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Rod Smith

IGT Still Rolling

23 July 2004

LAS VEGAS -- Slot making giant International Game Technology continued its earnings roll in the second quarter with net income of $141.1 million, or 38 cents a diluted share, up 36 percent from $103.7 million, or 30 cents a share, in the same period a year earlier.

Goldman Sachs analyst Steve Kent said in an investor advisory that IGT delivered a very solid quarter from its revenue-sharing slot machine business and improved average revenue per unit.

IGT also reported earnings before interest, taxes, depreciation and amortization, a key measure of profitability, of $253.3 million, up 22 percent from $207.6 million in the second quarter of 2003.

Revenue rose 10.1 percent to $618.9 million from $561.9 million.

"The strong earnings reflect the commitment we've made to be the leading provider of gaming machines," IGT Chief Financial Officer Maureen Mularkey said.

She said the earnings also reflected the company's continuing focus on operational efficiencies and controlling costs.

IGT Chief Executive Officer T.J. Matthews also said the outlook for the rest of this year and next year are positive, based largely on the expected legalization of slot machines at racetracks in Pennsylvania and the prospect of new compacts with tribal casinos in California.

He said the number of slot machines installed worldwide should increase over the next five years to 1 million from today's current market of 780,000 installed slots.

Based on such projections, Matthews said he expects IGT to be able to maintain its previously projected annual growth in earnings per share of 15 percent.

However, stock prices on Wall Street are based on future expectations more than past performance, and IGT's earnings report proved to be a big disappointment to many investors.

IGT was slammed with high-volume sales through the day Thursday and closed at $30.77, down $3.18 or 9.38 percent on 17.1 million shares, five times normal trading volume.

"They scorched it today. You had a company trading at a very heavy multiple (to earnings) and their guidance for fiscal '05 was OK, but investors were looking for something higher and were concerned," Susquehanna Financial Group gaming analyst Eric Hausler said.

"In a challenging market, they knocked the stock down to a reasonable market multiple (or price to earnings)," he said.

Investors were particularly concerned about the long-term timing of expected cashless slot machine replacement sales, the legalization of slots at tracks in Pennsylvania and negotiations for new tribal casino compacts in California, Hausler said.

George Smith, an analyst with Richmond, Va.-based Davenport & Co., also expressed concern about IGT's relationship with Harrah's Entertainment once Harrah's completes its proposed $9.4 million acquisition of Caesars Entertainment.

In the past, Harrah's has been critical of the slot maker's participation, or revenue-sharing machines, Smith said.

However, Matthews said he hopes IGT has improved its relationship with Harrah's over the past two years and is now a steady supplier of high-quality slot machines to the gaming company.

"We're comfortable with the idea they are a big customer, but they'll still represent only 10 percent of the installed (slot machine) business," he said.

IGT Still Rolling is republished from