This was supposed to be a soft year for slot-machine king International Game Technology (NYSE: IGT). The rush to replace yesterday's outdated coin-spitting slots with advanced coinless technology has likely pulled demand forward, and domestic sales weren't expected to pick back up until the next replacement cycle took hold. However, with the first quarter now officially in the books, fiscal 2006 is already shaping up to be another strong year.
Net income for the period did slip 1.4% to $120.6 million, but with stock buybacks reducing the outstanding diluted share count by around 11 million to 362 million, earnings actually rose by a penny to $0.34. IGT shareholders have grown accustomed to much stronger bottom-line growth, but any gain at all looks encouraging, considering that analysts had expected a sharp 18% drop to $0.27 per share. Overall, investors responded favorably to the news, as the shares rallied more than 9% in morning trading to a new 52-week high.
As anticipated, product volume was sluggish on the domestic side, with the number of units shipped dropping by 400 to 14,300. However, the average price per machine jumped from $12,400 to $14,500, which helped domestic product revenues climb 13.5% to $206.7 million. International sales were down for the quarter, as the sale of nearly 30,000 Terminator machines to Japan last year made for difficult year-over-year comparisons. Nevertheless, the remainder of the international division showed solid growth, driven by stronger pricing and increased demand from markets in Australia, Europe, and Latin America.
IGT is best known for its slot machine sales, which is not surprising, considering that the company has a dominating 70% share of the North American market. However, some might not realize that nearly half of the firm's revenues are generated by its higher-margin gaming operations. Basically, this business involves leasing slot machines -- many of which are linked to massive progressive jackpots -- to casinos that, in turn, guarantee IGT a cut of either the winnings or the gross bets.
Currently, the company has installed 43,300 of these machines in casinos worldwide, an increase of 6,300 from this same point last year. By comparison, rival WMS Industries (NYSE: WMS) only has an installed base of around 6,600 machines. With each of these units churning out revenues of more than $80 per day, IGT is raking in a recurring revenue stream that reached $290 million last quarter. And thanks to a five-point expansion in gross margins, this segment saw its gross income rise by double digits to $165 million.
Domestic product sales should remain constrained in the short term, but this should be more than offset by the company's other lines of business. International product sales and gaming operations both remain robust. Elsewhere, non-machine revenues generated from other ventures -- which include teaming up with Motley Fool Stock Advisor pick Shuffle Master (Nasdaq: SHFL) to develop RFID player-tracking systems -- surged by nearly 50% last quarter to a record $93 million.
Over the long run, though, the company's core business remains healthy. Rapidly developing technology has effectively shortened the life span of the average slot machine. For example, multi-line penny slots have taken over casino floors everywhere; next-generation server-based machines have already been introduced in California and are expected to usher in the next wave of upgrades. With an incomparable research and development budget, IGT is simply unmatched at developing new games that players flock to.
Throw in an expanding number of gaming jurisdictions both at home and overseas, and it shouldn't be too long before the company sees its earnings bucket spilling over once again.
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Fool contributor Nathan Slaughter is an IGT shareholder. He owns none of the other companies mentioned. The Motley Fool has an ironclad disclosure policy.
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