrill will assume the new post Oct. 1, succeeding Robert Miodunski, who will continue as a consultant.

Alliance closed Tuesday at $13.69, up $1.60 or 13.23 percent on 4.4 million share, triple normal trading volume.