IGT 1Q2010 CONF CALL TRANSCRIPT

IGT 1Q 2010 Conf Call

  • One less week in the quarter negatively impacted the quarter by $22.4MM of revenues 
  • New accounting for converts increased their share count
  • Gaming operations continued to feel the negative impact from the economy and mix shift of the install base
    • Excluding the interest benefit margins would have been 57% 
    • Average win per day of $49/day
  • Domestic Product sales
    • Product sales margins increased 200 bps due to lower material costs and mix shift to higher margin units
    • While they continue to have limited visibility on replacement units they do feel like replacements have reached a trough
    • 2,500 new units shipped and 3,000 replacement units 
    • 92% of machines shipped where AVP
  • International product sales benefited from recognition of Rosario shipments and increased European shipments
  • Expect product sales gross margins to remain in the low 50% range
  • Continue to move towards their $200MM cost reduction goal
  • SG&A declined 9%, expect quarterly run rate going forward to be $95-100MM vs. $90MM in FQ1
  • R&D expense declined 7%, expect a quarterly run rate in the low $50's MM vs $47MM in FQ1
  • Total D&A inclusive of games operations expense declined, but may increase as they refresh their install base
  • Interest on the debt component on their convert calculated using a normalized non-convert interest rate will impact them by $30MM or $0.07 for the year. Also new treatment of convert debt increased their debt balance by $145MM and that amount will be amortized going forward
  • Expect quarterly tax rate to be 37-39% vs 34% in FQ1
  • Made a lot of progress on converting working capital to cash flow
  • Capital expenditures expected to trend in the $50-75MM range, although they continue to trend at the lower end of that range
  • "Sex in the City" is outperforming their expectations with an average yield to IGT of $180/day
  • Product sales in the Dec quarter has historically been there lowest.  Remain cautiously optimistic on customer demand
  • MGM is very happy with the performance of their SB system
  • Hired a head of "new media," who will be in charge of repurposing content for new media
  • 2010 guidance remains $0.77 -$0.87, and excludes one time items and assume no dilution from convertible notes (excludes the 1 cent tax benefit this Q)

    Q&A

    • Other income line: Interest income = 16MM, Interest expense: $43.2MM, other is $1MM
    • How much of the decrease in yields came from mix shift vs. just normal seasonality?
      • Hard to say, probably mostly due to seasonality but definitely some mix shift
    • Know that new and expansion units will be off materially in FY2010, assume a decent increase in replacements, but visibility is fairly limited on that front
    • Server based feedback from MGM/ Interest from other operators
      • Aria is very pleased with the way the floor is playing
      • Significant interest in their T1 product which they have 
    • SG&A and R&D where very low in the quarter, why isn't that going to continue and why isn't IGT going to do over a $1 in EPS this year?
      • R&D Q1 is naturally lower since the team is pre-occupied with G2E.  R&D over time will run at a couple hundred MM. 
      • SG&A had $3MM of deferrals with new compensation plan that positively impacted the Q
      • The real answer is there are no new units shipping in the balance of the FY year, and SG&A and R&D will both be higher, so $1 is a pipe dream
    • "Still experiencing a fair amount of mix shift in game operations so there should be continued pressure on yields.  Customers are still conservative on their replacement orders"
    • Ship share in the quarter?
      • Won't know until everyone else reports, but think that they are around 40% on the replacement side, and north of 50% for new and expansion units
    • Mix of MLD was the same q-o-q. 
    • Remainder of the Aria floor should be all SB by June
    • More focus on applications vs infrastructure spending compared to prior years
    • Yield on IGT's install base (game ops) should continue to stabilize but trend lower due to mix, until they see the impact from new games like Sex in the City
    • On the replacement side their just isn't a lot of visibility in demand "shouldn't have a hockey stick increase" and need a pretty significant increase to simply offset the decline in new openings and expansions
    • They will also be more prudent in their deployment of game operations capital, and are ok with adding higher ROI but still lower "yielding" units to the install base
    • Guidance for international?
      • See improvement in Europe and Latin America, stability in South Africa/ Australia/UK. They aren't forecasting any huge improvements though for international shipments but sounds like they are forecasting some improvement
    • Timing on IL VLT shipments:
      • 2011 event before they see shipments, still need a central system and lots of things to do
    • Alabama exposure? 
      • Have 3,600 units in that market (Victoryland and Country Crossing) and have $100MM tied up in that market
    • Lower ASPs could be partially due to volume discounting and G2E promotions
    • Think that their Wheel products will continue to play well despite new competition from BYI