This summary is based on the first quarter fiscal 2009 earnings call conducted by International Game Technology. (IGT) on 22 January, 2009.
Management:
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Chairman, Chief Executive Officer: Thomas J. Matthews
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Chief Financial Officer: Patrick Cavanaugh
Key Investors Issues
- Income of $65.7 million or 22 cents a share, was down 42% from $113.7 million or 36 cents a share in 2007.
- Revenues were $602 million, down 7% from $646 million in the prior year.
First Quarter Highlights
The firm generated income of $65.7 million or 22 cents a share, down 42% from $113.7 million or 36 cents a share, with comparability unfavorably impacted by a number of significant items that total $20.4 million, after tax, or 7 cents a share.
- Revenues were $602 million, down 7% from $646 million in the prior year as a result of lower play levels largely attributable to unfavorable economic conditions.
- This was also combined with continued shifts in the installed base mix toward lower-yielding stand alone, lease and central determination games.
- The firm has responded to macroeconomic challenges by reevaluating organizational structure and initiated a cost rationalization effort to better align operating costs with the current business environment.
SG&A totaled $132 million which included $17 million in restructuring charges and in addition bad debt provisions totaled a net expense of $11 million compared to a $5 million credit in the previous year.
- Depreciation and amortization within operating expenses totaled $20 million for the quarter, up from $19 million on the prior year quarter.
- Total operating expenses were $206 million compared to $171 million in the prior year quarter.
The firm has completed the previously announced headcount reductions which represented approximately 8% of total headcount and expect the quarterly OpEx run rate to come in 10 to 20% lower going forward.
- Other income expense net was $20 million, up from $8 million in the prior year quarter, mostly driven by higher interest on increased borrowings and investment write-downs.
- Cash equivalents and short term investments inclusive of restricted amounts totaled $381 million and debt totaled $2.3 billion.
- The firm has drawn $1.4 billion on its $2.5 billion credit facility and to date has repurchased $71 million of this issue, leaving $829 million outstanding on the convertible bonds.
- Inventories have decreased by $11 million as it completed the ramp up of production leading to the introduction of new AVP products.
- Capital expenditures totaled $76 million compared to $63 million in the prior year quarter.
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Gaming operations continue to see the most immediate effects of the marketplace conditions, with revenues down 5% sequentially and 6% year-over-year.
- It earned an average of $53.00 in revenue per unit per day versus $62.00 in the prior year quarter, and $60.00 in the immediately sequential quarter.
- Lower yields are primarily the result of a decline in industry play levels that have reduced average yields on variable fee games combined with the growth and the mix of lower yielding fixed fee games in the install base.
- IGT’s install base ended the first quarter at 60,900 units which was up 1,200 year-over-year and 400 units sequentially.
Approximately 74% of the install base is comprised of variable fee games that earn a percentage of machine play levels rather than a fixed daily fee.
- Install base growth in the international and domestic lease market was partially offset by reductions in Florida and California Class II operations as Native American operators have been moving to the Class III for sale model.
- Gross profit on gaming operations declined 19% year-over-year, primarily as a result of interest rate reductions that contributed $17.2 million in additional jackpot expense due to the higher cost to fund jackpot liabilities.
- In addition, the current quarter also included $4 million in fixed asset charges related to technological obsolescence.
- The firm expects the margin impact to continue as rates are anticipated to remain low for the foreseeable future, making it now more expensive to fund jackpots, tied to a wide area of progressive machines without any accompanying increase in revenue.
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Domestic product revenue sales totaled $215 million on volume of 9,500 units compared to $167 million or 7,300 units in the prior year quarter.
- Replacement demand decreased as IGT sold 2,800 replacement units compared to 4,900 in the sequential quarter.
- Replacement demand across the industry is down due to customer capital constraints and balance sheet issues.
- The firm shifted 6,700 new and expansion units, up 2,400 units from the prior year quarter due to a strong pipeline of new openings.
Domestic non-machine revenues totaled $78 million, up from $76 million in the prior year quarter.
- With an expanded footprint of network systems the firm anticipates higher demand for upgrades with lower demand for new system installations.
- Network systems revenues are always volatile depending on the timing of the projects and the firm expects to see continued lower demand for conversions sold for the legacy platform products as a result of migration of development efforts to the AVP platform.
- Domestic average revenue per unit was $22,600, flat to the prior year quarter and sales of machines utilized in the AVP platform comprised 90% of total North American machines.
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International product sales revenue totaled $73 million on volume of 6,200 units compared to $147 million and 12,900 units in the prior year quarter.
- Last year saw a weak dollar benefit, while this year the dollar has significantly strengthened and acted as a headwind on international results due to less favorable foreign currency translation rates.
- International non-machine sales were $20 million, down from $23 million in the prior year quarter driven by a decrease in parts and game conversion demand.
- International average revenue per unit was $11,800 up 4% from the prior year, driven by pure lower priced machines shipped into Japan and the UK.
Worldwide, IGT shipped 15,700 machines, down from the prior year shipments of 20,200.
- Non-machine revenues comprised of gaming systems, game theme conversions, tables, cards and intellectual property fees came in at $97 million or 34% of total product sales compared to $99 million or 32% of total product sales in the prior year.
- Product sales gross margins were 50%, down 3 percentage points from the prior year primarily due to a less favorable product sales mix.
