IGT International Game Technology PLC

International Game Technology (IGT) reported first-quarter fiscal 2014 adjusted earnings of 25 cents per share, which missed the Zacks Consensus Estimate by a nickel. Earnings per share declined 13.4% from the year-ago quarter and 17.9% sequentially.

IGT also provided cautious earnings outlook for fiscal 2014. Shares declined 9.0% ($1.57) in after-hours trading.

Quarter Details

Revenues increased 2.1% year over year but declined 14.4% sequentially to $541.2 million and also lagged the Zacks Consensus Estimate of $556.0 million. The year-over-year growth was driven by a 41.0% jump in Interactive segment revenues and 3.1% increase product sales revenues, which fully offset the 8.1% decline in gaming operations revenues.

The sequential decline in revenues was primarily attributed to weak performance by both gaming operations and product sales. Gaming operations revenues declined 9.8%, while product sales plunged 22.0% in the last quarter.

Average revenue per unit per day decreased 3.9% from the year-ago quarter to $44.99. Gaming Operations installed base of 54,300 units was down from 56,800 units in the year-ago quarter.  

IGT shipped 12,800 machines during the quarter compared with 10,700 units in the year-ago quarter. Average machine sales price was $13,200 versus $14,800 in the year-ago quarter primarily due to higher mix of low-priced VLT sales.

In the Interactive segment, social gaming revenues were $64.8 million compared with $41.3 million in the year-ago quarter. Double Down was one of the top-playing social gaming apps on Facebook (FB) by the end of 2013.

IGTi revenues were $9.8 million, down from $11.6 million reported in the year-ago quarter. IGT launched real money online wagering in New Jersey in Nov 2013. The company currently offers 20 slot games and video poker games through eight casino partners.

Gross margin declined 120 basis points (bps) from the year-ago quarter but increased 80 bps sequentially to 57.2%. The year-over-year decline was primarily due to lower product sales gross margin (down 140 bps) and gaming operations gross margin (down 200 bps).

The sequential increase was primarily attributed to higher product sales gross margin (up 220 bps) and interactive gross margin (up 50 bps).
     
Operating expenses as percentage of revenues increased 310 bps from the year-ago quarter and 180 bps from the previous quarter to 35.0%. The year-over-year increase was primarily attributed to higher selling, general & administrative expense (up 290 bps) and research & development expense (up 80 bps).

As a result, operating margin contracted 300 bps from the year-ago quarter and 50 bps from the previous quarter to 22.9%. Net income margin was 11.6% compared with 14.4% in the year-ago quarter and 12.6% in the previous quarter.

IGT exited the first quarter with cash and investments (including restricted cash) of $580.6 million versus $809.1 million in the previous quarter. Total debt stood at $2.19 billion. During the quarter, IGT completed the $200.0 million accelerated share repurchase program.

Guidance

IGT noted that declining gross gaming revenue trends mostly in the gaming operations will continue to remain a major headwind in 2014. For fiscal 2014, IGT expects earnings to be in the lower-end of its earlier guided range of $1.28 to $1.38 per share. Currently, the Zacks Consensus Estimate is pegged at $1.28 per share.

Double Down is expected to grow strongly due to improving customer engagement, higher mobile revenues, international expansion and innovative product pipeline. Management also noted that Asia is well positioned to grow over the next 2–3 years.  

Our Take

IGT’s weak outlook will remain an overhang on the stock, going forward. We believe increasing investment in product development will increase operating costs. This will negatively impact profitability in the near term.

Moreover, increased competition from its peers such as Melco Crown Entertainment (MPEL) and Multimedia Game (MGAM) in its core as well as interactive markets will keep the stock range bound in the near term.

Currently, IGT carries a Zacks Rank #4 (Sell).

 
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