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Takeaway: Improving fundamentals and more stock buybacks leading to higher estimates going forward

In an effort to evaluate performance and as a follow up to our YouTube, we compare how the quarter measured up to previous management commentary and guidance

 

OVERALL:  BETTER - IGT put up a big quarter and provided guidance above the Street.  The strength of the quarter was mainly in product sales (pricing and margins) and the Interactive division - a pleasant surprise given the negative sentiment surrounding these acquisitions.  However, gaming ops also beat us and the Street so the overall quality of the quarter was quite high.

GAMING OPERATIONS MARGINS

  • LITTLE WORSE:  Game ops gross margins ex interactive was 61% while interactive gross margins was 62%.  IGT expects margins to improve in FY 2013.
  • PREVIOUSLY: For the fourth quarter, we are assuming consolidated gaming operations gross margin of approximately 62%, including our interactive businesses.

PRODUCT SALE MARGINS

  • MUCH BETTER:  Product sales gross margin came in at 56%.  IGT expects more improvement in margins especially in their international business.
  • PREVIOUSLY: For the fourth quarter, we are assuming consolidated product sales gross margin to be approximately 52%.

SHARE COUNT AND RETURN OF CASH TO SHAREHOLDERS

  • SAME:  FY 2012 diluted share count was 290.4 million.  IGT returned $550 million to shareholders in FY 2012.
  • PREVIOUSLY: "We expect our fully diluted weighted average shares outstanding to be 291 million shares for fiscal 2012. Inclusive of dividends, we anticipate returning over $0.5 billion to shareholders in fiscal 2012, a clear indication of the strength of our cash flows and confidence in our strategies."

DOUBLE DOWN OUTLOOK

  • BETTER:   Double Downs showed solid growth in revenues, gross profits, and bookings per user in F4Q. Even though the daily and monthly active users didn't change much, bookings per user came in better than expected.
  • PREVIOUSLY: "I think Double Down is the same. Double Down, we have a couple new products launching in August."

CANADA SHIPMENTS

  • BETTER:  While IGT has yet to confirm, we're pretty confident that Canadian shipments were closer to 4,000 than a couple of thousand this quarter. 
  • PREVIOUSLY: "We have a couple thousand, I think, coming in the next quarter, but it's coming into new provinces where we have to get through the compliance process, so those things are in the balance.

REPLACEMENT MARKET

  • BETTER:  IGT expects NA replacement ship share expected to be 48%. Of course this includes their Canadian shipments
  • PREVIOUSLY: "We always hear very optimistic things about the intent to purchase. I think it has been less predictable. You can see in our North American replacements there were very strong shipments this quarter. We felt very good about the replacement market, so I think that that's an indication of confidence. We'd like to see that trend continue. The things that we hear from operators would indicate they'd like to continue to put capital to work, so we just have to get a little help from the economy."

MARGIN ISSUES

  • BETTER:  Gaming ops margins were significantly higher YoY and international product sales margins was down slightly YoY.
  • PREVIOUSLY: "We're obviously handily beating last year on the revenue line, but we're having challenges on the margin associated with game ops and then some of the international product sales, and we expect that those will continue to a degree."

3Q SG&A, R&D, D&A RUN RATES

  • SAME:  SG&A and R&D increased 3% and 8% QoQ, respectively.  D&A was flat QoQ.  IGT expects to continue to invest in the interactive business but at a rate than the revenue growth in that business going forward.  For the base business they expect low single digit SG&A growth. 
  • PREVIOUSLY:  [3Q SG&A, R&D, D&A good run rates?]  "I think you're going to continue to see some level of growth there as, for example, advertising and selling continue to factor into the Double Down model. But we will continue to make those investments as long as they're accompanied by growth in revenue, which we are seeing."