Shares of International Game Technology (IGT) dropped 5.79% ($1.06) in after hours trading due to a 9.8% year over year decline in revenue growth in the first quarter of 2011. Revenue fell $24.2 million short of the Zacks Consensus Estimate, primarily due to a reduction in installed base. However, earnings per share inched past the Zacks Consensus Estimate by a penny.
Operational Performance
In the first quarter, International Game reported non-GAAP earnings of 21 cents per share (excluding a 4 cent positive impact), down 19.2% year over year but up 16.7% sequentially. Net income on a non-GAAP basis was $62.1 million, down 17.5% year over year but up 17.0% sequentially. Net income margin was 13.4% in the quarter, down 120 basis points (bps) on a year-over-year basis. Sequentially, the net income margin increased 270 bps.
Non-GAAP gross profit was $276.2 million, down 6.6% year over year but flat sequentially. Gross margin increased 200 bps to 59.4% in the first quarter, primarily due to lower cost of gaming operations and product sales.
Gaming gross margin increased to 63.0% in the reported quarter from 62.0% in the prior-year quarter. Margins were positively impacted by the removal of lower yielding charitable bingo games in Alabama. Product sales gross margin increased to 55.0% in the first quarter from 52.0% in the prior-year quarter, attributable to an increase in the mix of higher margin non machine products.
Operating expenses were $155.0 million, up from $152.0 million reported in the prior-year quarter. The increase was largely due to research & development (R&D) expense, which increased 13.8% year over year to $51.7 million. However, selling, general and administrative (SG&A) expense declined 2.7% year over year in the quarter.
Operating income plunged 15.5% year over year but rose 8.0% sequentially to $121.4 million. Operating margin decreased 180 bps on a year-over-year basis, primarily due to higher operating expenses and lower revenue growth in the quarter. On a sequential basis, operating margin increased 310 bps.
Revenue
International Game posted revenues of $464.8 million in the first quarter, down 9.8% year over year and 6.3% quarter over quarter. Gaming Operations contributed 56.0% to the total revenue whereas Product Sales accounted for the remaining 44.0%. The decline in sales was due to a dearth of international openings as compared with the prior-year quarter.
Segment Details
Gaming Operations revenues fell 5.8% year over year to $261.0 million in the first quarter, primarily due to a lower installed base. Average revenue per unit (ARPU) per day in the first quarter was $50.38, up from $49.25 in the year-ago quarter.
At the end of the quarter, the company’s Gaming Operations installed base totaled 56,700 units, a decrease of 300 units from the fourth quarter of 2010, and a decrease of 5,400 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 and the conversion of leased games to for-sale units in Mexico.
Product Sales slid 14.3% year over year to $204.0 million, primarily due fewer new shipments in both International and North America regions. North American revenues declined 1.1% year over year to $135.3 million in the quarter. International revenues decreased 31.7% year over year to $70.4 million. The company shipped 9,400 machines during the quarter, down from prior-year shipment of 11,900 units.
During the first quarter, International Game added seven new Advantage systems and eight new sbX installations. Of the seven new Advantage customers, five also installed sbX.
Balance Sheet
As of December 31, 2010, cash and investments (including restricted cash) were $253.6 million versus $248.9 million as of September 30, 2010. Long-term debt was $1.57 billion versus $1.67 billion in the prior quarter. In the first quarter of 2011, cash flow from operations was $102.4 million compared with $167.2 million in the prior quarter.
Guidance
International Game expects fewer new openings for fiscal 2011 as compared with the previous year. The company expects both R&D and SG&A expenses for 2011 to remain flat with 2010 levels. The tax rate is estimated at 36% in each of the next three quarters, or approximately 34% for fiscal 2011.
International Game expects earnings in the range of 79 cents to 87 cents per share, excluding the 3 cent gain from a lower tax rate in the first quarter, and a penny per share gain on an investment sale.
Our Take
We believe the lackluster first quarter points out that International Game is still facing a difficult macro environment in its operational market. Top-line growth remains muted and we believe that lack of visibility on replacement sales, very few new openings and increasing competition especially from Scientific Games Corp. (SGMS) are primary growth headwinds in 2011.
However, the company remains focused on reducing its dependency on replacement cycle over the long term, which is a prudent strategy, in our view. Moreover, a strong product pipeline, expansion into new international markets, stringent cost control and foray into interactive games will likely drive growth over the long term.
We have a Neutral recommendation on the stock. Currently, International Game Technology has a Zacks #3 Rank, which implies a Hold rating on a short-term basis.
INTL GAME TECH (IGT): Free Stock Analysis Report
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