IGT: KEEPING IT CONSERVATIVE

FY2013 guidance raised after a terrific quarter – but not enough.

 

 

We don’t have a problem with conservative guidance but it doesn’t mean we have to adhere.  Even through a conservative but realistic lens, $1.35 looks like the right number for FY2013.  Interactive is tracking better - much better actually - tax rate and share count are lower, and video poker sales may accelerate.  Dare we say that the Double Down acquisition is looking more and more attractive?

 

A nice run of quarterly announcements and aggressive share repurchases has us still scratching our heads with regards to IGT’s valuation.  Yes, the stock has done well but so has the market.  Stock is trading at under 12x next year’s EPS with new orders from Oregon and South Dakota likely to take earnings higher in 2014.  Is management really that bad? 

 

We don’t think we need Private Equity to get involved to make this stock work but remember that 4 PE firms were interested in WMS per the SEC filings and 1 actually made it to the final round.  We would argue that IGT is more interesting from a PE perspective in that, unlike WMS, it actually generates substantial free cash flow.

 

Here are some takeaways from the earnings release, conference call, and our number crunching: 

  • Guidance range is conservative. We don’t think our assumptions are aggressive.  Part of the improvement is the assumption of a lower tax rate – 34% vs. 37%.  Part of it is assuming that they can continue to build, albeit at a more measured pace off of a very strong Interactive number.  Of course, there’s the lower share count base, too.
  • It was surprising that IGT said video poker shipments weren’t material in light of BYI’s comments and the promotions offered on the product, coupled with the fact that they no longer support the old boxes with parts.  We think IGT did not procure any large video poker orders THIS quarter…that could mean that BYI’s intelligence was bad or that they got some big orders but they won’t show up until next quarter.  The latter scenario is more probable.
  • NA product sales product sales came in a little ahead of our expectations with higher unit sales, partly offset by lower ASPs.  We think that their strategy of making a promotional grab at market share was smart given the weak GGR trends we’ve seen in the market and the fact that there is more capital available in the beginning of the year.  The ASP weakness and corresponding margin weakness aren’t surprising given the strategy even though the margin impact was more than we expected.
    • They shipped 900 more units than we expected (500 more on the replacement front and 400 more on the new & expansion side)
    • About 125 more units shipped to Canada than we estimated
    • IL was a few hundred lighter than we modeled, some of that can just be timing though
  • International product sales were disappointing, but what else is new? Non-box sales were better than we thought though. Last time we spoke with the company they insisted that they would see a lift in the 2H13 for international sales.  We remain skeptical.  Below is the breakout of international shipments by region:
    • Asia: 100
    • Australia: 1,100
    • Europe: 500
    • South Africa: 100
    • Mexico:  200
    • Latin America:  1,200
  • Gaming operations was better than we estimated. The yield declines weren’t as severe as we had modeled.  We suspect the same is true in the models of the Bears who have been overly negative on yield trends.
  • Interactive was better than anyone really modeled.  There’s not much to add here aside from the company’s commentary that growth will likely moderate off of this awesome quarter. We’re modeling 35 cents of booking per using in 2H13 and a moderating of the pace of QoQ growth in DAUs
  • Bad debt expense:  Higher than we expected at $4.1MM, partly contributing to the elevated SG&A

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