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
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
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
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
- 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?)
- 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
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
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
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