IGT 4Q2009 PREVIEW

We expect the expected:  uninspiring 4Q09 results when IGT reports this Thursday. How the stock reacts will be largely predicated on the tone and outlook given on the call.

 

 

The BYI and WMS calls confirmed what we already suspected:  North American shipments were paltry.  We expect IGT's replacement units to be down sequentially to about 1,850 units and new units to be approximately 1,650.  While CityCenter had just over 800 units on it's floor in mid September, we're pretty sure that IGT won't be recognizing much revenue on those units.  Our understanding is that since IGT implemented the systems business at CityCenter and because there is a recurring component to each game sale since all the units will have a download feature, IGT will have to defer some of the revenue.  Therefore, we don't expect much upside from CityCenter in this quarter, or even the next, since it's unclear over what period IGT will need to amortize this revenue.

 

International shipments are always trickier to predict since they are largely all replacement driven.  FQ4 should be better than last for IGT due to a shipment of 1,472 units to Casino Rosario in Argentina.  As an aside, IGT helped finance this facility and in return received a 72% share, plus the systems business.  From the 10Q:  "Through June 30, 2009, IGT funded $93.0 million of financing extended to a consortium of Argentina gaming operators comprised of $100.0 million for development and $40.0 million for gaming equipment financing."

 

For gaming operations we expect a small sequential increase in the installed base in 4Q09.  We've also heard that IGT has been dealing hard with operators to maintain their floor print.

 

For the quarter we are projecting in-line EPS of $0.17.  Looking forward, our estimates continue to trail the Street; EPS of $0.81 versus consensus at $0.91.  The primary driver of the lower estimate is fewer unit sales to new and expanded casinos.  We do project replacement units to pick up modestly in 2010, however, in line with the Street.  Even though we are below consensu, we are not overly concerned with a product sale shortfall.  The long-term dynamics of the slot sector are very favorable due to the potential for domestic and international new markets.

 

 

 

3Q09 "YOUTUBE"

 

General Business environment/ Trends

  • Our business had reached a trough in the midst of very difficult markets

 

Gaming Operations

  • While the lower sequential unit count is disappointing, we expect that as the environment continues to stabilize, our install base should resume growth
  • The sequential reduction in units is really just more of a timing issue
  • I think you are apt to see a relatively stable install base at around 61,000, 62,000 units, in that range
  • In an environment of interest rate stability we would expect to see margins in the 57% to 59% range. Approximately 85% of our install base is comprised of variable fee games that earn a percentage of the machines play level rather than a fixed daily fee
  • We have recently reached agreements with two of the largest casino operators for the placement of over 450 MegaJackpot and Wheel of Fortune machines, over and above the existing units on their floors today

Game Sales

  • We anticipate new unit shipments will decrease for the next several quarters [from the 4,700 shipped in 3Q09] until some of the more recently approved jurisdictions, such as Maryland, Kansas, Illinois, and Ohio begin operations
  • While we continue to expect near-term improvement from trough levels, we will remain cautious until we see sustained incremental replacement demand, both domestically and internationally
  • Our international markets continue to feel the effects of the economic slowdown, most notably in Europe
  • Going forward, we expect product sales margins to be close to 50%, assisted by our cost efficiency efforts

Cost Cutting

  • Thus far, we have completed approximately $135.0 million in annualized cost savings, compared to the fourth quarter of 2008, which was the quarter right before we began these initiatives.
  • On the top of the cost reductions, we are currently working through our second $100.0 million of savings that we've made great progress
  • Portions of these savings have been, and will continue to be, offset by costs associated with the acquisition of PGIC and inflation
  • Our current low-manufacturing volumes, it is difficult to identify the full impact of manufacturing-related reductions in our reported gross margins. We would expect to see the impact of these adjustments as volumes return.
  • In the near term we would expect our SG&A, exclusive of bad debt provisions, to be approximately $100.0 million per quarter and R&D to remain in the low $50.0 million area
  • You should expect to see the R&D numbers stay relatively flat

Other

  • Going forward, we expect our quarterly tax run rate to trend at approximately 39% to 40%, excluding discrete items
  • Capex is expected to trend in the quarterly range of $50.0 million to $75.0 million, although we continue to come in near the lower end of the ranges

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