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    MARKET EDGES

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Our sense is that people want to own this group. BYI already let the cat out of the bag for the March and June quarters. Numbers would have to be awful for IGT to disappoint.

IGT is reporting its FQ2 this Thursday and we are expecting a miss.  In fact, we’ve been at $0.17 since IGT reported its FQ1.  Despite the Street’s current $0.20 estimate, real expectations are lower and therein lies the problem for any would be shorts.  Anyone who’s been listening to the company’s commentary and extrapolated from BYI’s pre-announcement knows that the near term earnings picture is cloudy at best.  Replacement demand is still sluggish, weak casino results negatively impacted gaming operations, and Alabama units have been offline for almost a whole quarter and will likely to remain so for the next few quarters. 

Not only is IGT probably not a great short into Thursday, it may actually see a relief rally.  Investors seem to want to own the slot guys.  The bad news for the group is short term and well known.  Judging from the muted reaction to a pretty nasty earnings revision by BYI, IGT will probably get another pass.  Forward commentary – beyond the June quarter – may be positive and discussion of a new Server Based Gaming contract with Cosmopolitan (See “IGT BAGS THE ELEPHANT?” from 4/14/10) could actually provide a positive catalyst.

Don’t get us wrong, we still think there are lots of booby traps with this name - primarily as it relates to share loss on the participation side, but that doesn’t mean that the name may not work for a trade – given the exuberance and momentum that is prevalent in this space.

We’re at $0.17 cents vs. the Street at $0.20 and are projecting FY2010 EPS of $0.84 vs. consensus of $0.91 (despite company guidance of $0.77-$0.87). Below are some details behind our estimates.

 

F2Q2010 DETAIL:

We are forecasting product revenue of $205.7MM and 52% gross margins

  • $124MM of NA product sales producing a gross profit of $67MM 
    • We are projecting 4.6k of units sales, with 3,250 replacements, 1,250 new units (including recognition of deferred units) at an ASP of $15.3k  
    • We estimate that NA non-box sales of $53MM, but don’t have any ‘edge’ on forecasting this number since it includes systems, conversions kits, used parts and ‘other stuff’ 
  • $82MM of international product sales producing a gross profit of $39.5MM 
    • International units of 6.2k –with 3k of those shipments from lower priced Barcrest units, thereby lowering the sequential ASP to $9.7k since Barcrest machines sell for roughly $4k. 
    • Non-box sales of $22MM- again – no real ‘edge’ here

Gaming operations revenue of $277.5MM with a 61% gross margin

  • We estimate 350 incremental installs, sequentially
  • Yield decline of 7% y-o-y

Other Stuff:

  • SG&A of $93.5MM, including $3.5MM of provision for bad debts – we’re below the company’s guidance of $95-100MM ‘run rate’
  • R&D of $51MM in-line with guidance of “low $50MM range”
  • D&A flat sequentially
  • Net interest expense of $30MM
  • Tax rate of 38%
  • While we don’t model these, we do expect charges related to the closure of IGT’s Japan operations.  The company guided up to $20MM of charges for the 2nd and 3rd quarters of FY2010.