• It's Coming...

    MARKET EDGES

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

We knew IGT had more levers to pull than the other guys and was regaining some share but a beat and raise of this magnitude was a surprise. 

IGT had been our favorite supplier heading into earnings season because we felt it was the safest pick.  Despite our longer term concern with participation share, we felt IGT had more near-term margin levers to pull and ship share was on the rise over the next few quarters.  What we didn’t bank on was a big beat and raise.

For the first time in a really long time IGT not only beat consensus but also raised guidance.   The beat was across the board – higher product sales, better game operations, and better margins.  IGT’s guidance raise was due to a combination of cost efficiencies and reduction in borrowing costs.  IGT also appeared to gain ship share this quarter in North America (NA).

Q2 Detail

  • Product sales of $215MM beat our estimate by 3%, while gross margins were $18MM above our estimate
    • Total units recognized were in-line with our estimate but once again NA units beat our estimate while international units fell short of our estimate
    • ASP’s were below our estimate – decreasing 4% YoY and over $1k QoQ.  While IGT did not elaborate on the call – nor did any analysts bother to ask, part of the reason for the depressed ASPs was due to a new promotional launch, which we wrote about in our preview.  The other reason for depressed ASPs was due to the conversion of 1,200 leased units to for sale units at very low prices.  Leases often have buyout options so this is not that unusual but would also explain the depressed ASPs in the quarter.  We estimate that the sale of the leased units could have depressed ASPs by about $600.
    • Domestic gross margins were also a lot higher than we estimated although IGT guided that a more normalized margin should be around 52%.  We suspect that some of the margin lift has to do with growth of high margin software included in non-box sales.
    • While international units were weak, margins of 56% were the best that IGT has had in at least 10 quarters.  We assume that normalized margins are lower (low 50’s).
  • Gaming operations revenue of $267.5MM beat our estimate by 4% and gross margins were 5% above our estimate
    • The install base was 300 units better than we estimated
    • Daily yields were 3% above our estimate
  • Other stuff:
    • Excluding the $1.7MM restructuring charge, SG&A was $7MM higher
    • D&A was $3MM lower than we estimated.

Outlook:

  • IGT increased the midpoint of its guidance range by 5 cents. 
    • We estimate that the interest savings from the new credit facility and the swap accounted for $0.02
    • This quarter was a beat – we estimate it contributed at least 2 cents to the guidance raise
    • Also, better gaming operations results and lower D&A, offset by higher SG&A