Earnings for IGT dip, sales increase

John Wilen

Thursday, April 22, 1999 | 11:10 a.m.

Gaming machine manufacturer International Game Technology of Reno today reported slightly lower earnings despite dramatically improved sales in the company's second fiscal quarter that ended April 3.

Earnings in the quarter declined from $35.5 million in the second quarter of 1998 to $33.8 million this year. Because IGT bought back 9.4 million shares of its stock in the quarter, and 10.8 million shares since the beginning of the fiscal year, per-share earnings actually increased, from 31 cents last year to 32 cents in this year's quarter.

The decline in profits came despite a 21 percent jump in sales, from $182.1 million in last year's quarter, to $220.9 million this year.

That discrepancy, analysts say, is due to a decline in IGT's profit margins.

"They had margin erosion in their business," said Andrew Zarnett, an analyst at Ladenburg Thalmann & Co.

While product sales increased from $91.7 million in the year-ago quarter to $139.6 million this year, profit margins fell from 42 percent in last year's quarter to 37 percent this year. IGT attributed the difference to "changes in product mix including a higher mix of international revenues as well as increased sales of new platform machines domestically."

Bear, Stearns & Co. Inc. analyst Jason Ader said the results were in line with his expectations. Though the stock traded as high as $17.50 this morning, it is still well below the $28.69 it traded at a year ago.

Internationally, IGT shipped 13,500 gaming machines in the quarter, representing 52 percent of its total unit sales, compared to 3,500 in the year-ago quarter. The company attributed the increase to its new Barcrest product lines and growth in Japanese pachisuro sales.

Domestically, the company shipped 12,300 units in the quarter, compared to 9,100 last year. These sales include 70 percent of the machines at the new Mandalay Bay and Venetian hotel-casinos, and 55 percent of the machines sold to the Ontario Lottery Commission. Increased demand from Indian gaming ventures also contributed to the increase.

Revenues from gaming operations also fell in the quarter, from $90.4 million a year ago to $81.3 million this year. That difference was due to record Nevada MegaBucks jackpots through 1998, which drove inflated levels of play in the year-ago quarter. New system introductions partially offset the decline in MegaBucks play. The company's installed base of MegaJackpots machines grew to 14,600 in the quarter, compared to 13,100 a year ago.

Operating expenses grew from $36.2 million a year ago to $50.8 million this year due to expenses assumed when IGT bought the Barcrest and Olympic businesses in March, 1998. Other income fell from $1.4 million a year ago to $444,000, due to increased interest expense on borrowings used for acquisitions and treasury stock purchases.

The company's buy-back of 9.4 million shares in the quarter cost $151 million. The company also discontinued dividend payments in the quarter, redirecting those funds to the stock repurchase plan or other corporate purposes.

IGT had little to say about the future financial impact of legislation under consideration in Nevada that would increase regulatory review -- and taxes -- on profits from linked or progressive jackpot slot machines. But Zarnett thinks the bill, if passed, will increase pressure on IGT's margins.

"It will cause them margin erosion in the future," said Zarnett.

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