Again and again lately, we've seen companies post strong quarterly results that top expectations, only to watch their shares lose ground because of soft guidance. Add one more to that tally: slot maker International Game Technology (NYSE: IGT).
On Tuesday, IGT reported that fourth-quarter earnings rose 10% to $0.33 per share, on revenues that climbed 5% to $638.7 million. Both numbers were modestly ahead of Wall Street targets.
However, before the ink had even dried on fiscal 2006, management projected that earnings would range between $0.33 and $0.37 per share in all four quarters of fiscal 2007. With analysts looking for more (especially in the second half of the year) that outlook did not sit well with investors -- particularly in light of rival WMS Industries' (NYSE: WMS) upbeat outlook last week.
Before we look ahead, let's take a minute to recap the impressive year behind.
The company shipped around 30,000 fewer units than last year to international destinations. However, shipments in North America ticked up slightly, thanks in large part to rebuilding efforts along the Gulf Coast -- where, for example, IGT has claimed three-fourths of the slot floor at MGM Mirage's (NYSE: MGM) Beau Rivage resort.
At the same time, demand for premium products has helped lift average per-unit prices, and the sale of parts, gaming systems, and other "non-machine" items (which now represent nearly one-third of total product sales) jumped 16% to $364 million, pushing overall product sales up 7% for the year to $1.3 billion.
Meanwhile, the firm's installed base of slot machines has expanded by nearly 11,000 over the past year to reach a total of approximately 50,000. Each of those machines churns out a steady stream of recurring revenues that reached a record high of $1.2 billion for the year. Combined, the two segments produced total revenues of $2.5 billion, a solid 6% increase from the prior year.
More importantly, significant margin improvements have allowed a larger chunk of those revenues to filter down to the bottom line. A shift in the sales mix toward higher-margin non-machine revenues has helped lift gross margins in the product sales segment, while those in gaming operations expanded 700 basis points to 58%, primarily because of fewer progressive jackpots being hit and the continued rollout of popular penny slots (which generally retain a higher percentage of the money pumped into them.)
As a result, gross profits increased $181 million (or 15%) for the year, and operating income climbed from $664 million to $725 million. As has been the case, the firm continues to return much of that cash to shareholders, dishing out $169 million in dividends and $427 million in share repurchases during the year -- the latter suggesting that management believes the stock is still undervalued, even after soaring 65% over the past 12 months.
Considering that these numbers came in what was supposedly a "lull" period following the last upgrade to cashless, ticket-based slots, imagine what IGT can accomplish when next-generation server-based technology catches on and casinos in new jurisdictions in Pennsylvania, New York, and elsewhere place orders for tens of thousands of machines.
My money says that management's cautious guidance gives the firm plenty of room to underpromise and overdeliver -- much like last quarter, and the one before, and the one before.
With those steady payouts, investors just might want to consider hitting the 'spin reels' button.
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Fool contributor Nathan Slaughter owns shares of IGT but none of the other companies mentioned. The Fool has a disclosure policy.
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