Sorry, IGT, just like McKayla, investors aren’t impressed


Remember the photo from the 2012 Summer Olympics of U.S. gymnast McKayla Maroney, standing on the medal podium after taking silver in the vault finals, arms crossed, lips pursed to the side, with a look of disappointment?

The image became a viral Internet sensation known as “McKayla is not impressed.”

The investment community might give giant International Game Technology the same disdainful look.

In April, the company reported a 66 percent decline in earnings and a 15 percent decline in net revenue for the second quarter. A month earlier, IGT said it was laying off 7 percent of its global workforce to save costs and lowered its fiscal 2014 guidance.

Wall Street was not impressed.

Janney Montgomery Scott gaming analyst Brian McGill said IGT was right to cut costs. However, he questioned whether the cost-cutting was enough to stem the bleeding.

“We remain concerned with the outlook for the company going forward for a number of reasons,” McGill told investors. “On the (slot machine) replacement front, we expect the company will lose share as it struggles with content and it faces increasing competition from smaller manufacturers. This was evident this quarter.”

Union Gaming Group analyst Robert Shore was similarly unimpressed with IGT’s quarter. He said the staff reduction hurts company morale and removes gaming-content developers from the payroll.

“Content is key in the gaming equipment space, which is driven by development talent,” Shore said.

Shore said sales opportunities for new games seem challenging. And there are just a handful of casino openings and expansions this year (The Cromwell and the SLS Las Vegas), and 2015 isn’t much better.

“The wave of casino expansion in Asia will not be a panacea either, given property programming and IGT’s floor share in Asia,” Shore said. “The gaming operations segment does have some new titles coming on line in the upcoming quarters. However, we believe IGT swill struggle to maintain its existing footprint.”

The day after IGT announced its second-quarter results, the company’s stock price tumbled more than 10 percent.

Stifel Nicolaus Capital Markets gaming analyst Steven Wieczynski said he doesn’t believe IGT’s share price will recover meaningfully over the next few months. However, a turnaround by regional gaming markets, where IGT has a sizable number of slot machines in which it shares revenues with casino operators, could limit the slide in stock price.

“We do not expect the fundamental challenges facing IGT to materially abate over 2014,” Wieczynski said. “However, we do believe several unique and attractive growth opportunities have emerged, which, if properly executed upon, could help mitigate the overall impact of a sluggish core North American market on bottom-line results.”

If there is one bright spot for IGT, it’s the company’s interactive division, which includes the DoubleDown Casino social gaming site and the content IGT provides to New Jersey’s online gaming market. The division’s revenue increased 20 percent.

IGT told investors a new licensing agreement with Sony will let the company use the popular “Wheel of Fortune” slot machine brand on the DoubleDown site by year’s end.

Wieczynski said use of the game “should help stimulate the overall returns generated by this high-margin revenue source.”

In a March research report, Credit Suisse gaming analyst Joel Simkins suggested IGT could spin off the DoubleDown business, which might unlock additional value in the business unit.

After what he termed an impressive quarter from DoubleDown, which now offers slot games featuring many of IGT’s best-known titles, his mind was changed.

“While many investors believe a spinoff of DoubleDown is one way for the company to create value, during our recent visit with the company in Las Vegas, management noted it sees more strategic value in this business staying within its umbrella.”

Still, Simkins said weak gaming industry revenue trends and a 6 percent decline in the installed base of IGT’s revenue-sharing slot machines causes concern.

“Given continued intense industry competition from emerging vendors,” Simkins said, “we don’t see this pressure abating anytime soon.”

The competition isn’t letting up. Bally Technologies, which acquired SHFL Entertainment, and WMS Industries, which was bought by Scientific Games, solidified their standings. Smaller companies, including Aristocrat Technologies, MultiMedia Games and Konami, are cutting into IGT’s business.

“We continue to view this year as a tough one for IGT,” J.P. Morgan gaming analyst Joe Greff said.