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IGT is now officially cheap but near term catalysts remain elusive. Whisper expectations for the quarter are pretty low. The focus will be on replacement demand.

The sell side remains stubbornly above IGT’s fiscal 2010 guidance of $0.77-0.85.  We suspect that buy side expectations are lower, however, so a reiteration of guidance should not disappoint.  For FQ3, our projection of $0.21 is in-line with the Street.  Replacement demand should be a major focus for both the quarter and the outlook.  Despite investor pessimism, replacements have been accelerating, which should bode well for next year’s earnings.  Of course, if casino revenue trends don’t recover, all bets are off.  In that environment, no gaming company will do well but the suppliers should be better off.

Here are the details of our projections:

FQ3 Detail

Product revenues of $231MM with gross margins of 49%

  • North American product revenue of $146MM and gross margin of $73MM
    • 6,350 new units ( 4,700 replacement) at $14.4k.
    • As we wrote about on 7/1/2010, “Q2 AND Q3 MARKET SHARE COULD BE MISLEADING”, IGT typically sees a big sequential increase in ship share in the June quarter, which is also typically a seasonally stronger quarter for replacement orders than March.  Since 2006, IGT’s replacement orders have seen some sequential pick up in June. 
    • While new and expansion shipments are nothing to write home about, we estimate that June shipments will be roughly 1,200 better than March shipments.
    • IGT’s Dynamix package offer, which was supposed to expire in May, was extended through the end of June, so we expect similar pricing to March.
  • International product revenue of $88MM at a 47% gross margin
    • 5,300 new units at $10.8k.
    • Our sequential decline is due to the removal of 2,200 units shipped to Japan in March, and less units shipped to Asia, since March included shipments to Singapore, and is offset by higher shipments to Australia, UK, and S. Africa.
    • Better margins due to the removal of impairment charges related to Japan last quarter.  Pachislot also had lower margins.

Gaming operations revenue of $281MM and gross margin of $171MM

  • Average install base of 60,300 with an average win per unit of $51.30.
  • June has seasonally lower yields than March for IGT.
  • Given the shipment of a lot of new product, we assume a small pickup in D&A and therefore, a small tick down in margins.

All the other stuff:

  • SG&A (including bad debt) of $89MM.
  • R&D of $52MM.
  • D&A (expensed) of $19.8MM.
  • Net interest expense of $23MM.
  • Tax rate of 38%.