• It's Here!

    Etf Pro

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

Beat and raise should drive the stock higher

"Our third quarter results further demonstrate the positive momentum generated by our new games, platforms and internal process improvements. We are expanding our business in new and existing markets around the world in a capital-efficient manner driven by our customer-first philosophy. The investments we are making today are expected to position the company to deliver continued revenue and earnings growth."

- Patti Hart, CEO of IGT

HIGHLIGHTS FROM THE RELEASE

  • Adjusted EPS of $0.26  excluding a $0.04 discrete tax benefit and revenue of $489MM
  • Gaming operations revenue of $267MM and average revenue per unit per day of $55.55 up $1.47 YoY "on performance improvements in our MegaJackpots brands globally, and down $0.83 from the immediately preceding quarter due to a higher mix of lower-yielding international units."
    • 62% gross margins "impacted positively by improved game performance and lower jackpot expenses."
    • "IGT's gaming operations installed base totaled 53,300 units, an increase of 800 units from the immediately preceding quarter primarily due to additions in international lease operations."
  • Product sales revenue of $222MM
    • 8,900 unit sales, up 7% YoY "primarily due to increases in domestic replacement and Latin America sales and down 2% sequentially, primarily due to fewer new openings domestically"
    • "Domestic average selling prices increased 2% compared to last year's third quarter due to a higher percentage of new cabinets, specifically, the Universal Slant and G23 MLD products.  International average selling prices increased 16% compared to last year's third quarter primarily due to favorable geographical and product mix, particularly in Europe and Australia, and favorable foreign exchange rates."
    • 56% gross margins: "The increase in gross margin was driven by increased higher-margin international machine sales."
  • SGA "flat compared to last year's third quarter, as lower bad debt provisions offset higher variable compensation expenses."
  • Cash: $401MM; Debt: $1.65BN
  • "During the quarter, the Company repurchased 1.5 million shares of common stock at an average price of $16.25 per share for a total cost of $25 million."
  • "During the quarter, the company closed on the previously announced tender offer to acquire Entraction Holding AB"
  • Barcrest sale is expected to close in F4Q11
  • Outlook: $0.89 to $0.93
    • "This range excludes the favorable impact of $0.08 per share from certain items detailed in the supplemental reconciliation at the end of this release."

CONF CALL NOTES

  • Operating margin was their best in over 3 years.  Their business now has the potential to deliver steady growth and returns.
  • Entraction acquisition is an example of their plan to responsibly grow their business.  Expect nice growth in their interactive division.
  • Coin-in per machine per day was up 13% in their WAP units, but international mix of more leased machines negatively impacted yields.
  • International product sales - favorable shifts in product mix and FX rates (Barcrest and Japan were lower priced units and are now excluded)
  • $185MM of operating cash flow was generated in the quarter
  • Gaming operations: Over 1,000 Center Stage units installed, which are performing well.
  • Shipping universal slant with large portfolio of games. Improving their game development process.
  • International continues to break records - achieved their highest ASPs. Early returns on their 6 Asian games are encouraging.
  • Interactive grew revenues 20% YoY.  Significant increase in total wagers and average bet.
  • Hosted systems user conference in June - demonstrated new applications on their SbX system which they expect to continue to roll out over the next year.  They had significant international wins this quarter.
  • Released Hot Roll Series with their first on-screen interactive bonus.
  • Universal Slant Top box has been well received. Already received orders for 2,300 units. They can swap out titles in an hour on these machines. Advanced design of this machine reduces its manufacturing time by as much as 50%.
  • Reduced time to bring games from idea to market by 33%

Q&A

  • The low hanging fruit has been picked; now it's really pruning and that takes more arms and legs and that's why they have added Eric Berg to their team
  • How are they thinking about the i-gaming opportunity? They are very bullish on the idea of convergence of content. Their igaming strategy is an 100% international strategy.
  • Product gross sales margins - where could they go when units improve?  59% GM that they enjoyed this quarter was a product of mix and cost reductions.  Mix will move around Q to Q. Mix will determine if they can get to 60+% margins.
  • SbX PNL potential? They believe that customer adoption is increasing.
  • What kind of market share do they expect in new markets? 50%+ is viewed as a successful allocation.
  • Trends in their domestic install base? Stabilization in their WAP segment where they have suffered a lot of degradation. Return to more normal seasonal trends. Some of that is due to better games and some is due to a more stable / healthy consumer. This was their second consecutive quarter where their WAP business saw improvements across install base, yields and coin in.
  • Did they sell any of their games ops games this quarter? Their sale of gaming ops games has been very selective for mature games or ones that weren't easily upgradable. There were maybe a few hundred sales in the quarter of games that were at the end of their life cycle.
  • How much of the price increase was due to FX? Regional mix, product line mix was 50% and FX was the other 50%
  • Center Stage - they are still deploying the hardware (backlog) and are also layering on conversions
  • How  many Universal Slant shipments this quarter? Not a huge number this quarter - most of the 2300 is in their backlog.  Interest is really high. They have not yet put forth a real effort on creating a poker refresh.
  • MLD was just south of 50% of their shipments this quarter
  • When will their interactive division revenue become material?
    • Will likely not get to 10% of their business. But it's not unrealistic that by 2013/2014 the business could become material enough to break out.
  • 82% of their gaming operations units were variable. The mix is pretty consistent across domestic and international units.
  • Growth rate on international gaming operations going forward are better than what they are in the US given the relative maturity of their business. Internationally, they have almost 13,000 units internationally. They should be able to continue to grow their international unit install base (albeit the international units have lower yields). They are focused on Asia and Latin American more so than Europe and Australia.