IGT profit bolstered by WMS settlement

David Strow

Thursday, Jan. 20, 2000 | 11:18 a.m.

International Game Technology reported a big jump in quarterly earnings today -- but that growth was driven entirely by a $27 million legal settlement reached with competitor WMS Gaming Inc. in a patent infringement lawsuit.

The Reno company, the dominant player in the slot machine industry, reported net income of $42.4 million, or 49 cents per share, for the quarter ending Jan. 1. Net income rose 23 percent, while earnings per share rose 53 percent.

But IGT would not have fared nearly as well without that settlement, which contributed $17.3 million to the company's bottom line. Revenues slid nearly 7 percent, to $206.5 million.

Net income before one-time expenses and income totaled $26.3 million, down 23.6 percent from the year-ago period. The company earned 30 cents per share before one-time charges and income, down from 32 cents per share a year ago.

IGT's per-share earnings were assisted by the repurchase of more than 21.6 million shares since the beginning of 1999. The numbers met the street expectation of 30 cents per share.

IGT stock traded this morning at $22.25, up 81 cents.

IGT's earnings reflected an on-going tale of two businesses. The company's gaming operations -- which include its leased games and progressive games -- continued to show strong growth. But those gains were diluted by a continuing slide in new slot sales.

The company's gaming operations recorded revenues of $96.8 million, up 14 percent from the year-ago period. IGT attributed its gains to the success of such high-profile product lines as Elvis, Triple Play Poker and Wheel of Fortune. Numbers were also boosted by the acquisition of Sodak Gaming, acquired by IGT in September for $230 million.

"IGT's accomplishments in the recurring revenue business are laudable," said Dave Ehlers, chairman of Las Vegas Investment Advisors. "The results speak for themselves."

Growth in this category is particularly encouraging, said one analyst, because it is marked by higher profit margins. IGT's gross profit margin in gaming operations was 66 percent, up from 55 percent a year ago.

"Their progressive business is very strong," said Stuart Linde of Lehman Bros. "Their focus is on high-margin gaming operations business. That helped offset disappointment on the unit (sales) side."

Those numbers continued to slide during the quarter. IGT reported product sales revenues of $109.8 million, a decline of nearly 20 percent from the year-ago quarter. Unit sales fell to 19,500, down from 32,200.

Sales in this category were hurt by a sharp decline in IGT's international sales, particularly in Japan. In the year-ago quarter, IGT sold more than 14,000 units in Japan as it released the "Popper King" gambling device to the Japanese market. During this quarter, IGT sold 1,600 units in that market.

Overall, IGT's international sales fell from 25,000 units a year ago to 11,200 in the most recent quarter.

Domestic sales, on the other hand, increased 16 percent, to 8,400 units sold.

"Those are better than expected, but well below historical levels," Linde said. "Their video product is not as competitive as it once was. If they can (develop new product) successfully, they can regain market share they lost."

The big debate on Wall Street is whether the new market among tribal casinos in California will cause IGT's sales figures to rebound.

"We believe expectations for new unit shipments may be a little too aggressive," Linde said. "The timeline (in California) may be longer than people think, and it will be predominately video."

Ehlers is even more doubtful that California will be much help.

"The Indians believe that IGT contributed significantly to efforts to defeat Proposition 5 (the 1998 initiative to legalize gambling in California), and they are angry," Ehlers said. "Wall Street believes IGT will get 75 percent of that market. If they only get 40 percent, then companies like Casino Data Systems and WMS will do awfully well."