Non-machine revenues comprised gaming systems, gaming conversions tables, parts and intellectual property fees come in at $115 million or 34% of total product sales compared to $92 million and 25% of total product sales in 2007.
- Average revenue per unit was $17,000 compared to $9,900 in 2007, with the 72% increase driven by the increased share of revenues from non-machine sources, stronger realized sales prices related to the mix of APB sales plus a lighter mix of sales into lower priced Japan and UK markets.
- Product sales gross margins were 54% up 300 basis points from the prior quarter driven by fewer machines shipped into lower priced markets of Japan and the UK and strength in non-machine revenues.
- Going forward, the firm expects product sales margins to slightly decrease to the range of 50% to 53%, margins will fluctuate as IGT realizes additional box demand relative to non-box revenues and depending on the mix of games sold in Japan and the UK.
Domestically, product sales revenues totaled $233 million on volume of 12,200 units compared to $213 million and 12,800 units in the prior year.
- Domestic replacement shipments totaled 3,600 units down from 6,400 units in last year’s quarter.
- Due to numerous casino openings and expansion new unit shipments were 8,600 units up 2,200 from last year’s quarter and 6,300 from the preceding quarter.
- Domestic non-machine revenues totaled $87 million, an increase of 28% from the prior year’s quarter as higher sales were driven by a number of new installations of IGT’s Advantage Systems and an increase in intellectual property fees.
- Domestic average revenue per unit was $19,100 compared to $16,600 in the prior year quarter and sales of machines utilized in the AVP platform reached 66% of total North American machines shipped.
AVP machines are premium priced products that generally sells for $2,000 to $3,000 more than the Legacy platforms due to the increased cost associated with the additional technology included in the unit.
- The firm anticipates the mix of AVP machines will comprise even a greater share of machine sales in future quarters as the Legacy platforms are slowly phased out.
- International product sales revenue totaled $111 million on volume of 8,000 units compared to $152 million and 24,100 units in prior year quarter.
- Latin American shipments increased over the prior year due to demand from Argentina but saw modest reductions in Japan and all other international casino markets in the UK.
- International non-machine sales were $28 million up 20% over the prior year quarter, with the increase driven mostly by increased parts [inaudible] in demand.
- International average revenue per unit totaled $13,900 up 121% over $6,300 realized in 2007, mainly driven by fewer low price machine ship into Japan and the UK as well as the higher non-machine sales.
Key questions and answers from the third quarter earnings call conducted by International Game Technology. (IGT) on July 17, 2008.
Robin Farley (UBS):
Could you talk a little bit about your share repurchase intentions going forward?
Thomas J. Matthews: Our goals are bifurcated into two buckets. That the one goal is we continue to generate excess cash and cash flow from operations greater than is needed for our reinvestment in the business.
We have said that we would redistribute all that money back to shareholders if we were not able to find good investment alternatives for our owners and continue to do that and continue to do that at a pace that we have said is probably in the neighborhood of about $100 million or so a quarter as well as the ongoing dividend. Beyond that that we do not have an optimal capital structure.
The capital structure is probably optimized, it’s weighted average cost of capital is probably optimized around 2.5 times leverage or so which allows us to opportunistically deploy even more cash back to shareholders if we see an opportunity to do so.
Certainly this pricing environment for gaming stocks in general and IGT in particular does appear to afford us that opportunity and so we have previously said that the authorization that we had would be exhausted by March of 2010.
Robin Farley (UBS):
Can you give specifics on where you are seeing replacement market share?
Thomas J. Matthews: Our replacement market share is definitely lower. You saw ship share at very disappointing levels last quarter. It will be obviously better this quarter given the number of units that we shipped into new and expansion environments.
Our issue is those 510,000 previously sold machines that we have not had a very good replacement strategy for them and we have been able to grow that install base with new and expansion.
This quarter you saw six brand new boxes introduced to the casino environment, comprised the majority of our sales for this quarter, it is going to continue to do so. In prospective quarters we have another big product introduction with the MLDs that are coming out hopefully this quarter, at least into the mega-jackpot product line.
You have got a real opportunity to move people from the existing hardware platforms to new hardware platforms. That probably cannibalizes some of the success that we have had with conversions but that’s okay, the hardware shipments will carry higher margins than conversion sales do.
The next step for us is to make meaningful progress on SB and to get people to start buying in front of SB in a way that they demonstrate that they believe in it. You saw a good customer of ours like Stations prepare the Redrock floor and hopefully will prepare the Aviante floor for SB future.
David Katz (Oppenheimer & Co.):
In terms of your replacement strategy, does this new product change some of the dynamics in the replacement activities of your customers at this point?
Thomas J. Matthews: Again without regard to any changes in their capital expenditure activity, the answer would be yes. We have products that legitimately replace some of the previously sold equipment and it gives them an opportunity to do more business than they have had overlast year.
