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IGT F4Q11 CONF CALL NOTES

Solid quarter in both segments and low ball guidance that excludes Ohio and Canada.

 

 

"In fiscal year 2011, we grew revenue, leveraged our gaming operations, improved margins, positioned the international business for growth and increased our interactive presence. We delivered strong financial results and held true to the commitments we made to our shareholders by directing our resources towards the highest returning opportunities.  We are focused on improving all aspects of our business, with the expected outcome of improved returns to our shareholders in fiscal year 2012."

 

- Patti Hart, CEO of IGT

 

CONF CALL NOTES

  • At least 50% of their core games are performing at 1.5x house average, up from 1/3 a year ago
  • Interactive business is advancing - added poker, bingo and sports betting with the acquisition of Entraction
  • Estimate that their NA replacement share was 40-45%
  • NA gross margins increase due to higher IP fees, lower production costs, and less promotional activity/discounting
  • Decrease in domestic conversion kits was offset mostly by an increase of domestic IP fees
  • Anticipate further improving their operating margins by growing their gaming operations install base.  Expect their R&D to remain constant in 2012. 
  • Plan to strengthen their interactive division by strengthening their poker liquidity 
  • They are changing their performance metrics to align incentives on delivering machines on customer deadlines
  • G2E: initial orders for G20 machines exceeded 2,000 machines
  • 2012 focus areas:
    • Optimizing operating as a truly global entity trying to leverage their scale
    • Continue to put customers first
    • Entered into a first look agreement with Sony 
  • Guidance assume a 37% tax rate and a share repurchase plan in-line with the last 2 quarters

 

Q&A

  • Assumptions behind their low guidance?
    • Management is conservative
    • Low end of the guidance assumes no uptick in replacement, small uptick in game ops and small yield uptick - no IL, OH, Canada
    • High end is a bit more optimistic but no IL, OH, or Canada given the uncertainty in timing
  • Thoughts on market share over the NTM? 
    • Think that they came in mid-40s for replacement share this quarter. Think that they can do mid 30s replacement share and 50% for new openings.
    • It's really about having breadth and depth across every product line for them at G2E
    • Clients appreciated efforts on systems front and investing in steppers
  • Think it's important to give guidance that investors can take to the bank
    • Reason that the guidance is low is that they excluded anything where the timing of openings and new markets was uncertain
    • They do expect margin expansion
  • NA ASPs
    • Saw high ASP's while they picked up a lot of share and in a highly promotional environment is good in IGT's opinion
    • In Q4 they had a slightly lower MLD mix.  Last year they had a big MLD push as well.
  • GM for gaming operations is still lower even adjusting for the charge and mix - WAPs are at a higher % and they have lower margins (but higher margin $)
  • Decline of non-machine sales was due to lower parts and conversion kit sales - reflective of them buying newer boxes instead
  • Entraction contribution - was neutral in the Q - slightly to revenues but nothing to earnings.  Right now it's not material but financially strategically important - same thing for the next few quarters.
  • Will continue to carefully manage their capex on their install base.  Big NY deployment moves things around though
  • Absent a better use of cash (M&A/acquisitions/ partnerships, change out of old platforms in games ops to improve yields) they will continue to pay out a dividend and buyback stock.  They will also accumulate some cash on the balance to address their convert maturity in 2014.
  • SG&A increase sequentially and YoY was due to 
    • Variable comp 
    • Investing in international resources
    • Transaction expenses
  • They are very focused on managing SG&A, so if it's rising, it's because of rising revenues and gross margins
  • They are still in investment mode in Asia - do expect to pick up a bit of share in F12.  Not as much in Europe in 2012
  • Their international ASPs float within $1k of the current range.  Assume that ASPs hold flat YoY.
  • Comment on replacement demand in the quarter - they are focused on the annual number, not so much on the quarterly number.  They are more focused on their 16k number for the FY vs. annualized this last Q.
  • IGT is just modeling what they have solid visibility on and not what they do not. They are comfortable modeling 15k replacement units. Also see a flatish year for new and expansion units if they exclude all the new markets (OH, IL, and Canada)
  • Where they have seen the benefit of their gaming operations capex is in the yield improvements (spent $190MM this year)
  • You should continue to see international drive gaming operations growth.  Goal is to maintain the US install base and grow the international one.
  • Gaming operations D&A looked like it increased? 
    • Picked up in the Q but for the year total D&A is down.  Going forward, capex and D&A should be pretty close to each other ~$200MM.
  • SG&A - bad debt was $1.1MM
  • Aqueduct is a big capex chunk that will come in lumpy.  Shipment was 36-37% in each phase.
  • Aria - recorded most of the systems revenue in the quarter as deferred revenue
  • Mexico?
    • Have 6, recurring revenue base games.  Don't see any exposure from an impairment standpoint right now. 
  • Did ship to both Kansas properties - but one has some deferred revenue since it had a systems piece - ship share was low 40's.  Didn't ship to Miami Jai Lai.

HIGHLIGHTS FROM THE RELEASE

  • "2012 guidance for adjusted earnings from continuing operations in a range of $0.93 to $1.03 per share."
  • Gaming operations:
    • Revenues "increased 8%...  mostly due to improved WAP performance, growth in the International install base and increased interactive revenue with the acquisition of Entraction Holding AB." 
    • "Average revenue per unit per day ...was $58.08, up 9%... on performance improvements in our MegaJackpots brand globally and International lease operations"
    • "gross margin declined to 57%... primarily due to an intellectual property litigation settlement of $5 million.  Additionally, increased jackpot funding costs due to unfavorable interest rate changes reduced gaming operations gross margin by 80 basis points"
    • "IGT's gaming operations installed base totaled 53,900 units, an increase of 1,000 over the prior year and an increase of 600 units from the immediately preceding quarter primarily due to additions in International operations"
  • Product sales:
    • "11,300 units in the quarter, up 38% from last year's fourth quarter, primarily due to an increase in domestic replacement units"
      • NA units shipped: 6.5K units (5.1K replacement & 1.4K new) and ASP of $14.2K
      • International units shipped: 4.6K (2.7K replacement & 1.9K new)  and ASP of $16.9K
    • "Domestic average selling price was flat... International average selling prices increased 4%... due to favorable foreign exchange rates."
    • "Consolidated gross margin on product sales was 54% ... compared to 55% last year primarily due to the higher mix of machine versus non-machine sales in the current year."
  • During 4Q, IGT "repurchased 1.6 million shares of common stock at an average price of $15.30 per share for a total cost of $25 million"


Covering AYT – Trade Update

Conclusion: We are covering our Asian currency basket short in our Virtual Portfolio as Asia is not likely to pick up the pace of rate cuts with oil (inflation) up here in November.

 

Shortly before this afternoon’s close, Keith covered AYT for a modest appreciation vs. our cost basis within our Virtual Portfolio. We remain bearish on emerging Asian currencies vs. King Dollar over the intermediate-term TREND, but we have chosen to manage the immediate-term risk of crude oil prices breaking out from a quantitative perspective on our proprietary factoring – particularly given the inflationary impact of higher energy and transport costs. Be it what we can model (QE3 speculation) vs. what we can’t (Iran/Israel shouting match), we don’t like what we are seeing in the oil markets because it will bring on more Stagflation. Refer to Keith’s 11/8 Early Look titled “Self Indulgence” for additional analysis on this subject.

 

Covering AYT – Trade Update - 1

 

Covering AYT – Trade Update - 2

 

The quick and dirty as it relates to the knock-on effects of higher energy prices across Asian currency markets is that it could slow the deceleration in headline CPI readings across the region and keep Asian central banks on the sidelines in the short term, which limits, on the margin, any near-term scope for further monetary easing – an outcome that has been largely priced into Asian interest rate swaps markets for the past couple of quarters.

 

Covering AYT – Trade Update - 3

 

Of course, a sustained breakout in global energy prices would indeed be a particularly growth-negative event for Asia, as well as the more developed economies such as the U.S. and the E.U. We think the USD is the ultimate winner here as Asian export earnings dwindle and short-term capital flows seek the perceived safety of U.S. instruments. Managing the duration risk will be critical to manage (i.e. don’t short Asian currencies too early in this scenario b/c the beta chase is likely to prevail in the short term). For further analysis behind the extremely damaging side-effects of further U.S. monetary easing from current levels of global growth/inflation, refer to our 10/25 note titled, "Global Growth Update: Incremental Deterioration Forthcoming?".

 

Darius Dale

Analyst

 

Covering AYT – Trade Update - 4



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HEDGEYE'S BEST IDEAS. PERIOD: CONFERENCE CALL FRIDAY, NOV. 11TH AT 11AM EST

HEDGEYE'S BEST IDEAS. PERIOD.

CONFERENCE CALL FRIDAY, NOV. 11TH AT 11AM EST

 

Dear Subscribers:

 

We invite you to join us this Friday, November 11th, for our first-annual Best Ideas call. We will be outlining the top investment ideas, both long and short, across each vertical of our world-class research team. In aggregate, we will offer more than ten unique and differentiated investment ideas for the intermediate term.
 
We will be circulating the dial in information and presentation the day before the call.
 
On the call will be:

 

·         Keith McCullough, CEO

·         Daryl Jones, Macro

·         Brian McGough, Retail

·         Todd Jordan, Gaming, Lodging and Leisure

·         Howard Penney, Restaurants

·         Tom Tobin, Healthcare

·         Josh Steiner, Financials
 


ABOUT HEDGEYE


Hedgeye Risk Management is a leading independent provider of real-time investment research. Focused exclusively on generating and delivering actionable investment ideas, the firm combines quantitative, bottom-up and macro analysis with an emphasis on timing. The Hedgeye team features some of the world's most regarded research analysts - united around a vision of independent, uncompromised real-time investment research as a service. For a complete listing of our sector head bios, please click here: https://www2.hedgeye.com/pages/team
 
Regards,
 

 

The Hedgeye Sales Team


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