IGT sees drop in net earnings

Thursday, Jan. 20, 2005 | 11:11 a.m.

A slowdown in the demand for slot machines in domestic markets has resulted in International Game Technology today reporting a drop in net earnings.

Reno-based IGT, the world's largest slot machine manufacturer, reported first-quarter net income of $122.4 million, 33 cents a share, for the quarter ending Dec. 31, compared with $176.3 million, 48 cents a share, the same period a year ago.

The results were based on record revenue of $641.2 million, up from $608.1 million a year ago. Analysts anticipated the downturn and had forecast the 33-cent earnings level.

"While we have maintained that the reason to own IGT (shares) was to move closer to visibility on '06 shipments, when we expect U.S. shipments to return to growth with shipments to new markets like Pennsylvania and Florida, the intervening period is going to be more challenging," said gaming analyst Robin Farley of UBS Securities, New York, in a note today to investors.

"We also believe that IGT's multiple will likely expand once new game shipments and placements begin to occur in markets like California and Pennsylvania and investors regain confidence in the forward growth rates," added Marc Falcone, an analyst with Deutsche Bank Securities in a note today to investors. "We maintain our 'buy' rating."

IGT executives said today the rollout of casino gaming in several new jurisdictions has occurred slower than anticipated. In addition, the company said the rush to replace machines with new ticket-in, ticket-out technology occurred at a rapid pace during the 2003 and 2004 fiscal years and was due for a letdown.

Although shipments on the domestic side weakened, the company, which is upgrading its presence in Las Vegas with a new campus that will consolidate multiple operations, had record worldwide unit sales of 55,300 machines, bolstered by the rollout of a new game in Japan.

"We are extremely pleased with the efforts and results of our IGT-Japan team," said Chief Executive T.J. Matthews.

IGT delivered 29,600 pachisuro machines with its Terminator theme in the quarter, the most successful game title release in the company's history. The Terminator rollout was greater than game sales in Japan for the entire 2004 fiscal year and outpaced the success of Nobunaga, IGT's inaugural release through its partnership with Sega Sammy Holdings Inc. of Japan.

While international sales were the highlight of the quarter's earnings, Matthews said he anticipates better times in the domestic market in the future.

"We remain very confident in our long-range prospects," Matthews said in a conference call with investors this morning. "We knew this year would be tough to follow after those performances in 2003 and 2004."

Matthews said he expected earnings to remain flat in the second quarter, but begin picking up in the third and fourth.

"Opportunities have been slow in materializing," he said, adding he still anticipates the California market would some day have 90,000 slot machines.

Matthews also cited slower-than-expected market development in tribal gaming outlets in Oklahoma, Florida and Washington, commercial gaming in New York and Pennsylvania and the charitable bingo market in Alabama.

"But the question we have to ask in these areas is not if, but when" the markets will pick up steam, he said.

The company shipped 14,700 units to North American operations during the quarter, compared with 22,600 for the same period a year ago. Of the shipments in the current quarter, 4,200 were shipped in Nevada, 5,700 in the East and 2,700 to tribal markets.

Matthews said while casino mergers have slowed some capital spending -- particularly with some replacement sales in properties operated by Mandalay Resort Group and Caesars Entertainment Inc., which are being acquired, respectively, by MGM Mirage and Harrah's Entertainment Inc. -- that isn't the primary reason for the domestic slowdown.

The company also expects to increase sales with the release later this year of a "Star Wars" themed machine and Video Megabucks units. The company also is optimistic about the prospects of its Fort Knox titled product, which was first released Wednesday.

IGT also said it would continue its focus on casino management systems and licensing opportunities.