INVESTORS NOT EXPECTING AN IGT BEAT

We think IGT has a lot of incentive to post a strong FQ2

Strong sales momentum, particularly in March, should contribute to an estimate-beating quarter in our opinion.  Our $0.32 EPS estimate exceeds consensus by $0.02 driven by a revenue estimate 3% higher.  Double Down (DD) could also outperform expectations as it did in FQ1.  Given the poor sentiment surrounding that acquisition, a DD beat could also be a catalyst.  Our sense is that any overall upside to EPS would be a surprise to the buy side. 

Going forward, we do not expect much change in F2013 guidance of $1.20 to $1.30 although a rise and narrowing of the range to something like $1.24 to $1.32 wouldn’t be surprising.  We remain at the top end of the guidance range (consensus is $1.26) which puts IGT’s valuation at slightly more than 12.6x FY2013 EPS.  On our FY2014 estimate of $1.45, IGT trades at only 11.3x.  Clearly at this valuation, IGT remains a “show me” stock for which every quarterly meet or beat could be impactful.

FQ2 DETAIL

We estimate that IGT will report $587MM of total revenue and adjusted EPS of $0.32, 3% and 5% ahead of consensus, respectively.  Product sales of $279MM at a 54% gross margin.

• Our channel checks have indicated that IGT had very strong sales momentum in March, some of the best that the company has seen in years. We believe that some of the strength is attributable to ongoing promotions which offered incentives to order products prior to the quarter close.  We would expect to see a slower sales pace in April.
• NA sales of $135MM and gross margin of $74MM
  • $143MM of NA box sales: 10,215 gaming machines at ASP of $14k
  • 7,915 replacements and 2,300 new units
    • ~800 shipments to IL
      • We heard some conflicting things here.  The company indicated that shipments should be up QoQ.  However, another one of our channel checks told us that IGT only shipped 775 units in the Q.
  • ~3,400 shipments to Canada
  • 1,375 to Saskatchewan
  • 1,500 to Manitoba
  • 500 to Quebec
  • 1,200 units to OH
  • 800 to Cincinnati
  • 400 to Thistledown
• ASP’s should be down QoQ and YoY given the larger shipment to Canada of lower priced VLT machines
• Non-box sales of $55MM, down a little QoQ.  1Q benefited from IP fees.
• International sales of $80MM and gross margin of $40MM
  • $59MM of box sales:  3,700 units at an ASP of $15.8k
  • Non-box sales of $21MM
  • 50% gross margins

Gaming operations revenue and gross margin of $308MM and $190MM, respectively

• End of Period install base of 57,632
• Core gaming operations revenue of $249MM, implying an average win per day of $49/day
• $59MM of interactive revenue
  • $46MM of DoubleDown revenue
    • During the JPMorgan conference, CEO Patti Hart indicated that DD revenues per user were trending at 31 cents.  In late March, IGT executives indicated that revenues per user and DAU’s were up QoQ and that the revenue momentum that they've seen the last few quarters in the business is continuing.
• $13MM of other interactive revenue

Other stuff:

• SG&A: $108MM
  • Management guided to a pace of $110MM/Q
• R&D: $57MM
• R&D is typically higher in 2Q
• D&A: $20MM
• Net interest expense: $21MM
• 37% tax rate
• Weighted average shares outstanding: 266.5MM
• According to the Company, they were in a self-imposed black-out period due to the ADER proxy fight that ended March 5^th.  The normal end of period black out period started up again on March 15^th.  Therefore, we are fairly confident that IGT did not purchase much stock during the quarter.