International Game Technology (IGT) reported strong fourth quarter 2012 results, with earnings of 38 cents per share, surpassing the Zacks Consensus Estimate by 6 cents. Earnings jumped 58.3% year over year driven by strong revenue growth during the quarter.
Total revenue surged 17.0% year over year to $631.1 million in the quarter, primarily driven by higher product sales and strong performance from interactive businesses. Revenue was well ahead of the Zacks Consensus Estimate of $583.0 million.
Gaming Operations revenue declined 2.2% year over year to $263.8 million in the quarter, primarily due to yield declines, which were partially offset by higher installed base. Average revenue per unit (ARPU) decreased 8.1% year over year to $50.83. At the end of the quarter, the company's Gaming Operations installed base totaled 57,100 units, up 3,200 units from the year-ago quarter.
Product Sales soared 22.0% year over year to $313.4 million, primarily attributable to higher domestic replacement sales (up 66.7% year over year). IGT shipped 14,600 machines during the quarter compared with 11,100 units in the year-ago quarter. ARPU in the reported quarter was $21,600 versus $22,700 in the prior-year quarter. Average machine sales price was $15,000 versus $15,200 in the year-ago quarter.
IGT provided separate results for the Interactive segment in the fourth quarter. Interactive revenue was $53.9 million compared with $13.4 million in the year-ago quarter. Social gaming revenue was $35.8 million while IGTi revenue was $18.1 million in the reported quarter.
Revenues from North America stood at $453.8 million, up 14.5% year over year while international operations revenue decreased 5.1% year over year to $123.4 million in the reported quarter.
Gross profit increased 15.5% year over year to $336.0 million. However, gross margin decreased 70 basis points ("bps") to 53.2% in the fourth quarter.
Gaming operations gross margin was up 440 bps from the prior-year quarter. Product sales gross margin expanded 200 bps in the quarter.
In the fourth quarter, operating expenses were $175.0 million, up 12.8% year over year and as a percentage of revenue, operating expenses declined 110 bps from the year-ago quarter. Higher operating expenses resulted from increasing investment in the interactive business
Operating income increased 3.6% year over year to $129.3 million primarily attributed to higher revenue. Operating margin decreased 260 bps to 20.5% in the quarter.
Net income increased 39.6% year over year to $101.9 million in the reported quarter.
As of September 30, 2012, cash and investments (including restricted cash) were $288.2 million versus $327.5 million, as of June 30, 2012. Long-term debt stood at $1.85 billion, down from $1.97 in the previous quarter.
For fiscal 2013, IGT forecasts earnings in the range of $1.20 to $1.30 per share (15.0% to 25.0% year-over-year growth). Operating expenses as a percentage of revenue are expected to remain flat on a year-over-year basis in fiscal 2013.
For fiscal 2013, IGT expects gaming operations revenue and installed base to remain flat on a year-over-year basis. However, gross margin and profit per unit are expected to show slight improvements.
Based on an anticipated strong performance from VLT business in Canada, Ohio and Illinois, IGT expects product sales and gross profit to increase at a double-digit range. However, unfavorable product mix may keep gross margin under pressure for fiscal 2013.
On the interactive front, IGT expects DoubleDown to be accretive by 2014.
We believe that increasing investment in product development will drive operating costs going forward. This will remain an overhang on the stock in the near term. Moreover, fewer new openings and increased competition from Bally Technologies Inc. (BYI) and WMS Industries Inc. (WMS) 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 growth from the interactive business will drive growth going forward.
We have a Neutral recommendation on the stock over the long term (6-12 months). Currently, IGT carries a Zacks #3 Rank, which implies a 'Hold' rating in the short term.