07/24/12 06:16PM EDT

A pretty big miss but you wouldn't know it by the tone of the conference call

"Against the backdrop of an inconsistent global economic recovery, we are generally pleased with this quarter's results and remain on track to meet our fiscal year 2012 financial goals.  The recent announcement of our $1 billion share repurchase is further evidence of our confidence in the outlook for IGT."

- Patti Hart, CEO of IGT


  • While some areas of the business fell short of their expectations, other areas excelled. 
  • International results were mixed.  Confident that international will be a strong contributor to growth in the future.
  • Expanding their Interactive business into mobile applications
  • About where they expected to be at this point in the year.
    • It is surprising that IGT thought the quarter would be this weak
  • They claim to be pleased with their revenue growth in the Q? Seriously?
  • Interactive generated $43MM in the Q
  • 62% gaming operations margin for next quarter
  • The gaming operations business remains extremely competitive
  • Game sales: Shipped 900 Canadian VLT units. More used unit sales lowered ASPs.
    • We thought that these were just new units
  • Expect gross margin of 52% for product sales in 4Q
  • Have repurchased 10% of their share count this year so far.  Anticipate returning $500MM of cash to shareholders (including dividends) in FY12
  • They are reiterating the same guidance for the year, despite the lower share count...ongoing fundamentals have clearly gotten worse.


  • Why in the world would they do the buyback ahead of such a nasty quarter?
    • They don't see the quarter as a miss: Double Down is performing better than expected. North America shipments are better than expected. They had some one time used unit sales into Mexico that negatively affected ASPs.
  • Big difference between shipped and recognized units this quarter
  • The reason for such a large range of guidance for one quarter has to do with:
    • Few thousand VLTs shipping next Q
    • Little IL VLTs in the F4Q
    • A few new Ohio properties that can go either way
    • Some import/export issues that have nothing to do with the business
    • Double Down has some new products launching
    • Poor international visibility
  • Double Downs 
    • Focusing on expanding across platforms and geographies and rolled out less games this Q which is why users slowed
  • Would like to see the trend of replacements in NA increasing YoY
  • Have a little IL and Canadian units included in their guidance now; they did not include them in their previous guidance
  • Lower margins on product sales next quarter is partly driven by the very competitive environment.  Their AVP and MLD units were down materially as a % of their mix. Since Canada and VLTs are going to be a big part of their business going forward, they will have lower prices and margins.
  • Excluding VLTs and used unit sales, the unit pricing would have been flat
  • Game ops margins ex DD was 60% 
  • Implicit guide down is due to margin challenges in gaming operations and international sales. 
  • Gaming operations yields continues to slide. They are adjusting their thinking about putting out lower yielding products and taking what they can get.  Competition is really hot in the WAP area, the economy is weak and they have some WAPs that aren't performing.  They have made some personnel changes to address some of the product issues. 
  • Double Down user growth from here?
    • The first priority is to expand the platform to mobile and geographic exposure
    • Then they are focused on adding the IGT content
    • So basically they don't expect to have MAU growth until the two above happen. 
    • Will their bookings per unit decrease when they go mobile? No comment but their competition has lower bookings per user on mobile. Mobile is still a small piece of their business so it's not impacting them yet.
  • They will have better ASPs next quarter but units need to be way higher to make the guidance
  • Double Down looks like a dilutive business so far, when will that change?
    • It's not dilutive 
    • There are other Interactive businesses in there, not just Double Down
    • Will continue to invest in those businesses as long as they believe in the growth there
  • There was nothing extraordinary in the R&D and SG&A 
  • Will they have to take an impairment on the Double Down purchase?
    • No, they don't believe that they will need to take a writedown. If anything they just wrote up their contigent payment. The added verbiage on writedowns had nothing to do with an impairment charge down the road. 
    • They are more focused on mining revenues from their existing users than customer acquisitions. Their plan is to grow users and revenue per user. 
    • The impairment language has to do with the fact that they will be reevaluating the earnout payments
  • The competitive environment has remained constant in terms of product and price for over a year at this point
  • Had sizable used unit sales in their unit numbers
  • Video poker: their competitors are making some moves but time will tell on how successful they will be.  The video poker customer is not one that likes change.  Their strategy is to tweak the product but to stick to appealing to the core player.
  • Evaluate the pricing on their WAP games based on each individual situation.  On a case by case basis, they will do what they can to maintain floor space, other times they relinquish floor space rather than cap yields.
  • In the quarter, they recognized Scotia Downs
  • They don't currently expect that OH legislation will allow for route operators
  • Expect that a handful of IGT games go into the Double Down platform this year. Want to wait until they have the broadest reach possible. Will see the broader language conversion come online in calender 2013.


  • "The company is reiterating its fiscal year 2012 guidance for adjusted earnings from continuing operations of $0.98 to $1.04 per share. This guidance assumes our fully diluted weighted average shares outstanding will be 291 million for fiscal 2012"
  • "Revenues increased 13% to $301 million in the third quarter, primarily due to increases in the interactive businesses. Excluding the interactive businesses, revenues were flat." 
  • "Gross margin decreased to 59% from 62% in the third quarter, primarily due to the inclusion of the interactive businesses and lower MegaJackpots yields"
  • "Excluding the positive impact from the interactive businesses, average revenue per unit per day in the third quarter was $50.20, down 4% sequentially and 7% over the prior year quarter, mainly due to lower MegaJackpots yields and a higher mix of lower-yielding units in the installed base."
  • "Double Down monthly users were 5.2 million as of June 30, 2012, a decrease of 7% when compared to March 31, 2012" but daily bookings per day increased to $0.25 from $0.24 last Q
  •  Product sales: 11.6k shipments recognized vs. 12.6k shipped
    • NA: 8.2k (3.1k new, 5.1k replacement) recognized and 8.7k shipped
      • ASP down 8.5% YoY and 12% QoQ to $13.1k
    • International: 3.4 units recognized, 3.9k shipped
      • ASP down 9% YoY and 14% QoQ to $15.1k
    • "Average machine sales price decreased 11% in the third quarter, mainly due to an unfavorable pricing mix related to increased lottery and used game sales." 
    • "North America gross margin increased to 56% from 55% due to higher production volumes"
  • "Excluding the revenue and operating expenses associated with the interactive businesses, total operating expenses increased 140 bps as a percentage of revenue compared to the prior year quarter, largely due to unfavorable bad debt provisions"
  • Debt increased $280MM as a result of funding the $400MM buyback announced on 6/14. 21MM shares were delivered under the ASB on July 2.  "The company may receive additional shares until the completion of the repurchase period, which is expected to end during this calendar year."
  • IGT also repurchased 2MM shares of stock in the open market under its previous authorization at an average price of $14.48 per share for a total cost of $25 million.
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