IGT Reports in Line, Guidance Low – Analyst Blog

International Game Technology (IGT) reported adjusted earnings (excluding restructuring and one-time charges) of 20 cents per share in the second quarter of 2010, in line with the Zacks Consensus Estimate of 20 cents a share but up from the prior-year period of an adjusted EPS of 13 cents a share due to increased cost cutting and higher international product sales.

 

International Game said that the prior-year results include retrospective application of the new accounting standards that have been adopted in the first quarter of fiscal 2010 for the separation of liability and equity elements, affecting items such as interest expense, earnings per share, long-term debt and shareholder equity.

 

The quarter benefited from an improvement in replacement units shipped, an increase in gaming operation’s yield and a decline in SG&A, the company said. This resulted in both year over year and sequential improvement in results.

 

 

While year over year profitability was boosted by cost-cutting measures, total revenue also increased 4.6% to $497.7 million from the year-ago quarter, boosted by increased international growth, partially offset by a decrease in gaming revenue.

 

Product revenue (43% of total revenue) increased 17.6% to $213.1 million in the quarter while units shipped worldwide decreased 7% year over year. Of the product revenues, North American revenue decreased 3% due to the lesser number of openings, while International revenue increased 65% due to the opening of Resorts World Sentosa in Singapore, improved sales in Europe and a favorable foreign currency exchange. International Game sold 5,200 units in North America during the quarter. Internationally, the company recognized 7,400 unit sales.

 

Revenue from Gaming Operations (57% of total revenue) decreased 3.4% year over year to $284.6 million primarily due to a lower installed base and the continued shift toward lower-yielding machines. Approximately $5.0 million of the decrease in gaming revenues was attributed to property closures and the reduction of electronic charitable bingo terminals being operated in Alabama, the company said.

 

The installed base of recurring revenue games decreased 2,500 units year over year and 3,400 units sequentially to 58,800 units, primarily due to the reduction of electronic charitable bingo terminals. As of March 31, 2010, approximately 83% of the company’s installed base comprised variable fee games, which earn a percentage of machine play levels rather than a fixed daily fee.

 

 

International Game is focused on reducing costs related to manufacturing materials and headcount reductions, as a result of which operating expense (both SG&A and R&D), fell 14.2% to $139.1 million from the prior-year quarter. Moreover, lower bad debt provisions and lower expenses largely related to cost control efforts led to higher year over year profitability.

 

Total company gross margin increased 70 basis points year over year to 55.4% due to higher gaming gross margin of 62.0%. Gaming gross margin improved 300 basis points year over year, primarily due to reduced depreciation and royalties expenses. This was partially offset by lower product sales margin, which fell 200 basis points year over year to 46%, mainly due to higher obsolescence, including write-downs related to the closure of operations in Japan.

 

 

International Game exited the quarter with $259.2.0 million in cash and investments and $2.0 billion in debt. This compares with $277.0 million in cash and investments and $2.1 billion in debt in the previous quarter. The company currently has $1.2 billion of available capacity on its $1.8 billion line of credit. Deferred revenue decreased approximately $4.8 million sequentially to $102.0 million at quarter-end as a result of the completion of multi-element contracts.

 

The company generated $108 million of cash from operating activities in the second-quarter, versus $168.7 million in the previous quarter. Free cash flow totaled $26.7 million, down from $97.6 million generated in the previous quarter.

 

 

As management remained cautious on casino budgets and spending plans for 2010 and limited visibility for replacement demand, International Game narrowed its previously announced earnings of 77 cents – 87 cents a share to 77 cents – 85 cents a share. The guidance also reflects the risk of the potential loss in revenues associated with units in Alabama, the company said.

 

The guidance was well below the Zacks Consensus Estimate, which calls for 91 cents per share in earnings for fiscal 2010.

 

As a result of the economic downturn and reduced demand for game play, revenue growth has suffered. Hence, International Game is focusing on reducing operational costs to improve earnings. Management expects cost reduction throughout 2010 and is well on track to achieve the $200 million in cost savings in 2010. Further, the company plans to remain focused on its core activities in fiscal 2010.