New markets bolster IGT

LAS VEGAS, Nevada -- Gaming analysts have predicted that 2007 will be a turnaround year for slot machine makers as lucrative new casino markets open for business.

Reno-based International Game Technology, in announcing its first-quarter earnings Thursday, gave hints that mirrored those assessments.

The industry's largest slot maker said it began shipping games to new slot machine parlors in Pennsylvania, soon-to-be open racetracks in Florida and new casinos in Arkansas during the quarter that ended Dec. 31.

Boosted by results from slot machines in which it shares in the profits with casino operators, IGT had overall revenue of $642.3 million in the quarter, a 4 percent increase from $616.2 million a year ago.

The company's net income was $121 million, or 35 cents per share, compared with $120.6 million, or 34 cents a share, a year earlier. Analysts polled by Thomson First Call predicted the company would earn 35 cents in the quarter.

IGT Chairman and Chief Executive Officer TJ Matthews, in discussing the company's quarterly results during a conference call with analysts and investors, said more sales could be pending this year.

"Trends continue (to be) favorable as both states in the U.S. and nations globally turn to gaming as a way to raise revenues without raising taxes or cutting services," Matthews said. "IGT continues to invest heavily in new markets and technology, and we remain focused on delivering the most complete line of industry-leading products and service to our global customers."

Matthews predicted that states where there will be a legislative or citizen effort to expand gaming during 2007 will include Kansas, Maryland, Massachusetts, Florida and Texas.

"Native American gaming always has the potential for expansion," Matthews said.

Gaming analysts also looked across the Pacific Ocean to Japan as a potential growth market. The Japanese government is requiring slot machine parlors to replace some 1.5 million games by September with new technology games. IGT expects to place 60,000 games between June and September.

"Japan can have a very substantial impact on (the company's) third and fourth quarters." Matthews said.

New York-based gaming analyst Steven Kent of Goldman Sachs agreed that emerging gambling jurisdictions could boost IGT's results in the latter part of the year.

"Overall, we thought this was an in-line quarter for IGT, as the company continues to do its best with what has been a very slow slot machine environment," Kent said in a note to investors. "We don't expect the environment to improve until the latter half of 2007 and into 2008 when the Japanese replacement opportunity picks up, the Macau opportunity builds, the bulk of Pennsylvania casinos open and the next replacement cycle becomes more visible."

IGT said its installed base of recurring revenue machines -- games it operates and splits the win with the casino or slot parlor -- reached 53,100 games worldwide during the quarter.

The company placed recurring revenue machines in Mexico, racetracks in New York and American Indian casinos in Oklahoma.

"Oklahoma has become a growth market," Matthews said. The company has 7,000 slot machines at American Indian casinos in the state, compared with 1,200 last year. IGT's market share in Oklahoma is 18 percent.

The company shipped almost 26,800 machines in the quarter, compared with 29,100 a year ago, an 8 percent decrease. However, sales revenue increased slightly in North America because of the higher cost of the games.

In Pennsylvania, IGT made an initial shipment of 3,650 games during the quarter. The state expects to add more than 60,000 slot machines at racetracks and stand-alone casinos over the next few years.

"On a positive note, the company has captured approximately 50 percent of the Pennsylvania gaming market, which is the maximum market share allowed under law and is above our market share expectation for IGT," Morgan Joseph gaming analyst Adam Steinberg of New York said in an investors note.

IGT shares fell $1.08, or 2.29 percent, Thursday to close at $46.10 on the New York Stock Exchange. More than 6.1 million shares were traded, almost four times the average daily volume.

Gaming analyst Steven Wieczynski of Stifel, Nicolaus Capital Markets in Baltimore told investors IGT's shares could be in for an up-and-down ride throughout the year.

"We continue to believe that fiscal year 2007 will be 'the perfect storm' as new domestic gaming markets come on line coupled with strong international gaming growth and the next replacement cycle looming on the horizon," Wieczynski said. "We believe that investors will start paying for this in the near future."