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Gaming Guru

Howard Stutz

IGT praised despite down quarter

18 July 2008

LAS VEGAS, Nevada -- Only in these current market conditions, with gaming industry stock prices slumping to historic lows, would the leading slot machine manufacturer be praised for a quarterly earnings miss.

Reno-based International Gaming Technology said Thursday its net income for the third quarter that ended June 30 declined to $108.3 million, or 35 cents a share, compared with $136.4 million, or 42 cents a share, for the same period a year ago. Analysts surveyed by Thomson Financial had predicted IGT would report earnings of 36 cents per share.

IGT's quarterly revenues fell 4 percent to $677.4 million, compared with $706.5 million in the same quarter last year. The company said the slowing national economy and a decline in casino business hurt quarterly earnings.

Nevada said this month that gaming revenues fell more than 15 percent statewide in May, the single-largest monthly decline since the state began keeping records in 1984. Within those figures, slot machine wagering was down almost 5 percent, the seventh straight month gamblers wagered less on slot machines than they had the previous year.

"The fact is these conditions we see in the marketplace are looking like they will continue for the foreseeable future," IGT Chairman and CEO TJ Matthews told analysts and investors during a conference call. "We've never really seen gaming-play levels fall."

Still, Matthews said IGT's profits and revenues were strong despite the adverse market conditions. He said the company released several new products during the quarter related to its server-based gaming initiatives and completed the $76 million buyout of European rival Cyberview. IGT has also repurchased 14.6 million shares of the company's stock since April 18.

IGT's stock has taken a beating. Company shares were down 44 percent from a year ago on the New York Stock Exchange going into Thursday. Following the earnings announcement, IGT, after a roller coaster session, closed Thursday at $22.73, down $1.93, or 7.83 percent. More than 16.3 million shares were traded, four times the average daily volume.

Wall Street analysts said the company's earnings miss was not a surprise, but they found some positive news within the company's quarterly statement. Researchers liked IGT's plans to continue buying back its stock with almost 13 million shares still available for repurchase under the current buyback plan.

Goldman Sachs gaming analyst Steven Kent said there was improvement in IGT's domestic sales, which indicated that some of the company's new products were gaining acceptance within the market.

"We think this was a generally solid quarter for IGT showing sequential improvement," Kent said in a note to investors.

Macquarie Capital gaming analyst Joel Simkins said IGT reported strong sales during the quarter of 12,200 slot machines to North American casinos, but he was disappointed the company sold just 8,000 machines internationally in the same time period. Simkins said strong competition and lukewarm demand in Japan and Australia caused reduced sales.

The analyst said he is still advising potential shareholders to remain cautious on IGT.

"Although we believe that IGT is getting closer to finding a bottom in the cycle and has done a good job of returning capital to shareholders, we recommend that investors continue to stay on the sidelines," Simkins said.

Before the company's conference call, Deutsche Bank gaming analyst Bill Lerner said IGT's quarterly earnings had been better than the investment community expected. After the call, he said comments by IGT management caused him to lower his upcoming quarterly earnings per share estimates.

Lerner said he didn't think IGT's gambling equipment rivals would make similar statements.

"Management's mantra is one of caution based on never having been through a similar economic environment, which management thinks could lead to major deterioration of gaming operations yields and casino cutbacks to capital expenditures," Lerner told investors. "We note that neither of these have yet materialized. We give IGT management credit for this approach."