• It's Here!

    Etf Pro

    Get the big financial market moves right, bullish or bearish with Hedgeye’s ETF Pro.

  • It's Here

    MARKET EDGES

    Identify global risks and opportunities with essential macro intel using Hedgeye’s Market Edges.

As it turned out, IGT was more than just the safe play

"Our second quarter results reflect the advances we are making towards moving IGT to a position of greater financial strength.  We continue to demonstrate the leverage in our operating model with strong performance in profit margins.  Although we remain in a challenging environment, the near and long-term outlooks for the Company are improving and we look forward to reporting our progress in coming quarters."

- Patti Hart, President and CEO of IGT

HIGHLIGHTS FROM THE RELEASE

  • Revenues: $492MM and EPS of $0.23
  • Guidance raise:
    • $0.84-$0.90 (excluding the 4 cents favorable impact from certain adjustments)
  • Games Ops:
    • Revenue per unit: $53.62; $3.24 increase sequentially and $2.66 increase YoY
    • Install base: 57,100; 400 sequential increase
    • "Improvement in per unit yields offset a lower installed base compared to the prior year, down largely due to removals from Alabama charitable bingo facilities and conversions of leased games to for-sale units in Mexico."
  • Product Sales:
    • 10,200 recognized unit sales
      • NA: 5.7k; International: 4.5k
    • 10,000 units shipped
      • NA: 5.3k (1.5k new and 3.8k replacement) ; International: 4.7k (2.3k new; 2.4k replacement)
    • ASP: $13.4k
    • "The Company recognized 10% more units in North America while International units were down 12% year over year."
    • "The increase in gross margin resulted from improvements to both the geographic and product sales mix combined with product cost efficiencies, such as lower obsolescence and rework costs."
  • "On April 18, 2011, IGT executed $250 million notional value interest rate swaps that terminate on June 15, 2019, which effectively exchange the remaining fixed interest payments on our 7.5% Bonds due 2019 for variable rate interest payments based on six-month LIBOR plus 409 basis points set in arrears with payments due on June 15 and Dec. 15 of each year"

CONF CALL

  • Visibility remains limited and they continue to expect macroeconomic pressure in the second half. Expect that their current trends of modest growth to continue for the balance of the year and into next year
  • Feel very optimistic about their international prospects
  • Had a higher mix of mega-jackpot games in the quarter
  • Game ops yields should continue their moderate improvement assuming normal seasonal trends continue
  • 82% of their games are variable fee in game ops
  • NA ASP increases are reflective of the competitive environment
  • Expect ASPs to rebound modestly from this quarter's levels but for margins to remain under pressure for the rest of the year, mostly due to mix
  • SG&A increased due to i-gaming initiatives and higher incentive comp. Expect SG&A to increase modestly for the remainder of the year.
  • New $750MM facility replaced their existing facility providing a lower borrowing rate and extended term. Their interest expense will be $13.5MM annually as a result.  The swap will save another $7MM of interest expense.
  • Their new facility will allow them to:
    • invest in their interactive space
    • enhance their international game distribution
    • enhance their content offering
  • 500 Centerstage games on order
  • Have over 33% of their install base on their new G33 platform
  • Expect their international unit sales to keep pace with their NA sales for the balance of the year. Expect game ops placements internationally to remain strong.
  • Still see a big opportunity in i-gaming internationally
  • Game operations G33 box is allowing them to deploy games in just a few hours at a lower cost to them. Placements of G33 boxes increased 16% to date and they have 3,000 more boxes in order
  • Centerstage is performing well. Sex in the City is performing well. Dark Knight, Hangover, Ghost busters all scheduled to be released soon.
  • Overall coin-in was down 4% YoY but up 15% on a per machine basis
  • They are still very much in a promotional environment for replacement units.  To help offset these promotions, they have continued to reduce their production costs but simplified their products and processes.
  • Increases in their IP revenue also contributed to their margins this quarters
  • Systems revenues have grown in the high single digit range YTD.

Q&A

  • WAP mix in their install base?
    • Have seen their WAP base stabilize and improve recently
    • New content is the biggest drive to the improvement but the return to normal seasonal trends is helping
  • Gun Lake was the most notable new shipment
  • Margins in product sales will be around 52% domestically for the remainder of the year
  • Working to keep their R&D expenditures flat. Redeployed their systems workforce to China earlier this year which is helping them keep costs down.
  • Any changes in NA pricing throughout the quarter?
    • ASPs that they experienced were a combination of mix and promotional activities.  MLD was only 37% of their mix.  There were 1500 units that slipped from lease ops to for sale at very low ASPs (Mexico). Hence they expect a pick up in ASPs for the balance of the year.
    • They are seeing some of their competitors price aggressively, but feel like their promotional activity is reasonable
  • Their spending on i-gaming internationally isn't a big portion of their spend. Going forward, they will link their spend on i-gaming with the growth in the revenue from that business. They will likely spend more on R&D next year.
  • Guidance raise is due more to margin expansion and cost control vs. revenue growth
  • They increased their resources in their China R&D center from their US center to reduce costs
  • Working on more localized theme product to grow share in Asia. Also making sure that their systems products are appropriate for that market. Expect their Asia group to gain share in 2012.
  • Going forward they will move more of their R&D dollars to online and applications
  • Don't think that there is that much elasticity to lowering prices
  • Expect MLD's as a % of sales to be up in the back half
  • Replacement sales? At the low end of their guidance, they assume that things remain flattish and at the high end that there is some modest pick up as well as some improvement in game ops.
  • Will focus on taking share on the slot side in Asia instead of focusing on electronic table games