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Defensive pressure starts a quarter early

IGT should not have been “extremely pleased” to report 2013 results and adjusted FQ4 EPS of $0.30, a sizeable miss from consensus of $0.34.  We suspect whisper expectations were for higher EPS.  We and others thought IGT may have been low balling FQ4 when they didn’t change annual guidance following a Q3 beat.  Our focus had been on the 2014/2015 headwinds as discussed in our recent “SLOTHY GROWTH” Black Book and indeed, the company gave pretty weak guidance that probably includes the accretive impact from an announced $200MM accelerated repurchase program.

FQ4 was bad across the board.  Here are some quick takeaways and our earnings table:

  • Guidance was weak and likely includes about $0.03 in accretion from the announced $200 million accelerated share repurchase. 
  • Commentary on the recognition of other significant items that are currently not determinable is also sketchy.
    • “GAAP earnings per share from continuing operations for fiscal year 2014 will include acquisition-related expenses, primarily related to DoubleDown, the amount of which is not determinable at this time.  The company may also recognize other items that are not currently determinable, but may be significant. For this reason, the company is unable to provide estimates for full-year GAAP earnings per share from continuing operations at this time.”
  • We already had $200MM in share buyback for our $1.35 estimate, although not accelerated - $0.01 accretive to our model
  • Gaming Ops below projection on all metrics – revs down, yields down, machine count down. What else can we say?
  • Sold 33% more units in NA than last year's but revenues were down 5% YoY due to a 29% decline in ASPs blamed on “product mix” and “targeted promotional activity”
    • The ASP decline isn’t just due to mix.  We had factored in that ~3,500 NA units would be sold at a steep discount of $9k (Video Poker) and used a $13k number for the balance of our estimate – which is about $1k below the average ASP in NA.  Whatever promotions IGT is offering are material.  Poor mix can also imply that their newer higher price boxes aren’t selling and customers are gravitating towards cheaper fixes.  Either way it’s not good.
    • To put the $10k handle ASP in perspective, IGT hasn’t had ASPs below $11k in any quarter since 2006
  • The only positive data point on Product sales was international box shipments which were up for the first time in 4 quarters
  • Product sales gross margins were terrible and reflective of the low ASPs and promotional activity
    • Both NA and International gross margins were the lowest we’ve seen in 3 years.
  • The bright spot on a YoY basis should’ve been Interactive but even here they missed the revenue number with MAU and DAU below our projections
    • Revenues for Double Down were flat QoQ. This is the first time IGT has reported zero QoQ growth for the crown jewel of their portfolio. 
  • SG&A up due to “increased advertising expenses in correlation with growing social gaming revenues” for the Interactive Division among other things.  Not good for this division where growth is clearly slowing. 
    • SG&A increased $21MM QoQ while social gaming revenues were FLAT.  If we strip out all of the other items on IGT’s list of increased expenses, we are still left with a big (~$13MM) QoQ increase on no revenue growth.
      • $2.4MM legal expense
      • G2E expenses are probably in the neighborhood of $3-4MM
      • Higher bad debt expense assumed to be $3MM