International Game Technology (IGT), a leading slot machine developer, reported adjusted earnings of 24 cents per share in the first quarter of 2010, beating the Zacks Consensus Estimate of 20 cents a share by 4 cents. Quarterly earnings of 21 cents per share increased from the year-ago period due to increased cost cutting and higher sales of replacement slots. Shares rose 3.81% in after-hours trading.
IGT said that the prior-year results include new accounting standards 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.
As a result of the economic downturn and reduced demand for game play, revenue growth has suffered. Hence, IGT is focusing on reducing operational costs to improve earnings. The quarter benefited from increased North American replacement units compared to the prior-year quarter, large-scale deployment of the sbX platform and improvement in operating margin – the highest in the last six quarters. The results were also boosted by increased international growth, offset by a decrease in overall domestic placement levels, resulting in total sales decline.
While management remained cautious on casino budgets and spending plans for 2010, IGT reaffirmed its previously announced earnings of 77 cents – 87 cents a share. Further, IGT plans to remain focused on its core activities in fiscal 2010. Management expects cost reduction throughout 2010.
The Zacks Consensus estimate calls for 88 cents per share in earnings for fiscal 2010.
Revenue
While profitability was boosted by cost-cutting, total revenue fell 14.3% to $515.7 million from the year-ago quarter, primarily due to the lower play levels and mix shift for lower-yielding, standalone lease operations games in its installed base.
Product revenue (46% of total revenue) fell 17.3% to $238.4 million in the quarter and units shipped worldwide decreased 20% year-over-year. Of the product revenues, North American revenue decreased 37% due to lesser number of openings, while International revenue increased 41% due to the rise in revenues from Casino Rosario units shipped into Latin America during the fourth quarter of fiscal 2009 and improved sales in Europe. IGT sold 5,500 units in North America during the quarter. Internationally, IGT recognized 6,400 unit sales.
Revenue from Gaming Operations (54% of total revenue) decreased 11.5% year over year to $277.3 million. The installed base of recurring revenue games increased by 1,300 units year over year and 800 units sequentially to 62,200 units, driven by growth in international placements, partially offset by a reduction in domestic placements.
Robust Margin
Total company gross margin increased by 670 basis points year over year to 57.5% due to higher gaming gross margin of 62.5%. Margins were positively impacted by reduced jackpot expense largely due to interest rate changes and lower depreciation. The prior-year quarter was impacted by additional jackpot expense resulting from unfavorable interest rate movements, as well as added fixed asset charges.
IGT 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 18.8% to $136.7 million from the prior-year quarter.
Impressive Cash Flow
We remain encouraged by the company’s substantial free cash flow, which should drive future growth. IGT generated $168.7 million of cash from operating activities in the first-quarter, an increase of 12.8% year over year. Free cash flow totaled $97.6 million, up more than 200% from the year-ago period. IGT exited the quarter with $277.0 million in cash and investments and $2.1 billion in debt. Deferred revenue decreased approximately $15.2 million to $106.8 million at quarter-end as a result of completion of multi-element contracts.
IGT competes against Aristocrat Leisure Ltd., Bally Technologies (BYI) and WMS Industries Inc. (WMS). We have a Neutral rating on the stock.
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