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Gaming Guru

Howard Stutz

IGT Records Higher Earnings

21 July 2006

RENO, Nevada -- A slight increase in slot machine sales revenue during what analysts have considered a challenging market helped Reno-based International Game Technology grow earnings during the company's third quarter.

The gaming industry's largest slot maker said Thursday that its product sales revenues increased 8 percent in the quarter ended June 30, largely because the games now being shipped are priced higher than previous models.

IGT's third-quarter net income actually slipped slightly to $114.1 million compared with $114.7 million for the same quarter a year ago. Still, earnings per share rose a penny to 33 cents in the quarter from 32 cents a year ago. The higher per-share figure results from 22 million fewer shares outstanding in the latest period.

Analysts polled by Thomson First Call thought the company would earn 31 cents per share.

"The ability to post meaningful financial improvements in a market with limited new or expansion opportunities is a testament to the diversity and depth of IGT's business and product offerings," IGT Chairman TJ Matthews said in a statement.

Total revenues rose 5.7 percent to $612.4 million from $579.6 million.

Gaming analysts said the lack of new domestic expansion opportunities over the past few years has forced IGT to explore more international sales opportunities.

"We are not surprised by the lower volume levels in the quarter as the replacement cycle continues to be soft and the new markets appear to be taking longer than expected to open," Goldman Sachs gaming analyst Stephen Kent said in a note to investors.

"The bearish argument is that the growth this quarter is of lower quality and really the result of IGT moving more into "nontraditional" gaming markets like Mexico," Kent added. "While the bullish argument is that IGT's product diversity is one of its greatest assets, and what allows it to always find a way to make the numbers."

During the quarter, IGT shipped 23,500 slot games, compared with 24,100 games shipped for the same time period a year ago. Revenues from those sales were $297.6 million, compared with $271.5 million in the third quarter of 2005. The breakdown in 2006 sales revenues was $187.2 million in North America and $110.4 million internationally.

"The sales figures show the diversity of our business both geographically and through the varied product lines that we offer," said Pat Cavanaugh, IGT's executive director of investor relations.

Cavanaugh added the slot machines included a new personal computer-based operating system and a slimmer cabinet design, both of which added to the game's increased costs.

By the end of the quarter, IGT had an installed base of 46,200 recurring revenue slot machines, games in which IGT either receives a monthly rental payment or shares in the revenues generated by the machine. The figure was 7,700 machine increase from last year and 1,800 more games than reported at the end of the second quarter.

The lease operations grew primarily because of business opportunities in Mexico, New York and Rhode Island. Additional games, both Las Vegas-style slot machines and bingo-based Class II games, were placed in California, Alabama, Florida, and Oklahoma's growing Instant Bingo market.

"IGT benefited from continued temporary casino openings in Biloxi, Miss., and product sales into non-traditional markets like Oklahoma," Deutsche Bank gaming analyst Bill Lerner said in a note to investors. "We continue to like the IGT story given its dominant presence, which is augmented by global gaming expansion and a new replacement cycle."

IGT shares rose on the earnings, which were announced before trading opened on the New York Stock Exchange. IGT closed at $37.85, up $1.17 or 3.19 percent. It was the only gaming-sector company to post an increase in trading Thursday.

More than 4.9 million shares of IGT were traded, four times the average daily volume.

Kent said IGT will benefit when gaming finally begins in Pennsylvania, possibly by late 2007. But, he added, the company should prosper in the interim.

"We do think that IGT's very strong balance sheet and cash flow will serve as a backbone for shareholder value, but the tough market environment will be an overhang for some time," Kent said.