IGT 4Q2009 CONF CALL

Messy quarter but top line comes in strong.  Should be good enough. 

"Our fiscal 2009 results reflect a challenging operating environment which we believe stabilized during our fiscal third and fourth quarters... While we remain cautious on the timing and extent of the replacement cycle, we have been encouraged by modest upticks in spending by many of our casino operator customers over the past two quarters."

 

IGT 4Q09 CONF CALL

  • Gaming operations continues to feel the impact of a weak economy, although they are starting to see some stabilization in win per day. 
    • $50 win per unit per day
    • Higher sub-segment yielded north of $110 per day
    • Margins benefited from a higher percentage of fully depreciated games
  • Installed base should resume growth as the environment stabilizes.  International saw relative strength
  • Product sales domestic:
    • Domestic replacement units were 3,800 in the quarter 
    • Future unit sales will exceed trough levels seen earlier this year
    • Domestic non-machine revenues were impacted by lower systems revenues and lower conversion kit sales
    • Higher deferred revenues due to bundling
    • ASPs increased as a result of higher mix of MLD products
  • International product sales:
    • Continue to feel the effects of economic weakness - especially in Western Europe
    • Higher systems and conversion kit sales
    • International ASPs were down due to a higher mix of lower price units
  • Product sales gross margins should remain in the 50% range
  • Operating expenses would have decreased 17% ex-non cash charges
  • Cost reduction efforts are becoming more evident.  Previously announced two rounds of $100MM of cuts.  They have completed about $135MM of annualized savings.  2010 plan contemplates the remainder of these initiatives, which will be partially offset by PGIC and inflation
  • SG&A expected to remain at approximately $100MM and R&D to remain in the low $50MM's range
  • Bad debt provision of $9MM stemmed from customers being impacted by the weak economy
  • D&A was $65MM including game operations
  • Beginning in the 1Q2010 they will have to bifurcate the interest expense calculated on the converts impacting them by $30MM or 6 cents a share next year.  (Basically interest expense > cash interest because the convert is at a discount to par and it needs to accrete re: new FASB rules)
  • Quarterly rate rate to trend at 39-40%
  • Have $1.7BN available on their R/C line.  New FASB rules will reduce their debt by roughly $140MM because the converts will be accounted for in equity
  • Capital expenditures were $250MM in 2009 due to lower investments and falling PP&E, expected to trend in the $50-75MM although they continue to trend at the low end of that range

 

 

Patty's comments

  • "While we remain cautious, there was continued improvement in operator sentiment"
  • This quarter saw operators cautiously re-enter the market to replace aging product
  • 1,700 MLD's shipped in the quarter and are excited about the 2.0 version which will be showcased at G2E
  • Stabilizing win per days at $51 per day are encouraging
  • Believes that this year's product portfolio will provide better clarity on the direction of the company
    • Game ops - introducing Sex in the City
    • Center stage mega jackpot series - Wheel of Fortune experience
    • They will finally have a common hardware platform  
    • Presenting a package that includes a box and package of games
  • Focusing on getting a better ROI
  • Refocusing sales organization around account management
  • New options exchange program will better align management with shareholders
  • New organization will be more focused on operating efficiencies, ROI, and delivering content driven product
  • Remain cautious on predicting timing and scale of the replacement cycle
  • Want to leverage renewed focus on content in their product sales business
  • Continue cost cutting efforts which will provide them with a leaner business model
  • Significant changes to accounting and capital structure impacting 2010 guidance of $0.77 to $0.87 which includes 6 cents a share of non cash accounting changes

Q&A

  • Interest income was $15.8, $36.8MM of interest expense
  • Conducting pre-G2E meetings with customers and the feedback has been very positive.  Like the MLD technology and greater balance between participation and for sale games
  • Guidance doesn't include revenues from new jurisdiction
  • Replacement assumption ranges from 2009 like to something better
  • Japan sales?
    • Continues to be a challenging environment.  Introduced 3 games in 2009 that performed at market level
    • Shipped 775 units this Q
  • Gaming operations for 2010 assumptions
    • Slight improvement in play levels and also a slight increase in install base
  • Walk through the deferred revenue accounting
    • The majority of the replacement units were recognized
    • As they sell more and more bundles it puts them into the world of the software accounting (a la BYI)
    • Two new accounting pronouncements that will let them more easily separate the boxes from the downloaded games
    • In Aria they will need to recognize those revenues over time
    • Apparently Rosario (Argentina) was also deferred, due to the bundle, despite company telling us otherwise
  • CityCenter and SBG color on other manufacturers
    • Inter-operability testing had to cease in October so that the opening can be flawless
    • So SB-system will be on all IGT machines and some WMS machines.  Everyone else will use Nex-Gen as a bridge 
  • Guidance implications - are they sandbagging?
    • Low end is fairly conservative around the replacement cycle, yields, and install base.  Top end assumes 4Q like replacements, slightly better yields and small increase in install base
    • IL:  just focused on matching product functionality to the market regulations
    • OH:  Still some political and litigation risk, gaming commission needs to be formed, expect some litigation.  Not likely to ship there in FY2010
    • We don't think the high end is sand bagging - 3,800 replacement units is way above recent quarters, new and expansion unit shipments will be down, and their install base hasn't seen much growth in years.  New markets probably won't ship in the next 12 months
  • ASP increase has been driven by 85% AVP mix and MLD units
  • ASP guidance?  Will it be like 16,000 or 14,000 next year. Will they lower MLD pricing?
    • They don't think the MLD pricing is an issue - save on conversion costs for steppers.  Are getting more creative on bundling the MLD with other products in their arsenal to get more on the floor
    • ASP's over time are moving up
  • Non-machine sales, very hard to model? International units shipped... how do we think about that?
    • Non-machine revenues is most susceptible to deferred revenues (systems piece - again, this is just like BYI)
    • UK pretty stable, continental Europe should improve in FY2010, seeing continued improvement in Latin & South America and Mexico can also provide growth
  • 45.6k units in game operations install base was domestic
  • Deferred units:  CityCenter and Rosario were the vast majority
    • Rosario will be a FQ1 revenue recognition event
    • Aria is a 2 year revenue recognition event
    • Washington 1,200 units recognized over 2 years (split btw this and last quarter)
  • What market share are they assuming in their range of guidance?
    • 40-45% for 2010
  • 6,900 were shipped last quarter and 6,700 recognized
  • International, what drove sequential improvement?
    • Improvement in non-box
    • PGIC assets are starting to nicely contribute to international
    • New box launched for Australian markets
    • UK also was up
    • ASP increase was also due to higher priced platforms