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International Game Technology (IGT - Analyst Report) reported fourth-quarter fiscal 2013 adjusted earnings of 30 cents per share, which missed the Zacks Consensus Estimate by 4 cents. Earnings per share plunged 21.1% from the year-ago quarter and 9.1% sequentially.

Quarter Details

Revenues remained flat on a year-over-year basis but increased 9.2% sequentially to $632.3 million and were better than the Zacks Consensus Estimate of $600.0 million. The sequential growth was primarily driven by higher product sales.

Gaming Operations’ revenues declined 6.3% year over year but remained almost flat sequentially at $247.1 million. The year-over-year decline was primarily due to lower-than-expected MegaJackpots revenues.

Average revenue per unit per day decreased 4.0% from the year-ago quarter. Gaming Operations installed base of 54,600 units was down from 57,100 units in the year ago quarter.  

Product Sales remained almost flat on a year-over-year basis at 312.2 million. However, revenues surged 20.4% sequentially. IGT shipped 18,400 machines during the quarter compared with 14,600 units in the year-ago quarter. Average machine sales price was $11,600 versus $15,000 in the year-ago quarter primarily due to higher mix of low-priced VLT sales.

IGT witnessed stupendous growth in the Interactive segment. Revenues surged 35.4% year over year to $73.0 million. Sequentially, revenues were up a modest 0.7%. Social gaming revenues were $61.4 million, while IGTi revenues were $11.6 million in the reported quarter.

Gross margin declined 210 basis points (bps) from the year-ago quarter and 220 bps sequentially to 56.4%. The year-over-year decline was primarily due to lower product sales gross margin (down 570 bps) and interactive gross margin (down 10 bps).

The sequential decline was primarily attributed to lower product sales gross margin (down 410 bps) and interactive gross margin (down 400 bps).

Operating expenses as percentage of revenues increased 440 bps from the year-ago quarter and 130 bps from the previous quarter to 33.3%. The rise was primarily attributed to higher selling, general & administrative expense.

As a result, operating margin contracted 650 bps from the year-ago quarter and 320 bps from the previous quarter to 23.4%. Net income margin was 12.6% compared with 16.1% in the year-ago quarter and 14.9% in the previous quarter.

IGT exited the fourth quarter with cash and investments (including restricted cash) of $809.1 million versus $302.1 million in the previous quarter. Long-term debt stood at $1.37 billion. IGT announced a new share repurchase worth $200.0 million.

Guidance

For fiscal 2014, IGT forecasts earnings to be in the range of $1.28 to $1.38 per share.

Our Take

We believe that increasing investment in product development will increase operating costs, going forward. This will remain an overhang on the stock in the near term. Moreover, increased competition from its peers such as Zynga (ZNGA - Snapshot Report), Bally Technologies (BYI - Snapshot Report) and Electronic Arts (EA - Analyst Report) will keep the stock range bound in the near term.

However, improving domestic gaming environment, international expansion opportunities, an impressive product portfolio, cost-cutting initiatives, lesser dependence on the domestic machine replacement cycle, contract wins, and strong performance from the interactive business are expected to drive growth, going forward.

Currently, IGT carries a Zacks Rank #3 (Hold).

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