IGT Beats Earnings, Reaffirms Outlook - Analyst Blog

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International Game Technology ( IGT ) reported third-quarter adjusted earnings of 33 cents per share, beating the Zacks Consensus Estimate by a penny. Reported earnings surged 43.5% from the year-ago quarter but were down 8.3% sequentially.

Revenues

Although revenues increased 8.7% year over year to $579.0 million, it lagged the Zacks Consensus Estimate of $586.0 million. Sequentially, revenues were down 3.5%. The year-over-year growth was primarily driven by higher product sales and strong performance from interactive businesses which offset the revenue decline in the Gaming Operations segment.

Revenues from Gaming Operations declined 4.2% year over year and 2.8% sequentially to $247.3 million. The decline was primarily due to lower-than-expected MegaJackpots revenues.

Average revenue per unit per day decreased 4.0% from the year-ago quarter and 3.0% sequentially to $47.96 in the quarter. Gaming Operations installed base of 56,700 units was down from 56,900 units in the year ago quarter.  

Product Sales soared 11.9% year over year to $259.2 million primarily attributable to higher North American machine sales, especially Canada, and non-machine sales. However, revenues were down 7.1% sequentially.

IGT shipped 13,400 machines during the quarter compared with 11,600 units in the year-ago quarter. Average machine sales price was $13,300 versus $13,700 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 68.6% year over year to $72.6 million. Sequentially, revenues were up a modest 8.7%. Social gaming revenues were $61.4 million, while IGTi revenues were $11.1 million in the reported quarter.

IGT's DoubleDown Casino was the top grossing game on Facebook ( FB ). It replaced Zynga 's ( ZNGA ) poker game to claim the top spot in the social casino game segment. Moreover, DoubleDown's mobile platform was the top-grossing social casino app on Apple 's ( AAPL ) iPad.

Margins

Gross profit increased 11.6% year over year to $339.5 million while margins came in at 58.6%, which was up 150 basis points (bps) primarily due to higher revenues from the company's operating segments. Moreover, lower jackpot expenses and depreciation also helped IGT's gaming gross margins.

In the third quarter, adjusted operating expenses as a percentage of revenues declined 80 bps from the year-ago quarter from the previous quarter to 32.0%.

As a result, adjusted operating income increased 19.2% from the year-ago quarter to $154.1 million and margins came in at 26.6% (up 230 bps on a year-over-year basis)

Adjusted net income increased 26.1% from the year-ago quarter to $86.4 million. However, net income decreased 9.1% on a quarter-over-quarter basis.

Balance Sheet and Cash Flow

IGT exited the third quarter with cash and investments (including restricted cash) of $302.1 million versus $312.3 million in the previous quarter. Long-term debt stood at $835.2 million.

The company reported fiscal year-to-date operating cash flow of $335.2 million and free cash flow amounted to $182.6 million after paying dividends worth $55.5 million. The company announced a 50% increase in its dividend payment.

IGT repurchased shares worth approximately $6 million at an average price of $17.03 per share.

Guidance Reiterated

For fiscal 2013, IGT reiterated its earnings outlook in the range of $1.26 to $1.32 per share, which implies 22.0% to 28.0% growth rate over 2012.

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 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, 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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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Business , Earnings , Stocks

Referenced Stocks: AAPL , FB , IGT , ZNGA

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