International Game Technology



|International Game Technology |(IGT-NYSE) |$16.82 |

Note: More details to come, changes are highlighted. Except where highlighted no other sections of this report have been updated.

Reason for Report: FLASH UPDATE: 4Q14 Earnings

Prev.Ed: Oct 15, 2014: 3Q14 Earnings Update (broker’s material considered till Aug 29, 2014)

FLASH NEWS UPDATE [Earnings Update in progress; to follow]

International Game Technology reported fourth-quarter fiscal 2014 adjusted earnings of $0.37 per share, improved from the year-ago earnings of $0.30.

Quarter Details

In 4Q14, revenues decreased 15.2% y/y to $536.5 million. Gaming Operations and Product sales declined 12.6% and 25.1% y/y, respectively. Interactive was the only segment to reports revenue growth of 18.8% y/y to $86.7 million.

For fiscal 2014, revenues dropped 12% y/y to $2.1 billion, owing to a plunge in gaming operations (10.5% y/y) and Product sales (21.9% y/y) offset by increase in social gaming revenues (22.3% y/y).

Average revenue per unit per day decreased 1% from 4Q13 to $48.39.

Adjusted operating expenses decreased 17% y/y in 4Q14, owing to significant decline selling, general & administrative (18% y/y) and research & development (16% y/y) expenses. As a result, operating ratio (adjusted operating expenses as a percentage of revenue) contracted 100 basis points (bps) from the year-ago quarter to 32%.

Balance Sheet

IGT exited fiscal 2014 with cash and investments of $314.4 million versus $809.1 million in fiscal 2013. Contractual debt obligations declined 15% y/y to $1.8 billion. During fiscal 2014, IGT returned $319 million in the form of dividends and through share repurchases.

Acquisition

Given the company’s prospective takeover by GTECH S.p.A, it has not issued any outlook for fiscal 2015. It expects the acquisition to be completed in the first half of calendar 2015.

MORE DETAILS WILL COME IN THE IMMINENT EDITIONS OF ZACKS RD REPORTS ON IGT.

Portfolio Manager Executive Summary [Only highlighted material has been changed]

International Game Technology, Inc. (IGT) is a leading manufacturer, designer, developer and marketer of computerized casino gaming equipments and systems products including online and mobile solutions for regulated markets. The company earned revenues of $2.34 billion in FY13. The company derived 84.0% of its FY13 revenues from North America, while the remaining 16.0% came from international operations.

Key factors for determining an investment strategy for IGT are as follows:

• IGT has a dominant position in the computerized casino gaming equipment and systems market

• The company is aggressively gaining traction in the interactive casino market

• It has significant growth opportunities from the ongoing international expansion

• It faces significant competition not only from small and localized companies but also from large, multi-national corporations, namely Aristocrat Leisure Limited, Bally Technologies and Scientific Games, across most of its jurisdictions

Of the 12 firms covering the stock in the Zacks Digest Group, 11 firms provided a neutral rating while one firm gave a negative rating. Target prices range from a low of $13.00 to a high of $18.00, with an average of $16.53. The average expected return on the current share price is (1.95)%.

The following is a summarized opinion of the diverse firm viewpoints:

Positive or equivalent rating (1 firm or 8.3%): The bullish firm believes that the company’s strong free cash flow generation ability will support its dividend and share repurchase initiatives, thereby enhancing shareholders’ value over the long term. Moreover, robust growth in the Double Down and social gaming segment (Interactive segment) remains a significant tailwind, going forward. Also, the fact, that IGT happens to be the market leader, places it in an advantageous position to recover from the macro-economic sluggishness faster than its peers.

Neutral or equivalent rating (11 firms or 91.7%): These firms remain on the sidelines due to increasing competition in product sales and the gaming operations segment, sluggish North American slot replacement outlook and a tepid macro-economic environment. Moreover, these firms believe that IGT will discount games in the future to combat fierce competition, which will reduce the average selling price (ASP) of its products, thereby negatively impacting growth and profitability. Additionally, these firms believe that operating challenges will persist going forward, which will adversely impact the top line. Further, they are skeptical over Interactive revenue growth in the near term and believe that it has limited upside, given the current circumstances.

Negative or equivalent rating (0 firm or 0.0%):

Conclusion: Most of the firms believe that the company will suffer from lackluster macro-environment and increasing competition over the next couple of quarters. However, the company’s improving liquidity and aggressive share repurchase will boost stock price in the near term.

Oct 15, 2014

Overview [Only highlighted material has been changed]

Founded in 1980 and based in Reno, NV, International Game Technology, Inc. (IGT) is a leading manufacturer, designer, developer and marketer of computerized casino gaming equipments and systems including online and mobile solutions for regulated markets. The company generates sales from the distribution of electronic gaming equipment, systems, services and licensing. The company primarily conducts its business through three segments: Gaming operations, Product Sales and Interactive. More information on the company is available at its website .

The firms identified the following investment merits and demerits of IGT:

|Key Positive Arguments |Key Negative Arguments |

|International expansion provides significant growth opportunities. |Sluggish macroeconomic conditions in the domestic market remain a major |

|Innovative product pipeline is a major growth driver. |headwind. |

|Strategic acquisitions have strengthened IGT’s patent and product |Strong competition is expected to hurt profitability, going forward. |

|portfolio. |IGT is significantly exposed to regulatory restrictions and legislative |

|IGT has strong growth potential from online real-money wagering. |actions, which can lead to volatility in its performance. |

|The company continues to focus on reducing costs through restructuring |A leveraged balance sheet reduces liquidity and hampers IGT’s ability to|

|initiatives. |raise funds. |

NOTE: IGT’s fiscal year ends on Sep 30; fiscal references do not coincide with the calendar year.

Oct 15, 2014

Long-Term Growth [Only highlighted material has been changed]

IGT’s EPS is projected to grow at approximately 12.0% over the next five years. The firms believe that the company is well positioned to achieve sustainable, above-average long-term growth based on its strong secular outlook and superior company fundamentals. The company’s dominant share in the manufacturing business places it well to benefit financially from secular growth. IGT has a history of developing innovative products and making early in-roads into the developing segments of the market. Past innovations, large economies of scale, a large portfolio of intellectual property and patents help IGT sustain above-average growth.

The firms believe that the company has significant long-term growth opportunities from online real-money wagering and rising demand for advanced slot-machines, combined with the growing urge among companies to develop new games. New player-centric games are expected to drive mega-jackpot business revenues. The firms also believe that server-based games possess the potential to drive meaningful sales for IGT, once the casino operators are convinced about their long-term viability and enhanced profitability and begin to replace existing machines with server-based ones.

Long-term goals include increasing market share in the replacement market, better conversion of research and development (R&D) into revenues, diversification of revenue streams and focus on capital allocation. Management indicated that compensation is tied to revenues and earnings growth. It believes there will be 150,000 domestic units in both new and expanding states like Texas, Alabama, North Carolina, Ohio, Kentucky, New Hampshire and Massachusetts in 2011–2015. Looking forward, IGT indicated that it expects to expand its Gaming Operations into new U.S. jurisdictions (including Pennsylvania, Maryland, Kansas, Florida, Arkansas, Washington and California) as well as in international markets. Management believes that these expansions will prove beneficial for product sales over the long term.

The firms expect core gaming revenue and gross operating profit to decline through FY2015 and beyond. On the replacement front, the firms expect IGT to lose share as it will struggle with content and face increasing competition from smaller manufacturers. They also anticipate pricing pressure to persist but the blended ASPs will benefit from the lack of VLT units going forward.

On Jul 16, 2014, IGT announced that it has entered into an agreement with GTECH S.p.A., per which it will be acquired by the latter. Following the closure of the transaction, GTECH shareholders will own approximately 80% of the company while the remaining 20% will be owned by IGT shareholders.

Oct 15, 2014

Target Price/Valuation [Only highlighted material has been changed]

Provided below is a summary of target price and rating as compiled by Zacks Research Digest:

|Rating Distribution |

|Positive |0.0%↓ |

|Neutral |91.7%↑ |

|Negative |8.3%↑ |

|Avg. Target Price |$16.53↑ |

|Digest High |$18.00↑ |

|Digest Low |$13.00↑ |

|Firms with Target Price/Total No. |9/12 |

Risks related to the achievement of the target price include slower spending by capital-constrained casino operators as a result of the sluggish business environment, negative trends in slot play (decelerating growth in Gaming Operations), lower interest rates (lowering margins), potential uncertainty and delays in adopting server-based gaming, variability in the opening of new casinos and entry into new markets and increasing competition.

Recent Events [Only highlighted material has been changed]

On Sep 23, 2014, IGT and GTECH S.p.A amended their previously announced merger agreement dated July 15, 2014.

On Jul 29, 2014, IGT reported 3Q14 results. Highlights are as follows:

• Revenues decreased 19.2% y/y to $467.8 million

• EPS decreased 25% y/y to $0.28

• Cash and investments (including restricted cash) were $235.6 million in 3Q14 compared with $432.3 million at the end of 2Q14.

Revenues [Only highlighted material has been changed]

According to the press release, 3Q14 revenues decreased 19.2% y/y to $467.6 million. This y/y decline was mainly due to a fall in product sales and gaming operations.

Provided below is the summary of revenue as compiled by Zacks Digest:

|Revenues ($ in Millions) |3Q13A |

|Copy Editor |Debasmita Bannerjee |

|Content Ed. |Pinky Ghosh |

|Reason for Update |4Q14 Flash Update |

|Lead Analyst |Pinky Ghosh |

|QCA |Sejuti Banerjea |

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Zacks Investment Research Page 7

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