IGT: FQ3 CONF CALL HIGHLIGHTS

We changed our positive tune one day too early.  Lower guidance and SBG problems were our concerns and they came to fruition.  So why is the stock up?

  • Patti Hart – She did a fantastic job on the call outlining her process.  Given IGT’s reputation for being fat, lethargic, and inefficient, Hart said all the right things to comfort long-term investors.
  • Short interest – There were many more shorts in the stock than we thought.
  • New markets – Even though the stock was on a tear the last few weeks, there were more investors afraid of the quarter than we thought.  Absent those fears, the stock would’ve been up even more.  Removing the potential negative catalyst allows investors to focus on the new markets.

Ms. Hart probably bought the company a few more quarters.  However, we remain concerned with the SBG issues including the bugs, the lack of functionality, and the poor reception from casinos.

 

IGT 3Q09 Earnings call

 

Game ops:

Earned $52/unit per day, which has been consistent over the last few quarters

Install base was driven by international unit growth, but NA had lower unit count

  • Expect that as the economy recovers install base will resume growth

Gross margins benefited from reduced jackpot expenses, due to higher rates on agencies vs prime

Domestic Product Sales:

Revenues comparisons were difficult

Replacement units were up 500 sequentially, new and expansion were 4,700

Anticipate new unit shipments will decrease over the next few quarters, booked forward 1,700 units that they originally expected to be recognized in their 4th quarter

Deferred revenue increased to $50MM

Sales of AVP machines were 80% of NA sales

International Product Sales:

Markets continue to fell effects of the economic slowdown

About ½ of the units shipments were to UK & Japan

Deferred revenue increased by 10MM to $23MM

Product margins were down due to lower mix Japan units; expect 50% margins going forward

Other Expenses:

So far expense controls have resulted in 100MM of annual run rate savings ($60MM of material savings and 440 less employees in manufacturing, SG&A reductions as well)

Costs associated with PGIC and inflation will offset some cost savings

Hard to get better margins with low unit shipments

SG&A low 100, R&D in the 50MM range going forward. 

Q4 will benefit from full cost cut benefits

Other:

No meaningful decrease in delinquencies from customers

Expect future tax rate to be 39-40%, annual tax rate for ‘09 to be 38-39%

Balance sheet/Cash flow statement:

Capex is trending around 50MM per quarter

Anticipate drawing the line to take out the convert which will get put to them

Quarterly commentary:

  • Those operators that can are replacing more units at a measured passed
  • Shipped 920 MLD units
  • $52/win per day looks like a stabilized play level
  • Reached agreements to place 450 wheel of fortune and mega jackpot products above what’s already on the floor – not sure when those will be placed (next few q’s?)

Strategic priorities:

  • Focusing on what they do well – content in the video slot segment
    • Restructuring the development effort, which will help them drive accountability
    • Consumer research group to feed the R&D process
    • Eliminations of layers
    • Other changes will take time
      • Streamlining of international processes to improve time to market
      • Focusing on two keys efforts
        • Can do a better job of processing information of testing products, compensation metrics, to investment and capital allocation decisions
        • Hired new COO to aggregate and process data to maximize return on capital

2009 Outlook:

Despite improvements in certain metrics in 3Q09, replacements are still very weak

Recording 3 cents of earnings in the 3Q09 that were originally slated for 4Q09

Reduced guidance range to 75 to 80 cents

Q&A:

Will the 4Q09 quarter install base increase?

  • Stable… is what Pat guided to

Timing of new markets

  • In the US (OH & IL) too early to tell because the bills are WIP
  • Italy – complexity in getting product to market, think that their product is well suited though
    • 300k AWP now, 14% can be converted to VLTs (so that’s the addressable market)

Cost reduction programs

  • No sacred cows       

By G2E, should see some more clarity about product direction and see what will be on the front burner for IGT going forward

R&D: thinks about it as an investment – expect it to stay relatively flat going forward. Expect to see more efficiency, more delivery for same dollars

  • Will not think about allocation by product/ systems, but more along improving patron experience

What are breakage fees – debt breakage fees – to break the draw times (draws are typically 60-90 days)?

MLD – 920 units were MLD, also what’s driving ASP’s (3-4k premium to normal games)

On the design/R&D side, what are the changes?

  • Everyone was arranged in modules that have impeded speed to market, so now they have stand alone units that are going to be measured on financial contribution for their products vs. being disconnected before

Japan, any Reg 5 amendment coming?  – not seeing any clarity to Reg 5 adjustments.  Expects the Japanese market to stay unpredictable (hit driven). Shipped 1200 units

Firekeeper’s shipment was pulled forward (got 1,700 out of 2,500 units), thought they would have to defer it because they are also providing the system.

  • They weren’t involved in the financing

Replacement sales commentary:

  • Mostly coming from outside of LV & AC

Did the US Economy Just “Collapse”? "Worst Personal Spending Since 2009"?

This is a brief note written by Hedgeye U.S. Macro analyst Christian Drake on 4/28 dispelling media reporting that “US GDP collapses to 0.7%, the lowest number in three years with the worst personal spending since 2009.”

read more

7 Tweets Summing Up What You Need to Know About Today's GDP Report

"There's a tremendous opportunity to educate people in our profession on how GDP is stated and projected," Hedgeye CEO Keith McCullough wrote today. Here's everything you need to know about today's GDP report.

read more

Cartoon of the Day: Crash Test Bear

In the past six months, U.S. stock indices are up between +12% and +18%.

read more

GOLD: A Deep Dive on What’s Next with a Top Commodities Strategist

“If you saved in gold over the past 20 to 25 years rather than any currency anywhere in the world, gold has outperformed all these currencies,” says Stefan Wieler, Vice President of Goldmoney in this edition of Real Conversations.

read more

Exact Sciences Up +24% This Week... What's Next? | $EXAS

We remain long Exact Sciences in the Hedgeye Healthcare Position Monitor.

read more

Inside the Atlanta Fed's Flawed GDP Tracker

"The Atlanta Fed’s GDPNowcast model, while useful at amalgamating investor consensus on one singular GDP estimate for any given quarter, is certainly not the end-all-be-all of forecasting U.S. GDP," writes Hedgeye Senior Macro analyst Darius Dale.

read more

Cartoon of the Day: Acrophobia

"Most people who are making a ton of money right now are focused on growth companies seeing accelerations," Hedgeye CEO Keith McCullough wrote in today's Early Look. "That’s what happens in Quad 1."

read more

People's Bank of China Spins China’s Bad-Loan Data

PBoC Deputy Governor Yi says China's non-performing loan problem has “pretty much stabilized." "Yi is spinning. China’s bad-debt problem remains serious," write Benn Steil and Emma Smith, Council on Foreign Relations.

read more

UnderArmour: 'I Am Much More Bearish Than I Was 3 Hours Ago'

“The consumer has a short memory.” Yes, Plank actually said this," writes Hedgeye Retail analyst Brian McGough. "Last time I heard such arrogance was Ron Johnson."

read more

Buffalo Wild Wings: Complacency & Lack of Leadership (by Howard Penney)

"Buffalo Wild Wings has been plagued by complacency and a continued lack of adequate leadership," writes Hedgeye Restaurants analyst Howard Penney.

read more

Todd Jordan on Las Vegas Sands Earnings

"The quarter actually beat lowered expectations. Overall, the mass segment performed well although base mass lagging is a concern," writes Hedgeye Gaming, Lodging & Leisure analyst Todd Jordan on Las Vegas Sands.

read more

An Update on Defense Spending by Lt. Gen Emo Gardner

"Congress' FY17 omnibus appropriation will fully fund the Pentagon's original budget request plus $15B of its $30B supplemental request," writes Hedgeye Potomac Defense Policy analyst Lt. Gen Emerson "Emo" Gardner USMC Ret.

read more