International Game Technology (IGT) announced fourth quarter 2010 earnings of 18 cents excluding one-time items, missing the Zacks Consensus Estimate by a penny, primarily attributable to sluggish revenue growth from gaming operations.

On a GAAP basis, earnings were 7 cents in the fourth quarter of 2010.

Earnings increased 11.8% year over year to 85 cents in fiscal 2010, beating the Zacks Consensus Estimate by a penny. On a GAAP basis, earnings escalated 44.2% to 62 cents.

Operational Performance

Net income margin was 10.7% in the quarter as compared with 10.5% in the prior- year quarter.

GAAP results were negatively impacted by 9 cents per share ($21.0 million) of investment losses due to changes in agreements with China LotSynergy Holdings Limited and $11.0 million for impairment on the Alabama and DigiDeal assets. Restructuring charges amounted to $1.1 million in the quarter.

Gross margin fell 80 basis points to 55.8% in the quarter, primarily due to weak revenue growth. Operating expenses were $164.4 million, down slightly from $165.0 million reported in the prior-year quarter.

However, the weakening of the gross margin fully offset better cost control in the quarter, resulting in an operating margin decline of 170 basis points to 22.7%.

Net income margin was 12.7% in fiscal 2010 as compared with 10.7% in the prior fiscal year.

Gross margin for the year increased 140 basis points to 56.4%. In fiscal year 2010, operating expenses decreased significantly, down 7.2% year over year to $614.6 million, reflecting strict cost control. The operating margin increased 230 basis points to 25.5% in fiscal 2010.

Revenue

Revenues dropped 3.2% year over year to $496.0 million, slightly above the Zacks Consensus Estimate of $485.0 million. Gaming operations contributed 54.0% of total revenue whereas product sales accounted for the remaining 46.0% of revenues.

For fiscal 2010, revenues decreased 5.0% year over year to $1.98 billion, in line with the Zacks Consensus Estimate.

The weak year-over-year growth for both the periods was primarily on account of disappointing gaming operations and product sales.

Segment Details

Gaming Operations revenues fell 5.0% year over year to $268.0 million primarily due to a lower installed base and the continued shift toward lower-yielding machines. Gaming operations revenues dropped 6.0% to $1.10 billion in fiscal 2010.

Average revenue per unit (ARPU) per day was $50.86, up from $50.71 in the year-ago quarter. ARPU per day was $51.10 in fiscal 2010, down from $51.64 in the fiscal 2009.

Gross margin fell to 58.0% from 60.0% in the prior-year quarter due to higher fixed costs. In fiscal 2010, gross margin increased to 60.0% as compared with 58.0% in fiscal 2009.

At the end of fiscal 2010, IGT’s gaming operations installed base totaled 57,000 units, a decrease of 1,800 units from the third quarter of 2010, and a decrease of 4,300 units from the year-ago quarter.

The year-over-year decline was due to weak results in North America, given the regulatory issues in Alabama, partially offset by increases in international markets.

Product Sales dropped 1.0% year over year to $228.0 million, primarily due to few new openings, which had an unfavorable impact on North American results, as revenues declined 12.4% year over year to $111.9 million in the quarter. International revenues increased 13.6% year over year to $116.1 million.

In fiscal 2010, revenues dropped 4.0% year over year to $886.0 million, primarily due to fewer openings in North America.

The company shipped 41,200 machines during the year, down from prior-year shipment of 52,400 units.

Gross margin increased to 53.0% in the fourth quarter from 52.0% in the prior-year quarter, attributable to decreasing material costs and increasing mix of higher margin non machine products. In fiscal 2010, gross margin increased to 52.0% as compared with 51.0% in the prior year.

Balance Sheet

As of September 30, 2010, cash and cash equivalents were $158.4 million versus $164.9 million as of June 30, 2010. Long-term debt was $1.67 billion as compared with $1.81 billion in the prior quarter. IGT’s leverage ratio improved to 2.4x in fiscal 2010 from 3.3x at the beginning of the year.

In fiscal year 2010, cash flow from operations was $591.0 million as compared with $423.8 million in the prior quarter.

Guidance

For fiscal 2011, IGT expects earnings in the range of 77 cents to 87 cents on a GAAP basis. IGT expects positive top-line growth for fiscal 2011, driven by strong international growth, increase in non-box revenues and higher market share gains from new jurisdictions, both on a domestic and international basis.

Our Take

We maintain an Underperform rating on a long-term basis (6-12 months), based on the belief that replacements of gaming machines are likely to remain weak over the next year.

Moreover, a continued lack of visibility for replacement demand, impact of interest rates on the Gaming margin, weak casino budgets, highly leveraged balance sheet and strong competition from Bally Technologies Inc. (BYI) and WMS industries Inc. (WMS) are also of concern.

Currently, IGT has a Zacks #4 Rank, which implies a Sell rating on a short-term basis (1-3 months).

 
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