• It's Here!

    Etf Pro

    Get the big financial market moves right, bullish or bearish with Hedgeye’s ETF Pro.

  • It's Here

    MARKET EDGES

    Identify global risks and opportunities with essential macro intel using Hedgeye’s Market Edges.

IGT was probably good enough. We'll have more on the quarter soon. For now, here are our "notes" from the release and transcript.

 


"Our second quarter results demonstrate real sequential progress at IGT.  An improvement in replacement units shipped, an increase in gaming operations yields and a decline in SG&A all reflect IGT's continued efforts to navigate our business through an operating environment which remains challenging."

- CEO Patti Hart

 

HIGHLIGHTS FROM THE RELEASE

  • Gaming operations "revenues decreased primarily due to a lower installed base and the continued shift toward lower-yielding machines. Approximately $5.0 million of the decrease in revenues in the current quarter was attributed to property closures and the reduction of electronic charitable bingo terminals being operated in Alabama."
  • Reduced expenses, primarily depreciation and royalties, positively impacted [gaming operations] gross margins, which improved to 62% from 59% in the same quarter last year
  • Product revenues: North America revenues declines were largely driven by fewer new openings. International revenues increased 65% for the quarter, primarily due to the opening of Resorts World Sentosa in Singapore, improved sales in Europe, and favorable foreign currency exchange. Consolidated gross margin on product sales for the quarter was 46% compared to 48% in the prior year quarter, primarily due to higher obsolescence, including write-downs related to the closure of our Japan operations.
    • Excluding the write-down, international margins would have been 45% vs. 43%
  • As of March 31, 2010, IGT had approximately $85.5 million in development financing notes, $9.2 million in fixed assets, and $7.2 million in accounts receivables associated with their customers in Alabama.

CONF CALL

  • Gaming operations was $51.70 average yield
  • Product sales:
    • Domestic shipments: replacements were 4,100. They are encouraged by the uptick in replacement demand
    • Increase in MLD: 51% of NA shipments in the quarter and led to higher prices, expect MLD's to continue to increase as a % of total mix
    • International benefited from increases in systems revenue for non-box sales
    • Going forward they expect 48-50% product sale margins
  • Operating expenses:
    • Excluding one time charges, their operating margins would have been 24% vs. 17% last year
    • SG&A declined 12% excluding bad debt, due to lower legal and compliance fees
      • no more BYI lawsuits
      • Still guiding to $95-100MM
    • Total D&A was $58MM - including game operations. The decrease was due to lower D&A on their WAP and Mexico games.  It should increase as they refresh their install base
    • $30MM of non-cash interest or $0.06 for FY2010 and $0.08 for FY2011
    • Tax rate was impacted by one time items - would have been 38%.  Going forward expect 37-39% tax rate
  • Balance sheet
    • Made a lot of progress with their WC cash flow
    • Saw their lowest inventory balance in 30 quarters (although i bet part of that is just due to low volumes)
  • Capex was $63MM this quarter.  Guidance of $65-75MM of Capex, although they continue to trend at the lower end of that range
  • Alabama bill to vote on electronic bingo games was not passed in the House
  • Gaming operations yields increased sequentially (as it should seasonally).  Mega Jackpots yields increased 11% sequentially.  Deployed 149 Amazing Race games and 93 Top Dollar games
  • New Products:
    • Wheel of Fortune - new center stage game, and Wheel of Fortune multi-play and WoF secret spins is coming out later this year
    • SB window solution for legacy games for 8960 footprint
    • Released 21conversion games for their legacy spinning reels
    • Sold 4017units under the Buy 1 AVP get 2 conversion kits program ("Dynamix" aka buy an AVP game and get 2 free conversion kits for other games)
  • Have 3,200 games in their backlog (participation), 2153 of which are for their top 3 games (Sex in the City, Amazing Race and Top Dollar)
  • Are encouraged by the performance of SB at Aria
    • Have had a number of successful trials internationals
    • Are in negotiations on 2 NA opportunities and several other Tier one opportunities
      • Cosmo?
    • Have closed 3 new advantage customers and are in talks with 5 more
  • Remain extremely focused on FCF generation
  • Central system provider for IL will be announced shortly. Expect to start shipping in the first quarter of FY2011
    • Expect a market of 35,000-40,000 units ( we expect a smaller market)
  • Remain cautiously optimistic to increased operator budgets allocated to slots
  • Adjusted their guidance to reflect risk of losing Alabama - new guidance is $0.77-$0.85 cents from $0.75-$0.85

Q&A

  • Market share? 35-40% on replacements based on their internal estimates
  • Excluding Alabama, what would yields have been?
    • Saw a seasonal uptick but attribute part of that to their new products - Sex in the City and Amazing Race and also saw that in the WAP product
    • I personally think that looking at yields sequentially is not useful due to seasonality
    • And yes Alabama positively impacted yields since those games do about $24/day
  • Some of their backlog is due to jurisdictional approval of the games and some of that is due to waiting for a customer delivery date
  • Domestic ASP of $14.3k - due to Dynamix package (ie discounting)
    • Special pricing is ongoing - was initially through end of Feb and was extended by 3 months
    • Competitors are not responding with comparable deals
  • SG&A? They are budgeting for more but it's been coming in lower because of the variable compensation component
  • Customers want to replace units but it's a capital budget issue. They are focusing on how to help customers refresh their older games within their limited capital budgets. They are also focused on placing their new Jackpot games given the budget constraints
    • It's a strategic move to keep floor share
  • Italy- timing seems to have moved out given the multiple systems providers. Think that there may be shipments by the end of the calendar year.
  • "Other expense": Interest expense was $39MM, $1MM of other income, $15.7MM of interest income
  • They got 24-25% of Marina Bay Sands shipments
  • What will conversion kits sales do if replacements come back next year?
    • Unclear...maybe on legacy units.
  • Don't know when the entire floor of Aria will be SB - no hard stop date, expect by the end of IGT's FY year (Sept 2010)