IGT IN-LINE QUARTER SHOULDN’T BE THE FOCUS

The only story surrounding earnings is that they shouldn’t be an issue.

IGT is scheduled to kick off the earnings season for us next week when they report F1Q11 earnings next Thursday after close.  We don’t expect many surprises on the call and our estimate is in-line with consensus at $0.20.  The near and long-term story will be driven by the main themes of re-acceleration of replacement demand and new domestic and international markets – near-term headlines and long-term actual earnings contribution. 

There are other areas of interest that should be addressed on the call:

Top line

1. Replacement Cycle… when will things pick up?

2. Gaming Operations… can they really grow?

3. How much juice is there in the international business?

4. Will systems get a lift from SbX? We’re waiting for the killer applications.

5. Online and mobile applications… when will it become material?

 

Bottom line

6. ROI – better return on capital deployment - consolidating platforms or allocation of R&D dollars,  all of which should yield better cash flow

7. Will they take out the convert which would add over a dime in EPS?

8. Quantify the benefit from the reinstated R&D tax credit

9. Accelerated depreciation rules that recently passed should result in a decrease in deferred tax liability and provide a benefit to working capital

a. 50% retroactive to [mid-2010]

b. 100% retroactive to [September 2010]

Details on FQ1:

We are projecting revenues of $502MM and EPS of $0.20 when they report on F1Q11 results on Jan 20th. 

We estimate that IGT will report $237MM of product sales at 51% gross margins

• Domestic product revenues of $134MM and gross margin of $69MM (51%)
  • Domestic box sales of $77.5MM: 5k domestic unit sales--comprised of 2,700 replacements and 2,300 new units at an ASP of $15.5k
    • December is usually and should be a better quarter for replacements for the industry since it’s the G2E quarter and many buyers must either use or lose their budgets.  However, this is usually not the case for IGT, given that their fiscal year ends in September.
    • New units should include: Cosmo units – roughly 750 units; Perryville units which were subject to a 90 day acceptance clause - ~600 units; at least part of the shipments to Gun Lake
  • ASP’s should be higher than the last few quarters with the expiration of the Dynamix promotion
  • Domestic non-box sales of $57MM, up 10% YoY
• International product sales of $103MM and gross margin of $51MM (51%)
  • $77MM of box sales: 6.3k international unit sales at an ASP of $12.2k
  • Non-box sales of $26MM
• Gaming operations revenue of $265MM at 59% gross margins
  • We expect the install base to stay constant from last quarter at 57k units and we expect average win per day to be $50.5

Other assumptions:

• SG&A of $87MM
• D&A: $20MM
• R&D: $49MM
• Net interest expense: $21MM
• Tax rate: 37% (lower than guidance due to the reinstatement of the R&D tax credit)