IGT Beats, but Earnings Down

International Game Technology (IGT - Analyst Report) reported adjusted earnings of 19 cents per share during fiscal 2009 fourth quarter, compared to a net income of 28 cents in the year-ago quarter. The result topped the Zacks Consensus Estimate by 3 cents. 

In the quarter, the company recorded non-cash charges of approximately $77.2 million, or 26 cents per share to give effect to a reduction in the carrying value of its investment in Walker Digital Gaming Inc. These charges also included a decline in the value of its Las Vegas Gaming International investment and foreign deferred tax provision. 

Total revenue fell 18.6% to $514.6 million from the year-ago quarter, primarily due to weakness in product revenue (45% of total revenue), which fell 23.2% to $231.4 million, while units shipped worldwide decreased 30% year-over-year. Revenue from Gaming Operations (55% of total revenue) decreased 14.4% year over year to $283.2 million due to the lower play levels and mix shift for lower-yielding, stand-alone lease operations games in its installed base. However, the quarter benefited from an increase in systems revenues and sand conversion sales. 

The installed base of recurring revenue games increased 900 units year over year to 61,400 units, driven by growth in international placements, partially offset by a reduction in domestic placements. 

Of the product revenues, North America decreased 30.7% due to lesser number of openings and replacement sales, while International revenue declined 11.5% due to the economic slowdown and negative effects of foreign currency. The company said it recognized 4,200 sales in North America during the quarter, including 3,800 replacement units. Internationally, IGT recognized 7,900 unit sales, all of which are from replacements. 

Operating Performance 

Gross margin remained unchanged from the year-ago period at 56.2% due to higher gaming gross margin, which benefited from a larger base of fully depreciated units, partially offset by lower product gross margin impacted unfavorably by higher costs related to systems upgrades and fewer systems sales and lower volumes due to fixed manufacturing costs. 

The company is focused on reducing costs related to manufacturing materials, headcount reductions and other operating expense controls and generated approximately $135 million in annualized savings. Excluding non-cash charges associated with the investment in Walker Digital, restructuring charges and bad debt expenses, operating expense fell 17% to $169.7 from the prior year quarter. Despite the fall, operating income fell 22.5% year-over-year due to lower revenue base. 

We remain encouraged by the company's substantial free cash flow which could drive future growth. The company generated $547.9 million of cash from operating activities for the full fiscal year 2009, compared to $486.5 million generated in 2008. Capital expenditures totaled $257 million for the year, compared to $298 million in the prior year. Thus, free cash flow totaled $169.2 million in fiscal 2009 versus $12.7 million in fiscal 2008. IGT exited the quarter with $247.4 million in cash and investments and $2.2 billion in debt. Deferred revenue increased approximately $48.8 million to $122.0 million at quarter-end as a result of additional multi-element contracts. 

Outlook 

The company is witnessing stabilized demand for its slot machines and casino management systems. The company plans to focus on its core activities in fiscal 2010. Management expects cost reduction throughout 2010. As a result, the company expects the EPS to be in the range of 77 cents to 87 cents per share, including 6 cents of non-cash interest expense due to a change in accounting for convertible notes. 

International Game Technology is a leader in slot machine distribution and manufacturing. IGT sells its games in the U.S. and internationally. It also makes systems that monitor slot machine play. However, the company faces strong competition from Bally Technologies Inc. (BYI - Snapshot Report) and WMS Industries Inc. (WMS - Snapshot Report) in the U.S.

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