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Gaming: Too little, too late for sinking slot maker?

22 September 2008

LAS VEGAS, Nevada -- It was late September 2003 when slot machine giant International Game Technology graced the cover of the New York Times Magazine. The lengthy Sunday profile touted the company's success in placing a vast collection of games based on once-popular television shows and celebrities inside casinos.

The IGT machines, manufactured in Nevada, feature some 62 licensed titles, including "Gilligan's Island," "I Dream of Jeannie," "The Beverly Hillbillies," "I Love Lucy" and "Laverne & Shirley."

Casinos cleared room on their floors for thousands of the machines. IGT's stock price skyrocketed, revenues flowed and profits soared.

Somehow, in the past year, IGT has lost its way. The slot maker has been hobbled by the slumping economic conditions that have beleaguered the gaming industry.

Since February, shares of IGT have lost more than 60 percent of their value on the New York Stock Exchange. During the same period, analysts said the company has lost market share to slot machine rivals Bally Technologies and WMS Industries.

IGT is now making changes to reduce expenses and reverse the trend.

Last week, news leaked that Reno-based IGT could reduce its 5,400-person work force anywhere from 9 percent to 18 percent. Many on Wall Street believe IGT should refocus its efforts on game content that will help casinos attract customers.

"While we are pleased that IGT is starting to take the right steps to right size its cost structure in light of the current environment, it may not be enough to offset a top line slowdown," Macquarie Capital gaming analyst Joel Simkins told investors a day after IGT informed employees through an e-mail that it would be reducing staff by Jan. 5.

Simkins, who has been critical of IGT recently, said the company needs to scale back its efforts to develop a server-based gaming system and return to its core slot machine business in order to sell more games. He said the company's video slot machines are not as popular as games being developed by other slot makers.

"IGT appears to be focusing on developing more innovative content to offset market share losses," Simkins said. "We are concerned that it could be on the verge of permanent displacement of share to its key rivals."

IGT Chairman and Chief Executive Officer TJ Matthews told employees in his e-mail that layoffs were part of a companywide restructuring. Although it was unclear how many positions would be lost, some analysts speculated that IGT could cut anywhere from 500 to 1,000 positions, including many spots in the company's engineering division.

Deutsche Bank gaming analyst Bill Lerner said IGT should have taken cost-cutting steps a year ago when the fortunes of slot makers began to sag. Casinos are not changing out older slot machines at the same rate that games were being replaced earlier in the decade.

"Layoffs, while as unfortunate as they may be at this time, make a lot of sense for this company," Lerner said. "During this tough economic environment, IGT needs to decide what is the right size this company needs to operate."

Stifel Nicolaus gaming analyst Steven Wieczynski said the layoffs shouldn't come as a surprise to IGT investors and could be considered welcome news.

"IGT's cost-cutting program will position the company in a better state so once the domestic slot market turns, revenues should flow to the bottom line at a quicker pace," Wieczynski said in a note to investors.

In his e-mail, Matthews told employees the number of layoffs will be determined by how many employees accept a recently offered buyout program. IGT spokesman Ed Rogich said all company divisions are being reviewed.

Analysts said IGT needs to reduce costs because revenues have declined. For the first nine months of fiscal 2008, IGT's selling, general and administrative expenses are 18 percent of the company's revenues, which are almost $1.9 billion, down 5 percent from 2007.

During 2003 and 2004, IGT's revenues soared as casinos replaced older slot machines with games featuring ticket in-ticket out cashless technology. Those same costs on the IGT balance sheet were between 12 percent and 13 percent of revenues.

"That's the figure the company needs to bring down," Lerner said. "That's why the layoffs are happening."

Some analysts were not critical of the millions of dollars IGT has spent in the past few years toward the development of server-based gaming, which is considered the next wave of slot machine technology. Conceivably, server-based gaming would allow casinos to change their games and payouts on slot machines linked by a central server.

In April, IGT announced an agreement to provide a server-based gaming system to Aria, MGM Mirage's 4,000-room hotel-casino that serves as the centerpiece of the $9.2 billion CityCenter development. Aria is expected to open in December 2009. In June, the company spent $76 million to acquire a European slot machine rival which was viewed as acquiring a key piece of the server-based puzzle.

Lerner said the company's return on its server-based investment could begin in 2010, especially after the system at Aria is implemented.

Wieczynski agreed with other analysts that IGT needed to refocus its research and development efforts on new game content, as it did to gain great success early in the decade.

"IGT has been under pressure from competitors who have improved their game content," Wieczynski said. "We continue to believe in the potential for server-based gaming but recognize that this concept will not be an overnight success like ticket in-ticket out (technology)."

***

CUTS TO THE CORE INDUSTRY

The resort industry has been hit with layoffs and staff reductions this year. Hotel-casinos operated by MGM Mirage, Station Casinos and the nongaming Trump International Hotel & Tower have reduced an unspecified number of positions in customer service-related job categories.

Plans by slot machine maker International Game Technology to eliminate at least 500 jobs now hits the manufacturing side of the gaming business. Brian Gordon, a partner in Las Vegas-based financial adviser Applied Analysis, said manufacturing jobs are just 2.9 percent of the Southern Nevada economy and 4 percent of the overall state economy.

"What's troubling is that while they are not casino jobs, they are still jobs related to our core industry," Gordon said. "For the sector, it's a rather small share."

IGT employs roughly 3,000 workers at its corporate headquarters in Reno. The company has about 1,000 employees at its secondary headquarters in Las Vegas. IGT expects to finalize the job cuts by November with the reductions taking place Jan. 5

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