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IGT delivers strong revs and eps, Interactive on fire, and buyback more aggressive than we thought. Guidance looks overly conservative.


"We are very pleased with our momentum through the second quarter, demonstrating the strength of our comprehensive strategy – leveraging our core business, broadening the distribution of our premier content, and generating shareholder returns.  As we continue to deliver on this strategy, we expect that this will be our fourth consecutive year of double digit growth in adjusted earnings per share from continuing operations."

-  Patti Hart, CEO of IGT 

 

CONF CALL NOTES

  • Estimate that they captured over 40% market share in the Canadian replacement cycle
  • IGT titles are driving more than 50% of their revenues on DoubleDown
  • Mobile gaming platform saw a remarkable increase in play
  • Remain confident that their investment in DD will more than exceed their cost of capital
  • Experienced a pivotal moment in Feb when NJ passed legislature to allow full online gaming 
  • In Canada they partnered with BCLC by hosting IGT content on BCLC's website
  • International: there is strong demand for IGT's offerings but there are systemic issues that have prevented IGT's participation in certain regions as well as economic issues.  Long term, they still expect international markets to outpace US market growth.
  • Confident that they gained ship share in both replacement and new market shipments in NA
  • Dolly Partner is doing well and was recently launched. Their skilled-based games are also gaining traction.
  • In international markets, systems products did well but product sales struggled
  • Expect that their objective of getting to flat YoY yields by year end will be challenging to achieve. 
  • Expect to see a decrease in game ops capex driven by a decrease in new installments
  • iIGT:  their online casino business grew but was negatively impacted by the absence of their European poker business
  • Double Down:  French, German and Spanish site launches should drive further growth; however, they could see declines in average bookings per user.  Still expect the transaction to be accretive by 2014.
  • Closed on a 5 year unsecured credit facility.  They lowered their borrowing costs by over 20% and extended their maturities.
  • Patti has never been more encouraged by IGT's prospects

Q&A

  • They wanted to be aggressive in tapping into capital budgets early in the calendar year
  • Traditionally their margins are in the low 50's range for product margins.  They expect to be there for the balance of the year.
  • Game ops: the biggest headwind is lack of stability in GGR trends across the States
  • Getting back to flat YoY yields may be a stretch unless they do something extraordinary
  • They are very excited about NJ.  They will use their content in NJ that they have been using for the past 10 years outside of the US.  The market in NJ has not matured to the point of sale yet.  For now, everyone is looking to decide which platform to use.  They expect to provide their content onto other platforms - they will be focused on casino style games only.
  • R&D and SG&A run rate?  They ticked up because of a jump in bad debt and some extraordinary costs with the proxy fight and Alabama charges. They expect that costs may tick down closer to 1Q levels aside from marketing costs related to DD.
  • Continue to see a shift towards lease operations and away from WAPs to standalones
  • They were unable to repurchase shares during the proxy battle
  • Model that they have used in Europe for online content and Canada - have all been revenue participation models. The cut for content providers have been a pretty tight range.
  • Wanted to be aggressive to taking share early in the year while their customers still had capital, especially if GGR continues to struggle
  • The decline in their NA install base has been due to heightened competition, shifting trend to standalone from WAP, and general weakness of GGR
  • Think that the introduction of a mid-tier participation products will help them (CSI, Family Guy, American Idol Encore)
  • They have not changed their approach to use of FCF  - first dollar to investment in the business then capital returns
  • Canadian VLTs:  3,500 
  • Expect that the vast majority of the balance of the units should ship this year. There may be some follow on activity as some locations top off their floors in 2014.
  • IL VGTs: only 500-600 units
  • DD - what to expect for the balance of the year in terms of momentum:  Think that they can continue to grow DAU with the launch of new language sites but that may impact average bookings.  Expect that they will continue to grow sequentially - but not necessarily at the same pace as they saw this Q.
  • Systemic issue on the international side?  Some impediments to importing into certain markets, continue to see major macro headwinds in Europe.  However, they still believe that they can grow high to mid-single digit over the longer-term internationally.
  • How many video poker machines did they ship?  It was "unremarkable."

HIGHLIGHTS TO THE RELEASE

  • Based on current expectations and the operating results for the second quarter of fiscal 2013, the company is increasing its fiscal year 2013 guidance for adjusted earnings from continuing operations to $1.26 to $1.32 per share. 
  • Revenues increased 11%...driven by growth in North America machine sales and social gaming
  • Non-GAAP adjusted financial measures for the second quarter ended March 31, 2013 exclude acquisition-related charges for DoubleDown, fees related to the proxy contest, Alabama note impairment and certain discrete tax benefits
  • Gaming operations revenues decreased 4%....primarily due to lower MegaJackpots revenue
    • Gross margin increased.... primarily due to lower jackpot expenses and depreciation
    • Installed base increase was driven by lease operations growth globally
    • Average revenue per unit per day ... was $49.26, down 6% ...primarily due to lower yields, most significant in MegaJackpots, and up 5% sequentially due to seasonal gaming trends
  • Product sales:  Revenues increased 16% .... and units recognized increased 40% to 14,300... primarily due to increased North America machine sales related to Canadian VLT customers, as well as an increase in North America new openings
    • Gross margin decreased... due to targeted promotional activity, unfavorable mix shift and higher non-standard manufacturing costs.
    • ASPs decreased 11% mainly due to targeted promotional activity and an increased mix of lower-priced VLT sales.
  • Interactive revenues increased 94% YoY and gross margins grew 600bps
    • Social gaming revenues...increased 31% sequentially to $54 million, primarily driven by an increase in both average DAU and average bookings per DAU
    • Average DAU were 1.7 million... an increase of 16% compared to the prior sequential quarter
    • Average bookings per DAU increased 19% sequentially to $0.37 
  • Second quarter operating expenses increased over the prior year quarter primarily due to additional expenses from DoubleDown and unfavorable bad debt provisions.
  • In 2Q, IGT repurchased 4.4 million shares at an average price of $17.03/ share for a total cost of $75MM