IGT 4Q2009 REVIEW

Beneath the messy results, the quarter was better than we expected. 2010 guidance looks reasonable.

IGT reported $515MM of revenues and normalized adjusted EPS of $0.19, beating the Street and our expectations.  Beneath the mess of deffered revenue and one-time charges, we think that the quarter was actually pretty good.  Furthermore, visibility on 2010 has improved.  While near term growth is still not in the cards, we like the long-term outlook for the sector.  The opening of new gaming jurisdictions, normalized replacements, and the leaner meaner IGT, could all combine to double EPS for IGT in 3-4 years.

Despite not being able to recognize revenues on 2,000 units shipped to North America, IGT reported much better than expected product revenues.

  • Replacement sales were surprisingly strong, since the September quarter is usually a seasonally slower quarter.  It doesn't appear that sequential replacements were down very much at all.  IGT's share of replacements also increased materially, hitting or exceeding 40% for the first time in over a year.
  • 2,300 new and expansion shipments also implies that IGT got over 60% ship share.
    • We estimate that most of the CityCenter units that were shipped in the quarter were IGT's (~800)
  • ASP's were materially higher than our estimate due to the higher mix of MLD's

International product sales were mostly in line with our expectations.  The FX headwind should reverse itself in FY2010, and therefore ASP's should appear higher.

Gaming operations revenues were a little below our expectations while margins were better due to lower D&A charges given that a higher percentage of IGT's install base is fully depreciated

Other thoughts:

  • The Walker Digital charge off should come as no surprise since the pre-paid poker play at Station's was basically a complete failure
  • We continue to be impressed with Patty and her assurance of focusing on running a lean and ROI focused organization.  For those of you who have followed this space as long as we have, you know that IGT has never been know for being "lean",  "efficient", or "ROI-focused"
  • If IGT can really move to a single platform, that could mean huge capital expenditure savings and higher ROI for it's gaming operations business. In that past they have replaced 20k participation units per year without recycling or redeploying those units given the numerous platforms at IGT

Going forward:

  • Deferred product sales should provide a nice cushion of roughly $4MM for just NA new unit sales and provide a very nice bump in the $20MM range for 1Q2010 international box sales
  • We think management guidance of $0.77-$0.87 is reasonable.  Our revised estimate is $0.83 after factoring in the $0.06 non-cash hit to the P&L from the accounting change related to the convertible note.