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International Game Technology (IGT - Analyst Report) reported third-quarter fiscal 2014 earnings (excluding one-time items) of 28 cents per share, which were in line with the Zacks Consensus Estimate. However, earnings declined 14.8% from 33 cents reported in the year-ago quarter.

Quarter Details

Revenues decreased 19.2% year over year to $467.6 million and missed the Zacks Consensus Estimate of $526.0 million. This year-over-year decline was mainly due to a decline in product sales and gaming operations.

Gaming operations revenue declined 12% on a year-over-year basis to $217.6 million in the reported quarter. This decline was primarily due to installed base declines and lower yields.

Product sales revenue plunged 35.6% from the year-ago quarter to $166.9 million in the third quarter. This year-over-year fall was primarily attributable to lower machine unit volume with the most significant decrease in North America replacement units.

Interactive was the only segment that reported growth (up 14.6%) in the quarter. Social revenues increased 17% year over year to $72 million in the reported quarter, driven by increases in average Daily Active User (DAU) and average bookings per DAU.

Average DAU increased 8% on a year-over-year basis to 1.8 million in the reported quarter. Average bookings per DAU registered growth of 7% from the year-ago quarter to 43 cents in the third quarter.

However, average Monthly Active Users (MAU) declined 10% on a year-over-year basis to 6.0 million, primarily due to increased focus on improving player conversion rates.

Average revenue per unit per day decreased 4% from the year-ago quarter to $46.02. Gaming Operations installed base of 50,500 units was down from 56,700 units in the year-ago quarter.  

IGT shipped 7,100 machines during the quarter compared with 13,600 units in the year-ago quarter. Average machine sale price was $11,900 versus $13,300 in the year-ago quarter.

Operating expenses as percentage of revenues increased 400 basis points (bps) from the year-ago quarter to 36.0%. The year-over-year increase was primarily attributed to higher selling, general & administrative (up 230 bps) and research & development expenses (up 110 bps). As a result, operating margin contracted 110 bps from the year-ago quarter to 25.5%.

Net income was $69.3 million or 28 cents per share compared with $86.4 million or 33 cents reported in the year-ago quarter.

 


IGT exited the third quarter with cash and investments (including restricted cash) of $299.0million versus $432.3 million in the previous quarter. Total debt stood at $1.99 billion. During the quarter, IGT paid $27.0 million as dividend to shareholders.

GTECH proposal

On Jul 16, 2014, IGT announced that it has entered into an agreement with GTECH S.p.A., per which it will be acquired by the latter. Following the closure of the aforesaid transaction, GTECH shareholders will own approximately 80.0% of the company and the remnant 20.0% will be owned by IGT’s shareholders.

Guidance

For fiscal 2014, IGT revised its previous earnings guidance range of $1.28 to $1.38 per share to $1.00 to $1.06 per share. Currently, the Zacks Consensus Estimate for the same is pegged at $1.02, which is below the midpoint of the management guided range.

Recommendation

IGT has been facing significant challenges due to tepid economic conditions that are impacting its gaming business, resulting in falling domestic replacement and lower play levels as well as a mix-shift to lower-yielding standalone lease operation games. The casino sector has witnessed tighter spending due to concerns about unemployment levels and lackluster macroeconomic condition.

Additionally, intensifying competition from the likes of Bally Technologies and Zynga (ZNGA - Snapshot Report) in its core as well as interactive markets remains a major headwind.

Nevertheless, we believe that IGT’s innovative product pipeline, growth from cloud-based products in international markets and strong growth from the DoubleDown business will boost its overall growth in 2014. The expanded partnership with Sony (SNE - Snapshot Report) is a significant positive that will boost the top line.

 

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