PREVIEW-Bally Technologies Q4 EPS likely to edge past Street

* What: Q4 results

* When: Wednesay, Aug 12

* Strong results expected from systems and gaming ops

* Weak demand for slots may bottom-out, slow recovery seen

By Mihir Dalal

BANGALORE, Aug 11 (Reuters) - Bally Technologies Inc's (BYI.N) fourth-quarter earnings are likely to edge past market expectations as strong performance at its casino systems and rental segments offsets weak demand for slot machines.

The higher-margin systems and gaming operations segments have help up relatively well for the company even as its gaming equipment segment, which includes sales of slot machines, has suffered from weak demand as its recession-battered casino customers sort out their financial issues and put off purchases.

For the fourth quarter, analysts on average expect the company to earn 55 cents a share, on revenue of $221.6 million, according to Reuters Estimates.

But Oppenheimer & Co analyst David Katz said, "We think 60 cents a share is very doable. The casino systems business and the participation business will drive earnings this quarter."

Katz expects the gaming operations segments to have a solid quarter due to an increase in the installed base of units.

Gaming operations is a steady segment for the company said Roth Capital Partners' Todd Eilers, who expects a profit of 57 cents a share. Roughly half the segment's revenue comes from fixed-fee leasing, so regardless of whether game play rises or falls, the company earns a fixed lease rate, he said.

In addition, except for Las Vegas and Atlantic City, regional gaming markets have held up fine, so Bally's variable-fee units also likely did well, Eilers added.

In the systems segment, Eilers said the company had a strong installation at a major customer, the Sands Bethworks casino in Pennsylvania.

Oppenheimer's Katz said that the company was "in the process of introducing new products, as well as new versions and software for existing products" which would boost the systems segment's results. "They also launched a new systems product -- Version 11.0 -- targetting the small-to-mid-size casino space. It is a Microsoft-compatible product. Previously, it was not compatible, which prevented Bally from going after the smaller and mid-size customers," Eilers said.

Last quarter, systems contributed about 29 percent of the company's overall revenue, with gaming operations chipping in with 35 percent and gaming equipment 36 percent.

The share of the higher-margin segments, which have relatively lower costs, has risen sharply over the past year or so at the expense of the recession-battered gaming equipment business.

SLOT DEMAND BOTTOMS OUT?

In July, larger rivals International Game Technology (IGT.N) and WMS Industries Inc (WMS.N) posted higher-than-expected quarterly profits. IGT also said it believed business had bottomed out.

Both analysts agree that demand for slot machines has reached a bottom in the quarter.

"In the coming four quarters casino operators will start replacing slot machines more again," said Katz, who expects a modest rise in slot machine sales next quarter onwards.

"A lot of the casino operators have been addressing their balance sheet issues over the past year, so they are in a better spot now than a year ago," Roth Capital's Eilers said.

He added that the recovery in demand will be slow as the second half of the calendar year is seasonally light for sales of slot machines, he said.

However, given casinos' shift in focus to maximizing profitability of casino operations from property development, and with "really old floors, you will see a lot of operators loosen their purse strings next year."

Stock prices of Bally Technologies, IGT and WMS have been on a upward trajectory following recent approvals of expanded gambling in Ohio and Illinois and expectations that other budget-strapped U.S. states will follow, which may boost the slot makers' results over the next two to three years.[ID:nBNG418060]

Bally's stock trades at about 16 times 2010 analysts' average earnings estimates, while IGT's and WMS stocks trade at multiples of 23 each. (Editing by Jarshad Kakkrakandy)