IGT stock drops despite higher profit

By Liz Benston

Wednesday, Jan. 22, 2003 | 11:03 a.m.

Driven by sales of higher-priced "cashless" slot machines to casinos, International Game Technology beat Wall Street expectations as it today reported earnings rose 77 percent in its fiscal first quarter.

But investors pushed down the price of IGT shares today on concerns about an important business segment, participation games, that is growing more slowly than sales of new machines.

IGT stock fell by about $2 to $75.17 in early afternoon trading today.

So-called participation games allow the Reno-based company to receive part of the revenue the machines generate for casinos.

Revenue-sharing games are popular with casinos because they attract gamblers with big jackpots and elaborate features. They include a series of "Wheel of Fortune" slots with lottery-style jackpots that collect millions and are linked across a wide geographic area. But some casino operators have stopped installing the games, claiming they are too expensive.

"We suspect investors may be disappointed in the participation trends at casinos and the fact that the disclosure of this was difficult to decipher at first glance," Goldman, Sachs & Co. analyst Steven Kent wrote in a note to investors today. Kent has an "outperform" rating on IGT stock.

Profits from revenue-sharing games are still rising despite a decrease in units, however, UBS Warburg analyst Robin Farley said.

"IGT benefits from revenue-sharing in particular in a difficult environment because the company gets a share of top-line revenues without having to share in the promotional activity that the casino may engage in to get that revenue," Farley wrote to investors. Farley has a "buy" rating on the stock.

The world's largest slot machine maker reported a profit of $91.6 million or $1.04 per share for its fiscal first quarter ended Dec. 28, up from $51.8 million, or 70 cents for the same quarter a year ago.

Excluding discontinued operations from the sale of the casino and slot operations of its Anchor Gaming acquisition last year, the company earned $1.00 per share.

Analysts expected the company to earn an average of 92 cents per share excluding special items.

Cash flow increased 65 percent during the same period, to $200 million.

The company defines cash flow as earnings from operations before interest, taxes, depreciation, amortization and stock-based compensation.

Strong domestic slot sales drove a 76 percent increase in revenue from last year, to $531.7 million. IGT sold 19,300 domestic machines during the quarter compared to 12,600 machines for the prior period. New casino openings and greater demand for new machines to replace older units in Nevada, Atlantic City and Indian casino markets contributed to the increase, the company noted.

Sales to new casinos rose 52 percent, while replacement sales jumped 54 percent year over year.

New casino shipments included the Seneca tribal casino in New York, the upcoming Borgata casino in Atlantic City and the recently-opened Tuscany and Cannery casinos in Las Vegas.

International machine shipments for the quarter totaled 10,400 units compared to 19,900 a year ago, primarily due to decreased sales in Japan, Australia and the United Kingdom. The decline was partially offset by increased sales in Europe.

"Achieving new records in the product sales segment is extremely gratifying considering the current generalized weakness in capital spending," IGT Chief Executive Officer G. Thomas Baker said in a statement.

"Our (cashless) technology continues to stimulate replacement demand for our gaming machines as evidence by recent announcements from prominent multi-property casino operators," Baker added.

IGT continues to benefit from the spread of legalized gambling as well as demand for so-called cashless machines that can dispense paper vouchers instead of coins.

Cashless machines can increase gambling revenue by speeding up the wagering process and can also decrease labor costs for casinos that would otherwise have employees fill machines with coins, analysts say.

Still, J.P. Morgan analyst Harry Curtis said the company would need to expand its slots into several new states to drive growth of IGT's already-expensive stock.

"We believe several new states would need to legalize gaming this year to drive multiple expansion from current levels," Curtis wrote in a research note to investors. "Although we believe (two) states will, new unit sales to these markets won't offset a decline in replacement unit sales."

Curtis has a "neutral" rating on the stock.

Installed participation games decreased by 100 machines from the September quarter to the December quarter, primarily because of the removal of "technologically obsolete" Anchor Gaming machines. Revenue-sharing units increased by 100 from the year-ago quarter.

During the quarter, the company repurchased 273,700 shares of its common stock for $19.7 million at an average price of about $72 per share. The company said it is authorized to buy back another 4.4 million shares.