IGT: NO WORRIES

IGT addressed some major concerns with a high quality and substantial beat.  Higher FY2013 guidance a nice bonus.

 

 

IGT was our favorite name heading into earnings and though we were projecting a beat this quarter and calling for higher 2013 estimates, even we were surprised how good the quarter was.  In fact, this is the first time in recent memory where we’re writing a positive review of IGT’s results.  The momentum looks sustainable as fiscal 2013 guidance was introduced at $1.20-1.30 vs. the Street at $1.18.

 

FQ4 was a very high quality quarter almost across the board.  EPS of $0.38 beat our estimate by $0.04 and the Street by $0.06.  Moreover, IGT addressed a couple of major issues that had been hurting sentiment:  Interactive performed very well and slot ship share grew substantially.  Maybe the Interactive acquisitions weren’t such a disaster after all?  And as we pointed out in our 10/1/12 note “IGT: IMPROVING 2013 VISIBILITY,” a significant capital deployment shift toward stock buybacks amid an improving fundamental backdrop is a pretty powerful long thesis for a cheap stock.

 

We will have some more insight after speaking with management today but here are some preliminary takeaways.

 

The Positives

  • North American product sales and margins were better than we expected
    • IGT shipped over 1.6k more units than we expected.  Most of the upside came from better ship share on replacements.
    • ASPs were significantly higher given the high percentage of Canadian units shipped in the quarter
    • IGT shipped 4,100 units to Canada but only 3,300 of those were VLT units.  Last year, IGT shipped 700 units to Canada in F4Q11.
    • IGT did not recognize any VGT units shipped to IL
    • Based on our calculation, IGT’s ship-share was 42% this quarter vs. 40% last year and 34% in the June Q.  The September Q is usually IGT’s best ship share quarter.
    • Product margins likely benefited from lower discounting and higher volume.  Higher IP payments likely also helped since those carry a 100% margin.
  • Non-box sales were better
    • We initially thought that perhaps IGT’s system business was gaining some traction, but it sounded like most of the bump was due to the settlement payments from BYI.
  • Interactive revenues and margins were a lot better than we expected
    • We thought that with the reorganization at Entraction that IGT’s revenues would take a hit, instead they look like they grew several MM QoQ
    • Double Down revenue was $2MM above our estimate due to bookings per user increasing more than we projected
    • Margins were just plain better
  • Guidance was above the street and the mid-point was higher than our $1.20 estimate
    • Interactive looks like it’s on track to deliver approximately $230MM of revenue at over a 60% gross margin
    • 10% growth in product sales seems achievable and IGT should be able to leverage some of that growth to produce better margins

The Negatives

  • International unit sales fell short of our expectations - though IGT backed away from guidance given earlier in the year of double-digit unit growth in international, during our last conversation with the company, they still insisted that international unit shipments would be up high single digits.  Instead, we saw a 2% YoY decline.
  • While the shipments to Canada were impressive, IGT also saw a huge increase in their receivable, largely as a result of monies due for the Canadian VLTs shipped
  • While ahead of us and the Street, core gaming operations continue at a flattish pace
    • The install base was disappointing, especially in light of the incremental units in Maryland.  IGT’s WAP base saw a fairly large sequential decline.
    • Yields in WAPs were down again YoY



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