IGT earnings up 51 percent but stock still declines

David Strow

Thursday, July 19, 2001 | 11:05 a.m.

International Game Technology today reported a 51 percent increase in net income for the quarter ending June 30, driven by strong sales in the U.S. market.

The company posted net income of $56.7 million, or 73 cents per diluted share, for the quarter. In the year-ago period, IGT posted net income of $37.6 million, or 51 cents per diluted share.

The consensus analyst estimate was 70 cents per share. Though IGT beat that by 3 cents per share, investors have grown accustomed to blow-out quarters by IGT in recent months -- in the previous three quarters, IGT beat analyst expectations by 5 cents, 12 cents and 10 cents per share, respectively, on net income growth that exceeded 100 percent in each quarter.

IGT stock retreated $2.05 this morning to $55.30.

William Schmitt, gaming analyst with CIBC World Markets, said the "whisper number" for IGT -- unofficial analyst earnings expectations -- has been moving up in recent days, and that IGT might not have met these recently accelerated expectations.

"I expected somewhere between 72 and 75 (cents per share)," Schmitt said. "Overall, these are pretty solid numbers. The whisper number might have been higher, but I expect the stock to move up."

Though he called it a strong quarter, "given the apparent slowdown in sequential growth, it is now becoming more obvious why IGT is acquiring Anchor (Gaming) at this time," Merrill Lynch gaming analyst David Anders wrote in a research note today. IGT agreed earlier this month to acquire Las Vegas-based Anchor in a deal worth more than $1.3 billion.

During the current quarter, the third in IGT's fiscal year, revenues rose 36 percent to $318.7 million. Operating income rose 43 percent to $103.4 million, a company record.

IGT's product sales revenue rose 34 percent to $222.7 million; IGT sold 32,600 slots during the quarter, up by just 600 over the last quarter. While sales to U.S. casinos were up from 12,600 machines to 18,100 machines in the quarter, international sales fell 16 percent.

Much of the strength in U.S. sales is being caused by "replacement" sales, which reached 10,500 units in the quarter. IGT attributed this to an "aging base of installed machines," improved new video-based slot machines, and growing demand for IGT's "ticket-in, ticket-out" cashless slot machine technology.

"(Cashless technology) may have a slight positive impact," Schmitt said. "But I think (a larger impact) is the fact these new multicoin (video) machines are creating more excitement, and the operators have more incentive to get them on the floor."

A big reason operators like the new slots, Schmitt said, is that they're able to increase the hold on the machines, so they can increase gaming revenues even while slot play is down slightly.

"That's an incentive for these guys (casinos) to put more of these machines in," Schmitt said.

Though international sales were down, Schmitt believes the United Kingdom's recent moves toward a big expansion in gaming could be good news for IGT. A key component of the proposed liberalization of the U.K.'s gaming laws is that casino operators be allowed to have more than 10 slots per casino, as well as larger progressive jackpots.

"Nobody's focused on Great Britain," Schmitt said. "That could provide some nice upside in terms of product sales in the future, maybe 12 to 24 months."

Revenues from gaming operations -- that is, from slots placed on a revenue-participation basis -- rose 40 percent to $96 million. Earnings from joint ventures -- which consist almost entirely of revenues from the IGT-Anchor joint venture -- were up 40 percent to $40 million.

IGT attributed these gains to the popularity of such new games as "Austin Powers," "The Price is Right," and "The $1,000,000 Pyramid," as well as continued demand for older titles.

IGT also noted it placed 600 more participation slots in California during the quarter, giving it 1,750 machines there. "This fact combined with exceptionally high play levels is making California an important contributor to our gaming operations," IGT said.

Separately, Lakes Gaming Inc. of Minneapolis reported a sizable increase in net income for the quarter ending July 1.

Lakes posted net income of $4.2 million, or 39 cents per share, compared to a net loss of $5.3 million, or 50 cents per share, in the year-ago period.

However, the year-ago period was impacted by a $10.6 million one-time charge -- when that charge isn't included, Lakes' net income was down $1.1 million in this year's quarter. Revenues were off 10 percent to $9.6 million.

Lakes said these downturns were primarily caused by the affects of bad weather, particularly from Tropical Storm Allison. Lakes' only revenue comes from Grand Casino Coushatta in Louisiana.

This contract expires in January 2002, and the tribe does not plan to renew it. Though this will cut off Lakes' only source of revenue, the company has signed agreements to develop and operate four Indian casinos -- two in California, one in Michigan and one in Massachusetts. The company also plans, though a joint venture, to develop a nongaming hotel, retail and residential development on the Las Vegas Strip.

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