Slot play returning to normal, IGT profits strong

David Strow

Tuesday, Nov. 6, 2001 | 10:51 a.m.

International Game Technology provided a bright spot to an otherwise dismal earnings season today, reporting a 6 percent increase in net income for the quarter ending Sept. 30.

IGT reported net income of $55.5 million, or 73 cents per share, compared to $52 million, or 70 cents per share, in the year-ago period. When one-time gains are factored out of IGT's year-ago quarter, the company's net income was up 13 percent.

IGT beat analyst expectations by 2 cents per share. Despite this, IGT stock was down as much as $1.45, a decline of nearly 3 percent, in early trading. By midday, it had recovered to $53.50, off 15 cents on the day.

"Although the earnings were solid the shares may be under pressure as investors may be disappointed that (estimates) were not surpassed more dramatically," Goldman Sachs gaming analyst Steven Kent wrote in a research note this morning.

Though earnings growth has proven elusive this quarter in the gaming industry, IGT's growth was quite modest by the company's recent standards. In previous quarters this year, IGT was able to post net income growth of more than 100 percent, and reported net income growth of 51 percent in the quarter ending June 30. In the previous four quarters, it beat analyst expectations by 3 cents, 5 cents, 12 cents and 10 cents, respectively.

Revenue rose 4 percent to $295.9 million, while cash flow increased 19 percent to $127.4 million.

The difference during the quarter for IGT was a growing shift from revenue from slot machine sales toward revenue from participation slot machines -- a more profitable business. IGT's gaming operations revenue increased more than 35 percent to $146.4 million during the quarter, as IGT had 1,100 more participation slot machines installed in casinos across the country.

Growth in this segment was boosted by strong customer demand for a number of new IGT slot titles, the company said, including the "Jeopardy!" video slot, "The $1,000,000 Pyramid," "Austin Powers," "I Dream of Jeannie" and "The Price is Right."

IGT's profit margin on gaming operations revenues fell 2 percentage points to 67 percent; IGT said lower interest rates make it more expensive to fund jackpot payments.

Play levels fell off following the Sept. 11 attacks, but appear to have recovered quickly. IGT said weekend play on its participation slots is actually running ahead of early September levels, while full-week play is at an average of 90 percent of pre-Sept. 11 levels.

Product sales did not fare as well during the quarter, falling 10 percent to $188 million. IGT sold 26,900 slots during the quarter, down from 32,600 in the year-ago period, as demand for new slots fell off from California casinos.

However, demand for replacement slots rose 57 percent to 9,600 units. And gross profit from product sales rose 4 percent to $80.2 million, since more sales came from the more profitable domestic market.

"We suspect this temporary deceleration (in slot sales) was a function of timing of product introductions and ordering," Kent wrote. "We continue to see strong demand from operators for IGT's cashless (slot) systems and participation machines."