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International Game Technology (IGT - Analyst Report) reported second-quarter earnings of 36 cents per share, which beat the Zacks Consensus Estimate by 6 cents. Earnings per share surged 33.3% year over year and 28.6% sequentially due to strong revenue growth in the second quarter.
Revenues increased 10.9% year over year and 14.2% sequentially to $600.0 million in the quarter. Year-over-year growth was primarily driven by higher product sales and strong performance from interactive businesses. Revenues were well ahead of the Zacks Consensus Estimate of $572.0 million.
Gaming Operations revenues declined 4.4% year over year and 4.8% from the previous quarter to $254.3 million in the quarter. The decline was primarily due to lower MegaJackpots revenues, partially offset by higher lease operations revenues.
Average revenue per unit per day decreased 5.9% year over year, but climbed 5.3% sequentially to $49.26 in the reported quarter. Gaming Operations installed base totaled 56,700 units, up 600 units from the year-ago quarter, but declined 100 units from the previous quarter.
Product Sales soared 15.9% year over year and 18.8% on a sequential basis to $279.0 million. Year-over-year growth was primarily attributable to higher North American machine sales related to Canada, Ill. and Ohio.
IGT shipped 14,300 machines during the quarter compared with 10,200 units in the year-ago quarter and 10,700 units in the previous quarter. Average machine sales price was $14,100 versus $14,800 in the year-ago quarter and $15,800 in the previous quarter.
IGT witnessed stupendous growth in the Interactive segment. Revenues surged 94.5% year over year and 26.1% sequentially to $66.7 million. Social gaming revenues were $54.3 million, while IGTi revenues were $12.4 million in the reported quarter.
Revenues from North America stood at $475.7 million, up 14.5% year over year while international operations revenues decreased 1.1% over the same period to $124.3 million in the reported quarter.
Gross margin decreased 150 basis points (“bps”) from the year-ago quarter and 200 bps from the previous quarter to 51.6% in the second quarter. The margin contraction was primarily due to lower product sales margin. Lower average sales price, unfavorable product mix and higher marketing expenditure hurt product margin in the quarter.
In the second quarter, operating expenses as a percentage of revenues declined 160 bps from the year-ago quarter and 220 bps from the previous quarter to 30.0%. Selling, general and administrative (SG&A), research & development (R&D) and depreciation & amortization (D&A) expenses declined 170 bps, 50 bps and 30 bps, respectively from the year-ago quarter reflecting significant cost control. On a sequential basis, SG&A, R&D and D&A contracted 60 bps, 70 bps and 30 bps, respectively.
The weak gross margin base was partially offset by lower-than-expected increase in operating expenses. As a result, operating margin declined modestly, 10 bps from the year-ago quarter but improved 110 bps from the previous quarter to 27.3%.
Net income as a percentage of revenues was 15.9% compared with 14.7% in the year-ago quarter and 14.5% in the previous quarter.
Balance Sheet and Cash Flow
As of Mar 31, 2013, cash and investments (including restricted cash) were $312.3 million versus $277.0 million, as of Dec 31, 2012. Long-term debt stood at $1.83 billion, up from $1.78 in the previous quarter.
Net operating cash flow was $88.0 million in the quarter compared with $94.5 million in the previous quarter. Free cash flow was $69.2 million compared with $56.9 million in the reported quarter.
IGT recently entered into a new 5-year credit facility worth $1.0 billion, which not only boosted its liquidity but also lowered overall borrowing costs by 20.0%.
IGT repurchased stocks worth $75.0 million and paid dividends worth $19.0 million.
For fiscal 2013, IGT raised its earnings outlook in the range of $1.26 to $1.32 per share (from $1.20 to $1.30 per share), which implies a growth rate of 22.0% to 28.0% over 2012.
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 Bally Technologies Inc. (BYI - Snapshot Report)), WMS Industries Inc. and Zynga Inc. (ZNGA - Snapshot Report) in its core as well as interactive markets 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, new contract wins, and strong performance from the interactive business are expected to drive growth going forward.
Currently, IGT carries a Zacks Rank #3 (Hold).