THE DETAILS BEHIND THE SOLID IGT QUARTER

It wasn’t as good as the headline $0.04 beat but it was solid and long thesis remains intact.

Following the solid FQ1, our full fiscal 2013 estimate goes from $1.26 to $1.30.  We think IGT’s unchanged fiscal 2013 guidance was conservative – the company has learned.  Our thesis remains intact:  strong EPS growth, stabilized market share, better capital deployment (read:  higher ROI), and a still cheap valuation.  Hard to argue that 65% EPS growth in FQ1, reduced capex (no new acquisitions – Yeah!), and likely stable and possibly higher market share refutes our thesis in any way.  We will be doing some more work on the capex situation in a follow-up note because that seemed to be an interesting development in the quarter.  For now, please enjoy the additional details/thoughts from the quarter.

 

Product sales

  • North America:
    • Replacements excluding Canada were 3,500 compared to a comparable replacement of 2,800 units in the same period next year
    • Gross margins would have been up an estimated 500bps even without the royalty settlement payment in the quarter.  However, that should be no surprise given the 72% YoY increase in sales.
    • There were 900 units shipped to IL this quarter, 1100 recognized
    • IGT expected to ship about 2k units to Canada this quarter – some of that slipped into next quarter
  • International:
    • 2,500 International shipments in the quarter:
      • Asia:  200 (vs 300 last year)
      • Australia:  1,100 (flat YoY)
      • Europe:  300 (vs 100 last year)
      • S. Africa:  100 (vs 200 last year)
      • Mexico:  700 (vs 200 last year)
      • Latin America:  100 vs (1,100 last year)
    • The thousand deferred units recognized in the quarter were units shipped to Peru and France

Other

  • SG&A was seasonally low and should be higher in the next several quarters.  Moreover, bad debt of $6MM in the quarter actually inflated SG&A.  Management guided to an SG&A number more in line with $110MM/Q.
  • Mgmt was vague on why the bad debt number increased in the quarter – just said that it was several factors and that they increased their reserves related to a few properties
  • Retention and earn out payments should be higher in the next 3 quarters assuming Double Down’s performance remains on the current path
  • Note:  our “normalized EPS” do not exclude the higher amortization related to the acquisition of DD. We never really adjust other company's numbers for higher amortization related to acquisitions so we don’t do it here.  We do exclude the retention and earn out payments.
  • Tax rate was only 33% vs. guidance of 37%
  • Nice decrease in capital expenditures to just $38MM vs $49MM last year.  The majority of the decrease came from a reduction of gaming operations spend.