Friday, January 21, 2005
Copyright © Las Vegas Review-Journal

Reno slot giant says earnings decline sharply

Demand for devices down domestically

International Game Technology technician Erik Cruz works Thursday on new slot machines bound for Wynn Las Vegas. The slot maker said first-quarter profits dropped from a year earlier. Photo by John Gurzinski.

With sales of slot machines and gaming equipment having slowed in domestic markets over much of 2004, Reno-based International Game Technology on Thursday reported a drop in the company's first-quarter net earnings compared with a year ago.

IGT had net income of $122.4 million during the quarter ended Dec. 31, down from $176.3 million a year earlier, a 30.6 percent drop.

Still, the gaming industry's market leader in the production and sales of slot machines and related gaming equipment had record revenue of $641.2 million during the quarter, an increase of 5.4 percent from $608.1 million a year ago.

In a statement, the company said a slowdown in demand for slot machines in the United States had been expected. However, the company added, international business and the expansion of nongaming machine products contributed to strong cash flow during the quarter.

In addition, the company noted in its financial report that its fiscal calendar had one fewer week to work with in the quarter, which sent revenue and gross profits down slightly while bumping up operating expenses.

"We remain confident in IGT's long-term outlook," IGT Chief Executive Officer TJ Matthews said during a question-and-answer session with gaming analysts. "We knew this year would be tough to follow our past performances because we still remain dependent on gaming market expansion for much of our growth and that has been slow in materializing. We will still achieve our long-term growth objectives."

Earnings per diluted share were 33 cents for the quarter, in line with the average estimate of analysts polled by Thomson First Call. Going forward, Matthews said the earnings per share should be in the low end of 30 cents to 35 cents per share in the second quarter and top end of 30 cents to 35 cents in the third and fourth quarters.

Matthews said the company stood by its 15 percent annual earnings growth target.

IGT announced earnings before stock markets opened Thursday. IGT closed Thursday at $30.05, down $3.50, or 10.43 percent.

Analysts thought 2005 may prove challenging for IGT.

Deutsche Bank analyst Marc Falcone downgraded shares of IGT to "hold" from "buy" following the company's conservative outlook, saying he didn't see any material upside for the slot maker over the next six to 12 months.

"Despite a challenging fiscal year 2005, we still believe IGT has leading products in the industry, a strong management team, and long-term growth prospects," Falcone said. "However, given the uncertain environment over the next few quarters, we believe the stock will likely underperform."

Susquehanna Financial Group analyst Eric Hausler said the earnings did not change his rating for the company. However, he said, IGT is in the down part of the expansion and replacement cycle.

"We thought IGT might be able to buckle it together throughout fiscal year 2005 with a smattering of games to Oklahoma, Japan, Russia and other markets, which are opening up to the company," Hausler said. "Looking closely at the numbers, it seems apparent that for the first time in several years IGT has real competitors out there in Aristocrat, Konami and WMS, and that market-share losses could be a factor in the numbers."

Matthews said he expects domestic gaming growth in 2006, with several states looking to add slot machines or expand use of gaming devices. In addition to Pennsylvania, which has said it will allow 60,000 slot machines into the state, California could have a total of 90,000 slot machines in the next few years while Oklahoma, Alabama, Florida and Washington should see significant growth. Matthews also expects New York to allow video lottery terminals inside the state's racetracks.

"What we've learned is that it takes longer than we thought to establish gaming through the legislative process," Matthews said. "There is a tremendous amount of time taken to establishing a gaming commission, setting up the rules and licensing. "

He said the North American market could have an installed base of 1 million slot machines by 2010.

Matthews said the pending Harrah's Entertainment-Caesars Entertainment and MGM Mirage-Mandalay Resort Group mergers might have led to softer domestic sales.

In both cases, capital expenditures by Mandalay and Caesars, the companies being bought out, could have been lessened. He said the "postmerger environment could allow those companies to invest heavily into bringing slot floors up to date."

International slot machine sales helped lift the company's shipments

to 55,300 games, up 20 percent from a year ago.

IGT shipped 40,600 gaming machines overseas during the period, almost double what the company shipped during the same time in 2003. In North America, IGT shipped about 8,000 fewer gaming machines from the similar period a year earlier. International product sales revenues were a record at $172.2 million, an increase of 84 percent from $93.6 million a year ago.

Japan was the largest international market, due to sales of 29,600 units of The Terminator pachisuro machine in the quarter.

In North America, IGT expects to roll out new games during the year, including a game based on the "Star Wars" theme.