It seems like only yesterday that I was sifting through last year's first-quarter update for International Game Technology (NYSE: IGT). At the time, the company showed an unexpected ability to swim against the tide, posting stronger results despite a challenging environment for domestic slot sales. By the end of the year, that pattern would play out three more times -- and shareholders were rewarded with a hefty 52% gain.
That brings us to Wednesday's first-quarter 2007 results, which held very few surprises.
As expected, the numbers on the product side showed continued softness. During the quarter, IGT shipped 26,800 units -- about 2,300 fewer than last year. The vast majority of that decline can be attributed to slackening volume here at home. International shipments were essentially flat, as healthy demand from the key Japanese market was offset by weakness elsewhere.
Overall, product sales for the period dipped to $317.4 million from $324.5 million a year ago.
Fortunately, recurring revenues generated by the firm's extensive gaming operations continue to pick up the slack. At the beginning of 2005, IGT had an installed base of approximately 37,000 slot machines placed in casinos around the world. By last January, that total had risen to 43,300 machines, and it currently stands at 53,100 -- each of which churns out revenues of approximately $70 per day, rain or shine.
Over the last three months, those slots have produced revenues of $324.9 million and gross profits of $186.7 million -- increases of 11% and 13%, respectively. Incidentally, the installed base at rival WMS Industries (NYSE: WMS) has been climbing steadily higher as well.
Combined, IGT's gaming and product segments delivered modest top-line growth of just 4% for the period. However, the sale of 2,400 slots to Las Vegas' new South Coast casino, previously owned by Boyd Gaming (NYSE: BYD), and replacement orders tied to reconstruction on the Gulf Coast last year both made for difficult comparisons.
Nevertheless, the company still posted solid gains where it counts; adjusted EBITDA hit record levels and operating cash flows jumped 41% to $223.5 million. And setting aside the raw numbers for a moment, all of the signs point to robust growth over the next couple of years.
First, the placement of leased machines (which carry lower daily revenue yields but higher margins) in New York and Mexico continues to boost profitability in the gaming operations segment. Over the past year, the number of leased machines in operation has surged from 10,000 to 16,000, representing more than one-fourth of the firm's total installed base.
At the same time, the long-awaited rush of orders from new gaming jurisdictions has begun to trickle in. Last quarter, the company shipped roughly 3,600 units to Pennsylvania, 1,000 to Florida, and nearly 800 to Arkansas.
Better still, slots powered by advanced video platform (AVP) technology accounted for roughly one-third of domestic shipments last quarter. These next-generation systems -- which feature high-resolution LCD monitors, fancy 3-D graphics, digital sound systems, and downloadable games -- are the next step toward server-based gaming.
Naturally, they also come with steeper price tags, which is why average prices per unit have climbed from $12,400 to $17,100 over the past two years.
Trends like that make it easy for investors to keep pumping in their cash and awaiting yet another payday.
Catch up on IGT with "2006 in Review: IGT."
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Fool contributor Nathan Slaughter hates ticket-based games and misses the sound of falling coins. He owns shares of Boyd and IGT. The Fool has a disclosure policy.
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