IGT: OHIO SLIPS BUT WHO CARES?

We’re 2c below the Street for FQ2 but 3c above for FQ3.  Focus should be on international.

 

 

Fiscal 2Q is likely to be a quarter of record deferrals for IGT.  We already knew that IGT would not be able to recognize their shipment to Revel and now are pretty sure that Ohio will also be deferred.  With over 2,300 units deferred, our F2Q estimate is $0.24 but our FQ3 estimate is $0.30, 3c above the Street.

 

While the deferral of the Ohio and Revel units have been well telegraphed, most sellside analysts have yet to lower their numbers.  Consensus still reflects over 6k units being shipped to NA in the F2Q.  We don’t think that investors will really care about a quarter of deferrals especially if the rest of the business is humming along. 

 

We think that will be the case, especially on the international side where 11% top line growth should provide some visibility on IGT’s positive long-term outlook for the market and market share growth.  We’re still skeptical that IGT can reach its 30% market share goal but 25% or even 20% share does not appear to be discounted in the stock at this level.  Any progress in the international arena should outweigh the slippage issue.

 

 

F2Q Detail

 

We estimate that IGT will report F2Q results of $504MM of revenue and $0.24 of EPS.  At $215MM of product sale revenue, we’re 9% below the Street.  Our game operations estimate of $289MM is in-line with sell-side estimates.

 

Domestic product sale revenue of $120.7MM and gross margin of $68.5MM

  • Box sales of $68MM
    • $14.5k ASP
    • Recognized units 4.7k
      • We project that replacements should be up YoY, at 4,000
      • New unit sales of approximately 700
  • Lots of deferred unit sales:
    • IGT shipped ~950 games to Revel, but won’t get recognized until the June Q.  The server based component in the games makes it difficult to separate the system from the unit sales.
    • Approximately 1,425 units were shipped to Penn and CZR in Ohio but will not be recognized until the June quarter.  While the operators have “provisional licenses”/ “letters of acceptance” which give them authorization to receive slot machines, IGT is taking a conservative approach to revenue recognition.  One of the revenue recognition rules requires all consequential obligations to have been fulfilled at the time of recognition.  The way various operators interpret “consequential” will determine whether they recognize the units in the March or June quarter.  Having a license to open can be determined as consequential by IGT.
  • ASP’s will be down QoQ given the lower mix of MLDs this quarter compared to last, but margins should be up
  • Non-box sales of $54MM, down 5% YoY, due to lower conversion kit sales

International product sale revenue of $94.4MM at a 50% margin

  • $72.4MM of box sales
    • 4,050 unit sales (up 24% YoY)
    • $16.3k ASP
  • We believe that most of the unit growth will be driven by share gains in Macau and placements at SCC opening on April 11th
  • While we expect a decline QoQ in ASPs, margins on box sales should be up sequentially
  • We project international non-box sales of $22MM up YoY and QoQ

Gaming operations revenue of $289MM at a 60% gross margin

  • We estimate and ending install base of just 55.9k units.
  • The March quarter should benefit from a full quarter of a fully open and ramped Resorts World NY and some contribution from Double Down.
  • The strong regional results this quarter should benefit IGT’s largely variable average win per day

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