A leader in designing, manufacturing and marketing games, International Game Technology (IGT) announced its third quarter 2010 earnings, in line with the Zacks Consensus Estimate.
Earnings, excluding onetime items, decreased 8.7% year-over-year to 21 cents. Including net effect of 11 cents related to onetime items, earnings on a GAAP basis came in at 32 cents in the third quarter of 2010 compared with 21 cents in the prior-year period.
Revenues dropped 5.3% year-over-year to $489.7 million compared with $517.3 million in the third quarter of 2009. This was well below the Zacks Consensus Estimate of $503.0 million. Gaming operations contributed 57.0% of the revenues, whereas product sales accounted for the remaining 44.0% of the revenues.
Gross margin decreased 90 basis points to 56.3% in the reported quarter. Stringent cost control resulted a fall in operating expenses which slid 8.0% year-over-year to $155.7 million, in sync with management’s expectations. IGT continues to expect its cost savings target of $200.0 million. Operating margin decreased 10 basis points to 24.5% in the quarter.
Revenues and margins plunged in the quarter due to weak results from gaming operations and product sales, partially offset by stringent cost controls.
Segment Details
Gaming operations revenues decreased 3.5% year-over-year to $276.6 million primarily due to lower installed base and the continued shift toward lower-yielding machines. Average revenue per unit (ARPU) per day was $51.68, which was up 1% sequentially and up from $51.47 in the year-ago quarter.
Gross margin fell to 58.0% from 62.0% in the prior year due to an increasing jackpot expense in the quarter.
At the end of third quarter, IGT’s gaming operations installed base totaled 58,900 units, an increase of 100 units from second quarter 2010, but a decrease of 2,200 units over the prior-year 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.
During the quarter, one additional property in Alabama ceased operations. IGT still has 1,800 electronic charitable terminals in Alabama. We believe Alabama continues to remain a headwind for IGT in the long term.
Product Sales decreased 7.6% year-over-year to $213.1 million, primarily due to a 29.0% decline in global shipment. Few new openings had an unfavorable impact on North American revenues, which declined 16.0% in the quarter. However, based on favorable foreign exchange impact, international revenues grew 8.0% in the quarter.
The company shipped 9,000 machines during the quarter, down from prior-year quarter’s shipments of 12,600.
Gross margin increased to 54.0% in the third quarter from 51.0% in the prior-year quarter, attributable to lower material costs and favorable mix of higher margin non machine products.
Balance Sheet
As of Jun 30, 2010, cash and cash equivalents were $164.9 million versus $171.8 million as of Mar 31, 2010. Deferred revenues decreased $10.2 million in the quarter to $91.8 million.
During the reported quarter, IGT refinanced $300.0 million of debt through sale of 5.5% notes that are due in 2020. IGT’s domestic credit facility declined to $1.5 billion from $1.8 billion in the quarter.
Outlook
IGT expects gross margins for fourth quarter 2010 gaming operations to be in the range of approximately 58% to 61%. Product sales margins in the quarter are expected to be in the range of approximately 50.0% to 52.0%. IGT estimates SG&A expense to be in the range of $85.0 million to $90.0 million and R&D expense of approximately $50.0 million in the fourth quarter.
Recommendation
We maintain our long-term Neutral rating (6+ months), due to weak third quarter results, declining shipments and Alabama headwinds. However, we believe IGT has a strong product portfolio and the company recognizes the importance of open network and is well positioned to gain from server-based gaming in the long term.
Despite facing tough competition from Bally Technologies Inc. (BYI) and WMS industries Inc. (WMS), we contend that IGT remains focus on expanding its gaming services in a number of new markets such as Ohio, Chicago, Kentucky, New Hampshire, Rome and Canada, which will drive its profitability over the long term.
Currently, IGT has a short-term Zacks #3 Rank (Hold) rating.
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