IGT F1Q13 REPORT CARD

Takeaway: IGT thesis remains intact: better capital deployment, strong EPS growth, and cheap valuation.

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

  • SLIGHTLY BETTER: While the topline was clearly ahead of the Street and our estimate we think that the the core results were weaker than the headline.  Product sales were strong but benefitted from the recognition of deferred units.  Core gaming operations continue to disappoint but gross margins and better cash flow were encouraging.  Overall, the EPS beat vs. our numbers was really a combination of the lower SG&A, R&D, D&A and rentention accruals in the quarter. 

2013 GAMING OPERATIONS REVENUE AND GROSS PROFIT

  • SLIGHTLY WORSE:  F1Q 2013 gaming ops revs fell 4% but margins showed improvement. Installed base was up 2%.  IGT is still targeting flat gaming ops yield in 2013 as well as better gross margins
  • PREVIOUSLY:  “In 2013, we expect Gaming Operations revenue and installed base to be about flat with 2012, while gross margin and profit per unit are expected to show modest improvements.”

 

GAMING EQUIPMENT SALES AND MARGINS

  • BETTER:  Product sales revenues soared 30% YoY and margins rose 4% YoY, both better than expected. Uptick in margins was due to higher non-box sales and discount sales were down significantly. $5MM in royalty settlement fees also helped.
  • PREVIOUSLY: “On the strength of our VLT business in Canada, Ohio, and Illinois, where we expect to enjoy leading ship shares, we anticipate our product sales revenue and gross profit to deliver double-digit increases, while gross margin may be slightly softer due to mix.”

IGTi REVENUE AND MARGINS

  • SAME:  IGTi revenues and margins were $1MM and 1% lower YoY, respectively.  Online casino customers, including Italy, rose 20%.
  • PREVIOUSLY:  
    • “Moving forward, we expect some additional costs and, in the short term, lower revenues and gross margin in our IGTi business as this restructuring plan is executed. On the positive side, these actions are anticipated to reduce annual operating expenses in our IGTi business.”
    • “At our IGTi group, we expect to see continued growth in our mobile real-money wagering business consistent with our past trends.”

ADJUSTED OPERATING MARGINS

  • BETTER:  Adjusted operating expenses were 32% of revenues for the first quarter compared to 34% of revenues in the prior year quarter.  IGT sees more room for improvement.
  • PREVIOUSLY: “For the year, adjusted operating expenses were about flat as a percentage of revenue, and we expect this trend to remain consistent into 2013.”

MEGAJACKPOTS  

  • WORSE:  Megajackpots drove gaming ops revenues and average revenue per unit per day lower.  Margins, however, did improve more than 200bps YoY as IGT managed their capital investment.
  • PREVIOUSLY: “We expect to stabilize our MegaJackpot revenues."

SG&A GROWTH

  • SAME:  F1Q SG&A grew about $10 million or 12% YoY, with almost the entire increase attributable to investments in Interactive. The YoY increase should moderate in 2H and particularly in 4Q as IGT laps the consolidation of Double Down.
  • PREVIOUSLY:
    • “The vast majority of the growth in SG&A this year has been related to our Interactive businesses. That's the IGTi business and then, obviously, the acquisition of Double Down. In fact, the base SG&A has grown less than double-digit dollars. So we would expect to continue to invest in the Interactive business, but at a rate that's less than the revenue growth expectations going forward. And then in the base business, we'd expect again low, low single-digit SG&A growth.”
      • Q: So if I think about that just empirically, maybe $30 million in incremental SG&A?
      • A: I think that's about right on the growth next year, recognizing that we have one more quarter of Double Down next year than we had in the prior first quarter

GAMING OPERATIONS CAPEX

  • BETTER:  Gaming ops capex was about $30MM in F1Q 2013.  IGT expects total capex to be at or below year-ago levels for FY 2013, however this quarter certainly ran materially below last year.
  • PREVIOUSLY: “I would think about capital in the Gaming Operations business as flat to down slightly.”

GAME OPS YIELD

  • SLIGHTLY WORSE:  Average revenue per unit per day in the first quarter was $46.80, down 7% over the prior year quarter and down 8% sequentially.
  • PREVIOUSLY: “I would expect that there will be continued pressure on yield, so we're taking active steps in the quarter and have been for the last quarter”

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