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Canada and IL moving faster than expected

Maybe the only positive takeaways from IGT’s earnings call were that replacements were a lot better than we expected and Illinois units should start shipping in the September quarter.  Canada was the big boost to IGT’s replacement tally and the news there looks even better.  We’ve done some research and it looks like both markets may be moving faster and generating greater sales over the next 1 to 2 years than expected by the Street.

 

Canada


Driving IGT’s strong replacements was the beginning of the once-in-a-decade tailwind where Canadian provinces overhaul their systems and undergo a massive replacement cycle.  IGT shipped 900 units to Loto-Quebec in the June quarter.  Next quarter, IGT may ship 3,000 units to Loto-Quebec and Atlantic Lottery Corporation.  IGT isn’t the only manufacturer gearing up their plants for Canadian shipments; BYI and WMS may ship in the September quarter to the Atlantic Lottery and Alberta, respectively.    

A further boost could come from the Western Canadian Lottery Corporation (representing the provinces of Saskatchewan and Manitoba) who may be awarding between 10-11k replacement units soon after finalizing some details.  We estimate that over the next 2 years, an additional 28k replacement units should be shipped to Canadian provinces.  This may be more than the Street is expecting.

Illinois


In IL, there are currently 88 locations that are approved for VLTs, with a maximum of 5 machines per location.  The Illinois Gaming Board meets each month to approve additional locations.  Starting in September, the authorities will actively pursue enforcement against locations operating “grey” machines, charging them with Felony action.  We therefore expect an acceleration of approvals for legal machines in the coming months.  Our understanding is that ASPs will be in the mid $12k range and that many suppliers will offer financing to route operators. 

Into Illinois, IGT will distribute its units exclusively through ABS; WMS will use Betsson as their distributor; while BYI is planning on selling directly to route operators.   We understand that IGT has a slug of units on order while BYI also has “some” units on order.  We believe WMS do not have any orders yet.

We expect about 1,000 units to be shipped to IL in the September quarter, with IGT recognizing the majority of those units.  In total, we think that there should be about 3,000 units shipped to IL in 2H2012 and over 10,000 units in 2013.  In terms of backlog, we think that distributors have already put in orders for 5,000 slots, of which 1,500 went to IGT.  BYI and ALL garnered about 10% share, while WMS was left behind given their high product pricing.  While there are still a few obstacles for the route market to begin operations, it looks like we could be seeing at about 10,000 units go to IL over the next 12 months and potentially much more than that over the next 2 years.  Again, we think those numbers may exceed Street expectations.