IGT shares down after 1Q miss, but outlook remains solid

May 26, 2017 1:20 PM
  • Aaron Stanley
May 26, 2017 1:20 PM
  • Aaron Stanley

IGT shares took a beating Thursday after reporting first quarter earnings that missed Wall Street expectations across the board, but analysts expressed confidence in the company’s underlying fundamentals and trajectory.

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The lottery and interactive giant reported EBITDA of $371 million – 7 percent below the $401 million consensus estimate, net revenue of $1.15 billion – down 10 percent year-over-year, and earnings per share of $0.29, well below estimates of $0.47. Net loss for the quarter was $55 million.

The company also lowered its EBITDA guidance for the full year 2017 by $80 million to a range of $1.6 to $1.68 billion. This change reflects the sale of DoubleDown, its former social gaming business, and higher taxes in Italy.

IGT shares closed Thursday at $18.26, down 13 percent from the previous day’s close of $21.01.

On a conference call with investors, IGT chief executive Marco Sala said that while the results for the period were not optimal, they should be understood in the greater context – including a tough comparison to the prior-year period.

“We are experiencing the reality of comparisons with the last year’s unusually high base and the headwinds that we expected in our gaming business,” Sala said. “While revenue and adjusted EBITDA did not match the record levels achieved in the first quarter last year, it is important to note that the results we are reporting today are consistent with the pattern for the year that we described in March.”

“A unique combination of elements affected first quarter revenue and profit comparisons, including record jackpot activity in 2016,” added Alberto Fornaro, IGT’s chief financial officer, adding that profits are expected to accrue more to the second half of the year when the company’s new product begins to come to market.

Same-store lottery revenues grew by 2 percent in North America and internationally, and the company’s global installed base grew by roughly 400 units for the quarter. However, global lottery revenues fell 11 percent for the quarter due to the abnormal jackpot activity.

“The performance of our international business was uncharacteristically low in the first quarter for a combination of reasons, which we expect to fully offset in the balance of the year,” said Sala.

Despite the results, analysts on Wall Street expressed confidence in IGT’s underlying business model and are largely overlooking the short-term noise.

“Management remains confident on stabilizing the gaming business in [the second half of 2017] given a higher installed base (new product) and higher yields (evidenced in the first quarter),” wrote Chad Beynon of Macquarie Research.. “With the merger transition fully behind us, we believe this more focused IGT will carry its momentum in gaming into 2018 and beyond.”

“We like IGT’s diversification, very defensive lottery revenues and improved industry structure. IGT is a deleverage story that is actually deleveraging, and while its cash conversion is relatively low, we think its revenues are more defensive and ‘bankable’ than a lot of our coverage,” wrote Cameron McKnight, an analyst with Wells Fargo Securities.

The company has, however, been roughed up by the market in recent quarters, creating an optics problem that could worsen with another down quarter.

“IGT has now sold off 5 percent, 15 percent and 13 percent during the last three earnings prints, so restoring confidence is top of their priority list,” said Beynon.

After topping $30 last November, the current price range of IGT shares presents an attractive opportunity for investors, reckoned David Katz of the Telsey Group.

“Given how out of favor the stock has become and what we believe to be a reasonably stable core of earnings and cash flows that should solidify by the latter half of the year, we are maintaining our view that patient investors will be rewarded,” he emphasized.

On its balance sheet, the company reported net debt of $7.4 billion, down from $7.57 billion at the close of the fourth quarter.