International Game Technology (IGT)

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International Game Technology (IGT)

Q4 2011 Earnings Call

November 08, 2011 5:00 pm ET

Executives

Patrick W. Cavanaugh - Chief Financial Officer, Principal Accounting Officer, Executive Vice President and Treasurer

Matthew G. Moyer - Vice President of Investor Relations

Eric A. Berg - President

Patti S. Hart - Chief Executive officer, Lead Independent Director, Director and Member of Stock Award Committee

Analysts

Ryan L. Worst - Brean Murray, Carret & Co., LLC, Research Division

Steven Wieczynski - Stifel, Nicolaus & Co., Inc., Research Division

Felicia R. Hendrix - Barclays Capital, Research Division

David B. Katz - Jefferies & Company, Inc., Research Division

Robin M. Farley - UBS Investment Bank, Research Division

Dennis I. Forst - KeyBanc Capital Markets Inc., Research Division

Joseph Greff - JP Morgan Chase & Co, Research Division

Todd Eilers - Roth Capital Partners, LLC, Research Division

Carlo Santarelli - Deutsche Bank AG, Research Division

Mark Strawn - Morgan Stanley, Research Division

Presentation

Operator

Welcome to International Game Technology's Fourth Quarter and Fiscal Year 2011 Results Conference Call. [Operator Instructions] This call is being recorded. If anyone has any objections, you may disconnect at this time. I would now like to turn the call over to Matt Moyer, Vice President of Investor Relations. Sir, you may begin.

Matthew G. Moyer

Thanks, Kim. Good afternoon, and welcome to IGT's Fourth Quarter Fiscal Year 2011 Earnings Conference Call. With me today on the call are Patti Hart, CEO; Eric Berg, President; and Pat Cavanaugh, Chief Financial Officer.

Before we begin, I'd like to remind listeners, our discussion will contain forward-looking statements concerning matters such as our expected financial and operational performance, including our guidance for fiscal 2012, our expectations for the economy in general, and the gaming industry in particular, and strategic operational and product plans. Actual results may differ materially from the results predicted, and reported results should not be considered as indicative of future performance. Potential risks and uncertainties that could cause our business and financial results to differ materially from our forward-looking statements are included in our filings with the SEC, including our most recent annual report on Form 10-K and subsequent quarterly reports on Form 10-Q. All information discussed on this call is as of today, November 8, 2011, and IGT does not intend, and undertakes no obligation to update this information to reflect future events or circumstances.

In addition, on today's call, we may discuss certain non-GAAP financial measures. Reconciliation of these non-GAAP measures to the GAAP measures we consider most comparable can be found in today's earnings release, which is posted on the Investor Relations section of our website, www.igt.com and included as Exhibit 99.1 to the Form 8-K we furnished today with the SEC.

With that in mind, I'll turn the call over to Patti.

Patti S. Hart

Thank you, Matt, and good afternoon, everyone. The fiscal year 2011, we set out, at IGT, to drive higher revenue, grow our gaming operations, improve profitability, leverage our strong cash flows, and increase our interactive presence. We delivered results in line with the commitments we made to our stakeholders by driving improvement across every aspect of our business.

Our products are better than ever and our revenues are growing. Total fourth quarter revenues increased 14% year-over-year to $540 million. This represents our highest revenue quarter since the first quarter of fiscal 2009. We launched several of the most successful participation for sale and interactive games in the company's history. Nearly 50% of our newly introduced core games are performing at least 1.5x the floor average, that's up from 33% just 3 years ago. Gaming operations continue to expand. We grew our average yield by 9% over the prior year quarter, and our domestic installed base was up for the year, for the first time since 2007.Our profitability is improving. Full year consolidated gross profit margin increased 100 basis points to 58%, with strength in both product sales and gaming operation's gross margins. Our cash flows are unrivaled. We returned over $120 million in capital to our shareholders, decreased our borrowing cost and grew our cash position to over $500 million. Our interactive business is advancing, with the addition of Entraction, we have added poker, bingo, and sports betting to our industry-leading online and mobile portfolio. Over the past 2 years, we have nearly doubled the earnings performance of the company. In 2009, with $2 billion in revenues, our GAAP EPS from continuing operations was just $0.50. This year, with similar revenues, our GAAP EPS from continuing operations is $0.97. We have added considerable earnings leverage to our business and we expect this momentum to accelerate in 2012.

I'd like to take a minute to express my gratitude to those who have made these results possible, our employees. 2011 is a testament to the collective effort of our global workforce, and I want to thank our employees for delivering financial results that remind us of the power of IGT. I'll now turn the call over to Pat for the financial details. Pat?

Patrick W. Cavanaugh

Thank you, Patti, and good afternoon, everyone. Our fourth quarter adjusted earnings from continuing operations grew 44% to $73 million or $0.24 per share versus $51 million and $0.17 in last year's fourth quarter. The growth in adjusted earnings was driven by higher product sales revenue coupled with strong margin performance. Both periods presented in this release have been adjusted to classify the Barcrest Group and discontinued operations.

For the fiscal year, adjusted earnings from continuing operations grew 13% to $280 million or $0.93 per share versus $248 million and $0.84 in the prior year. Our total revenues for the fourth quarter increased 14% to $540 million year-over-year, a result of stronger product sales in North America and higher International Gaming operations. For fiscal 2011, total revenues grew 2% to $1.96 billion. Gaming operations revenues were $283 million in the fourth quarter, up 8% versus last year on higher MegaJackpots performance and increases in our international installed base. For the quarter, we generated an average of $58.08 in revenue per unit per day, which is up 9% compared to last year's fourth quarter. The strong performance of our domestic wide area progressive games positively contributed to this increase in yield. IGT's consolidated installed base ended the fourth quarter at 53,900 units, up 1,000 units from a year ago, and 600 units sequentially. Reported gaming operations gross margin was 57% in the fourth quarter, down from 58% to the same quarter last year. And intellectual property settlement and changes in interest rates reduced our gaming ops' gross margins by 240 basis points and 80 basis points, respectively. Consolidated product sales revenue increased 20% to $257 million for the quarter, compared to $213 million in the fourth quarter of last year. Globally, we recognized 11,300 units in the quarter, up 38% from last year's fourth quarter, primarily driven by higher domestic replacement. In the quarter, we recognized 5,000 North American replacement units, the highest quarterly level in 4 years. We estimate our North American replacement share grew again and was 40% to 45% this quarter when including the 5 largest suppliers. North America's machine sales revenues were up 115% over the prior year quarter to $101 million or an increase of 3,800 units. North America's average selling price in the quarter was flat compared to last year. North America's product sales gross margins were up 500 basis points to 56% due to lower nonstandard costs, lower discounts, and increased intellectual property fees. International product sales revenue decreased to $96 million on volume of 4,200 units recognized to the current quarter, compared to $101 million on 4,900 units respectively in the prior quarter due to new opening. International average selling price was up 4% year-over-year, primarily due to favorable foreign exchange rates. Worldwide, non-machine revenues, mainly from the sale of the systems, conversions, and intellectual property fees declined 2% to $85 million for the quarter with 32% of product sales compared to $87 million or 41% of product sales in the prior year quarter. The decrease in domestic diversion kit sales was partially offset by a significant increase in domestic intellectual property revenues.

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