IGT sees its future profits outside of the box

TJ Matthews thinks investors should begin paying less attention to the boxes advice that the investment community clearly shrugged off.

International Game Technology's stock declined nearly 9 percent in the first three hours after the company reported last week that domestic shipments of its slot machines fell sharply during the quarter ended Dec.

31.

That's certainly a number worth watching, acknowledged Matthews, the chief executive officer of IGT.

But in the future, he said investors will want to keep a closer eye on other streams of revenue such as IGT's development of server-based software for casino floors.

"More and more of our business is going to be non-box driven," he told analysts.

But boxes clearly were the story in the most recent quarter as IGT said its North American shipments of slot machines totaled 14,700 in the quarter, generating $182.1 million in revenue.A year earlier, the company shipped 22,600 units to North American locations, generating sales of $236.9 million.

Matthews told analysts that some of the decline comes because casinos that had speeded their replacement schedules to grab the cost-saving ticket-in, ticket-out technology now have cut back their purchases.

And he acknowledged that company executives were overly optimistic about the speed at which the doors would be opened to gaming in new states.

The result: IGT won't make its long-stated goal of 15 percent growth in earnings per share during this fiscal year.Matthews said he's confident, however, that the longer-term goal doubling earnings per share in five years still is within reach.

International sales, he said, are expected to be an important element of that growth.

In the most recent quarter, IGT sold 29,600 units of a game it calls The Terminator into Japan a market that's historically been tough for IGT to crack.

Those Japanese shipments, in fact, accounted for about two-thirds of IGT's international sales during the quarter.

That's not entirely good news, because those Japanese machines don't generate nearly the same profit margins as boxes sold in North America.

A second key element will be continued growth of IGT's gaming operations think of the MegaJackpots games in which IGT splits the take with casino operators of linked progressive games.

In the most recent quarter, gaming operations generated $287 million of IGT's total revenue of $641 million, and profit margins ran 52 percent.

The margins took a hit in the most recent quarter, partly because of the costs of moving machines from low-yielding to high-yielding locations.

And then there's the software side.

Matthews said IGT expects to start fullblown testing of server-based gaming late this year with commercial rollout in 2006.

For casino operators, this raises the possibility that changes in games on the floor could be accomplished simply by swapping software packages rather than wrestling boxes onto the floor.

And IGT thinks margins on the software business could run higher than 60 percent, an improvement over the rest of its business.

The company has a good head start in the systems business,Matthews said last week, because it already has more than 80 percent of the market for spinning-wheel slots and video poker machines.

And it has a head start, too, because its ticket-in, ticket-out and customer bonus systems already have elements of server-based technology.

For the quarter, IGT reported net income of $122.4 million, or 35 cents a share.

That compares with earnings of $176 million, or 51 cents a share a year earlier, but last year's figure included a gain of $60 million, or 17 cents a share, from discontinued operations.