This summary is based on the second quarter fiscal 2008 earnings call conducted by International Game Technology (IGT) on April 17, 2008.
Management:
Investor Relations: Patrick Cavanaugh
Chairman, President, Chief Executive Officer, Chief Operating Officer: Thomas Matthews
Chief Accounting Officer: Danny Siciliano
Key Investors Issues
- EPS were 22 cents per share compared to 38 cents per share last year.
- Net income was $68.4 million compared to $128.2 million in the same quarter last year.
- Revenue fell to $573.2 million from $609.7 million a year ago.
Second Quarter Highlights
Net income totaled $68 million or 22 cents per share compared to $128 million and 38 cents per share in the prior-year quarter.
Included in the quarter were a number of financial items which negatively impacted results. These items totaled $20 million after tax or 6 cents per share. Last year’s second quarter saw items which increased net income $17 million after-tax or 5 cents per share.
Gaming operations business generated revenues of $341 million.
- Revenue on a quarterly basis was up 3% sequentially and flat with the same quarter last year.
- Install base ended the second quarter at 58,700 units and earned $64 in revenue per unit per day compared to 54,800 units and $69 in revenue per unit per day in the last-year quarter.
- The decline in revenue per unit year over year is mostly due to the growing mix of lower-yielding units and to lower play levels given the current operating environment.
- On a sequential basis, the 3% increase in yield to $64 from $62 in the first quarter is primarily attributable to seasonality, as second quarter usually sees an uptick from seasonally slowest first quarter. Historically, second quarter has shown an average yield growth of 6% to 8% compared to the first quarter due to seasonal play level improvements. The underperformance in the most recent quarter the company believes to be the result of lower play levels given the current operating environment as well as shifts in product mix.
- Placements were up 3,900 units over the prior-year quarter but off at 100 units.
- In the casino operations sector of installed base the company ended the quarter at 39,700 units, up 1,600 over last year’s second quarter and down 800 sequentially from the prior quarter. The increase over the prior year was generated by additions in Oklahoma and Florida, while the sequential reduction was primarily the result of the transition away from Class II and into for-sale Class III units in both Florida and California.
- In the lease operations sector, installed base totaled 19,000 units, representing growth of 2,300 units year over year and 700 units sequentially. Mexico made up the bulk of the year-over-year growth, while growth in Delaware and the UK contributed to the sequential increase.
Gross profit on gaming operations totaled $184 million, down from $211 million in the prior-year quarter.
Gross margins were 54%, down from 62% in the prior year, with most of the decrease attributable to items. Margins were reduced by unfavorable jackpot expense as a result of the 200 basis point drop in the prime rate. The margins were also affected by other items, with current quarter technological obsolescence charges related to the transition toward innovative new cabinets and platforms as well as last year’s benefit from the hurricane property insurance proceeds. Adjusting for these significant items margins would have been approximately 60%. The remainder of the reduction in margins was mostly due to lower play levels.
While gaming operations’ margins are negatively impacted by lower interest rates, on a whole IGT is somewhat mitigated or hedged as the company incurs lowering borrowing costs when rates are declining. However there is a 60 to 90 day lag due to the timing of rate adjustments on line of credit, so the company was not able to realize this benefit during the second quarter.
Taking into account lower interest rates and current market expectations for rates, game ops gross margins are projected to trend within a range of 57% to 60%, with fluctuations based on the timing of jackpots, interest rates and the mix of games in install base. The company expects the install base to resume growth in the second half of 2008 and beyond as new expansion opportunities begin to open and expands footprint in Florida, Alabama, and Oklahoma.
Product sales revenue totaled $232 million compared to $269 million in last year’s second quarter.
- Worldwide the company shipped 12,100 machines, down 35% from prior-year quarter shipments of 18,800. As expected, the second quarter saw continued low levels of marketplace demand and minimal new capacity added.
- Non-machine revenues comprised of gaming systems, game theme conversions, table parts and intellectual property fees came in at $87 million or 38% of total product sales compared to $90 million and 33% of total product sales in the prior-year quarter.
- Average revenue per unit for the year was $19,200 compared to $14,300 in the prior year. The 34% increase was driven by increased share of revenues from non-machine sources and reduced demand in lower-priced machine markets of Japan and the UK.
- Product sales gross margins were 55%, up 100 basis points from the prior-year quarter, due to favorable product and jurisdiction mix and fewer machines having been shipped into Japan and the UK.
- Breaking product sales down domestic versus international, first domestic, product sales revenue totaled $148 million on volume of 6,500 units compared to $181 million and 9,700 units in the prior year quarter.
- Domestic replacement shipments totaled 4,300 units, down from 6,400 units in last year’s quarter and up from 3,200 in the immediately preceding quarter. As expected, new unit shipments were 2,200 units, down from 3,300 in last year’s quarter and down from 4,200 in the immediately preceding quarter.
- Domestic non-machine revenues totaled $67 million, down 6% on a year-over-year basis. The decrease was the result of lower systems revenues, which fluctuate from quarter to quarter depending on the timing of installations.
- Domestic average revenue per unit was $22,800 compared to $18,600 in the prior-year quarter. Sales of machines utilizing AVP platform reached 57% of total North American machines shipped.
International product sales revenues were a total of $84 million on volume of 5,600 units, compared to $88 million and 9,100 units in the prior year quarter.
