International Game Technology (IGT) reported fourth quarter 2011 earnings of 24 cents per share, beating the Zacks Consensus Estimate by a penny. Earnings per share (EPS) increased 41.2% from 17 cents reported in the year-ago quarter.
The better-than-expected result was driven by strong revenue growth and lower operating expenses in the quarter.
Operational Performance
Non-GAAP gross profit was $297.8 million, up 11.5% year over year. However, gross margin decreased 110 basis points (bps) to 55.2% in the fourth quarter, primarily due to weak product sales and gaming margin in the quarter.
Gaming gross margin increased 90 bps year over year to 56.6%, due to an intellectual property litigation settlement and increased jackpot funding costs. Product sales gross margin declined 110 bps on a year-over-year basis to 53.5% in the fourth quarter, due to higher mix of machine versus non-machine sales.
Operating expenses were $165.1 million, up 4.0% year over year. However, as a percentage of revenue, operating expenses declined 290 bps on a year-over-year basis. Selling, general and administrative (SG&A) expense increased 12.4% year over year, while research & development (R&D) expense declined 3.0% in the quarter.
Operating income surged 22.6% year over year to $132.7 million. Operating margin expanded 180 bps on a year-over-year basis, primarily due to strong revenue growth and lower operating expenses in the quarter.
Net income on a non-GAAP basis was $73.0 million, up 44.3% year over year. Net income margin shot up 280 bps to 13.5% on a year-over-year basis. A 62.3% decline in other expenses contributed to the significant growth in the quarter.
Revenue
Total revenue increased 13.8% year over year to $539.8 million in the fourth quarter, and was well above the Zacks Consensus Estimate of $485.0 million. Gaming Operations contributed 52.4% to the total revenue whereas Product Sales accounted for the remaining 47.6%.
Revenues from North America stood at $396.6 million, up 16.7% year over year. International operations revenue increased 7.0% year over year to $143.2 million in the reported quarter.
Segment Details
Gaming Operations revenues increased 8.5% year over year to $283.0 million in the fourth quarter, primarily attributed to a better-than-expected WAP performance, higher international installed base and additional contribution from the acquisition of Entraction Holding AB. Average revenue per unit (ARPU) in the fourth quarter was $58.08 compared with $53.36 in the year-ago quarter and was driven by strong performance by the MegaJackpots brand and international lease operations.
At the end of the quarter, the company’s Gaming Operations installed base totaled 53,900 units, up 100 units from the year-ago quarter. The year-over-year growth was due to additions in international operations.
Product Sales were up 20.4% year over year to $256.8 million, primarily due to higher domestic replacement sales. The company shipped 11,300 machines during the quarter, up from the prior-year shipment of 8,200 units.
Average revenue per unit (ARPU) in the reported quarter was $22,700 versus $26,000 in the prior-year quarter. Average machine sales price was $15,200 versus $15,400 in the prior-year quarter.
Balance Sheet
As of September 30, 2011, cash and investments (including restricted cash) were $552.0 million versus $401.4 million, as of June 30, 2011. Long-term debt was $1.65 billion versus $1.57 billion in the prior quarter.
During the quarter, IGT repurchased 1.6 million shares, at an average price of $15.30 per share, for a total cost of $25.0 million. IGT generated free cash flow of $95.8 million in the reported quarter compared with $87.4 million in the year-ago quarter.
Guidance
For fiscal 2012, IGT expects EPS in the range of 93 cents to $1.03 per share, assuming a tax rate of 37.0% and share repurchase similar to the last two quarters of fiscal 2011. However, the guidance was well below the Zacks Consensus Estimate of $1.10 for fiscal 2012. IGT expects to incur $200.0 million in research & development expense for fiscal 2012.
IGT continues to expect a volatile macroeconomic condition over the next 12 months. However, IGT plans to further pursue its expansion policy in new and existing international markets in 2012. The company expects operating margin expansion driven by higher gaming operations installed base and subsequent increase in profit per unit.
Recommendation
We believe that international expansion, impressive product portfolio, cost-cutting initiatives, focus on reducing dependency on the domestic machine replacement cycle, new contract wins, solid free cash flow, and strong growth from the interactive business will drive growth over the long term.
However, sluggish macroeconomic conditions, fewer new openings and increasing competition from Bally Technologies Inc. (BYI) and WMS Industries Inc. (WMS) will keep the stock range bound in the near term.
We have a Neutral recommendation on the stock over the long term (6-12 months). Currently, IGT has a Zacks #3 Rank, which implies a Hold rating on a short-term basis.
