IGT earnings jump 72 percent

By Liz Benston

Tuesday, Nov. 4, 2003 | 11:16 a.m.

Sales of slot machines to new casinos as well as replacement of machines with new "cashless" devices helped profit soar 72 percent to $108.3 million at International Game Technology in its fiscal fourth quarter compared to the same period a year ago.

The world's largest slot maker also said during an earnings call today it is eyeing potential new markets in several states and anticipating accelerated demand for so-called cashless machines that can dispense paper vouchers instead of coins, saving on labor costs for casinos as well as improving revenue.

Legislatures in at least four states are considering some form of gambling, while three states -- Colorado, Maine and Indiana -- are considering votes on expanded gambling today.

"We feel very comfortable that gaming expansion is alive and well," IGT President and Chief Executive Officer Thomas J. Matthews told investors during a conference call.

Last week IGT announced the resignation of board chairman Charles Matthewson, who became chairman emeritus. Replacing Matthewson as chairman is G. Thomas Baker, who stepped down as CEO. Matthews retained his Chief Operating Officer title in addition to his new role as CEO and President.

Baker assured investors today that the "continuity of management at IGT is very sound." Baker called Matthewson his "guiding light" and said Matthewson's influence has been "instilled in current management ... for years to come." Matthewson was named board chairman in 1986.

"(Matthews) is ready to run this company in every way," said Baker, who first joined IGT in 1988 as vice president of finance and administration and chief financial officer.

Demand for cashless games continues to be the primary driver of replacement sales in the United States, executives said. The company anticipates replacing 60,000 to 65,000 slots with new IGT machines during fiscal 2004.

Reno-based IGT also expects to become a market leader in a newer segment of games called Class II devices. The games resemble slots but are actually electronic bingo games that are typically offered in tribal casinos that can't offer traditional slot machines. They have been considered illegal in certain areas and aren't well regulated. Recently, the National Indian Gaming Commission, the national regulatory agency for tribal casinos, has indicated a desire to regulate the machines so that companies can offer them without jeopardizing their state gaming licenses.

IGT already licenses games on a limited basis in certain Class II markets but expects to begin rolling out complete game systems by at least next year, Matthews said.

The market for bingo devices is "notable enough for us to no longer ignore that market," he said.

Promising markets for electronic bingo games include California, Oklahoma and Florida, he said.

The company's focus will remain on slot machines -- called Class III machines by government regulators -- that are more likely to flourish alongside Class II machines in certain markets such as California and Oklahoma, he said.

California's Indian casinos are allowed a certain number of slots but can theoretically offer an unlimited number of bingo devices, while Oklahoma only permits bingo machines.

"It seems like the ground is fertile (in California) for more negotiation" between tribes and the state for more traditional slot machines, Matthews said. Tribes in Oklahoma also have expressed an interest in slot machines, he said.

IGT reported profit of $108.3 million or 31 cents per share in the fourth quarter ended Sept. 27 compared to profit of $62.8 million or 18 cents per share a year earlier.

IGT stock traded today at $32.49, down 57 cents.

The company said it expected to meet analysts' profit expectations of about $1.27 for fiscal year 2004.

Excluding the effect of discontinued operations during this year's and last year's quarters, the company earned 29 cents per share compared to 15 cents per share a year ago. That was a penny higher than analysts' estimated for the fourth quarter.

Revenue rose 14 percent to $547.4 million in the quarter compared to a year ago. The company sold 20,700 machines domestically in the quarter compared to 17,100 devices a year ago. Domestic replacement sales totaled 15,000 units, a 38 percent increase from a year ago.

IGT sold 134,800 machines worldwide during fiscal year 2003 compared to 123,900 machines in 2002. The company introduced more than 70 new game themes over the past fiscal year.

The company's balance sheet is "rock solid," with more game installations than predicted, Deutsche Bank Securities gaming analyst Marc Falcone said in a research note to investors today.

"We believe IGT remains well positioned to use its balance sheet to pursue a potential increase in its dividend, strategic acquisitions and share repurchases," wrote Falcone, who has a "buy" rating on the stock.

Gaming analyst Todd Jordan of Buckingham Research Group said he was still concerned about a "leveling off" of demand for replacement games as well as fewer opportunities for the sale of games into new areas.

"Longer term, we believe that current replacement levels will decline dramatically as coinless works its way through the North American installed base of slot machines," Jordan wrote in a research note today. "We believe investors will soon begin to discount the slowing 2004 growth in (earnings per share), which could prevent meaningful share appreciation from current levels."

The company closed the acquisition of Acres Gaming last month for about $125 million. Acres makes systems that track gamblers' play. "The combination of Acres and IGT systems gives us a market leadership position" with an estimated 276 gaming systems installed at domestic casinos, IGT said today.

In September the company announced it had signed an agreement to sell its online lottery systems provider, IGT OnLine Entertainment Systems, to Scientific Games Corp. for $143 million and expects the sale to close early this month. IGT also expects to close a sale of United Tote, a pari-mutuel wagering business acquired in the purchase of slot maker Anchor Gaming at the end of 2001.

"For the first time in two years at IGT our focus is on being the best in the slot machines business" after selling off several non-core assets, said Matthews, formerly Chairman and CEO of Anchor.