International Game Technology (IGT)

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International Game Technology (IGT)

F1Q10 Earnings Call

January 21, 2010 5:00 pm ET


Patrick W. Cavanaugh – Chief Financial Officer, Executive Vice President & Treasurer

Patti S. Hart – President, Chief Executive Officer & Lead Director


Steven Wieczynski – Stifel Nicolaus & Company, Inc.

Joseph Greff – J. P. Morgan

Steven Kent – Goldman Sachs

Robin Farley – UBS

David Katz – Oppenheimer & Co

Todd Eilers – Roth Capital Partners, LLC

David Bain – Sterne, Agee & Leach



You will be on a listen only mode until the question and answer session of today’s conference call. The call is being recorded. If you have any objections you may disconnect at any time. I would now like to turn the call over to Mr. Pat Cavanaugh.

Patrick W. Cavanaugh

Welcome to IGT’s first quarter fiscal 2010 earnings call. With me this afternoon is Patti Hart, our President and CEO. Before I go in to a discussion of the results for the quarter I would first like to remind our listeners our discussion reflects management’s views based on the marketplace environment as of today, January 21, 2010 and will include forward-looking statements including forecasts of future performances and estimates of amounts not yet determinable, the potential for growth existing and the opening of new markets for our products, levels for our install base of recurring revenue gains as well as our future prospects and proposed new products, services, developments and business strategies.

We do not intend and undertake no obligation to update our forward-looking statements to reflect future events or circumstances. Actual results may differ materially. Additional information about factors which could potentially impact our financial results is included in today’s press release and our filings with the SEC including our most recent annual report on Form 10K and our reports on Form 10Q filed during fiscal 2009.

During this call we may discuss certain non-GAAP financial measures. In our press release and in our filings with the SEC, each of which is posted on our website at you will additional disclosures regarding any non-GAAP measures including reconciliations of these measures with comparable GAAP measures.

With that said, this afternoon IGT reported its first quarter results for fiscal 2010. Net income totaled $73 million or $0.25 per diluted share. This compares to $61 million and $0.21 per diluted share in the prior year quarter. The first quarter benefitted from $0.01 of EPS related to the adoption of the new revenue recognition rules i.e. we were effectively able to recognize some revenue that had been schedule do occur later in this fiscal year so it was really just swapping it from one quarter to the next. Then we also benefitted from $0.01 of EPS related to discrete tax items.

Additionally, the first quarter was affected by a number of notable items, the details of which are broken out in our earnings press release which went out this afternoon. The prior year quarter includes certain restated amounts due to the required retrospect application of new accounting standards associated with our convertible debt. On a consolidated basis our revenues for the quarter were $516 million of which 64% came from gaming operations and the balance from product sales compared to $602 million for the same quarter last year.

Consolidated gross profit and operating income for the quarter was $297 million and $147 million respectively compared to $306 million and $100 million respectively in the prior year quarter. Revenue comparisons for last year were impacted by an extra week in the prior year quarter which contributed $22.4 million to revenues and $11.5 million at the gross profit line at our consolidated operations as well as lower play level and fewer new openings.

During the current quarter we adopted new accounting standards requiring retrospective application of prior periods associated with our convertible debt and with equity classification of non-controlling interest. The retrospective adjustments are outlined in the supplemental schedule at the end of our press release. The new accounting standards for convertible debt resulted in diluted EPS of $0.02 and $0.01 in the current and prior periods. Additionally, we adopted new accounting guidance during the quarter related to revenue recognition for certain software enabled products and multi element arrangements on a prospective basis.

The adoption of the new revenue recognition guidance for transactions in the first quarter of fiscal 2010 resulted in $10.4 million of revenues which would have been recognized in later periods this fiscal year under the prior guidance. Approximately $6.9 million of this amount was accumulated in lease fees that had not yet been recognized pending execution of the final contract which occurred in Q1 of ’10.

Increased revenues of $10.4 million which were recognized because we met the accounting requirements for revenue recognition earlier than anticipated resulted in approximately $0.01 of incremental EPS.

Moving on to gaming operations, our gaming operations continue to feel the impact of challenging marketplace conditions. Game op revenues were $277 million in the quarter which was down 2% sequentially and 5% year-over-year excluding the extra week in the prior year quarter. Gross margins were 62% in the quarter versus 52% in the prior year quarter. Current quarter margins were positively impacted by reduced jackpot expense associated with interest rate changes and lower depreciation on the install base.

The prior year quarter margins were impacted by $14.1 million unfavorable adjustment to jackpot expense related to interest rate reductions as well as $3.5 million in fixed asset charges that occurred in that prior quarter. The fluctuation in these rates leads to a quarterly revaluation of the balance sheet liability and impacts margins. Excluding these items gross margins in the prior year quarter would have been 57%.

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