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July 17, 1998

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Subject: IGT's numbers are not straightforward, IMHO
Author: Iveystone

After looking at the IGT press release, it is clear to me that it isn't clear to me at all (LOL).

Such silliness as touting the Operating income growth of 44%, caused primarily by the acquisition of Barcrest (which seemed to have virtually no impact on eps) makes the job of figuring out what actually happend all that much more difficult. And selling buildings and buying back stock and stuff like that, which sort of "hides" stuff like the $11 million in interest expense is tedious. Nevertheless one has to laud the disclosure of "after quarter" share repurchase, even though it is a bit self serving.

As to the JV numbers, it's tough, IMHO. The initial look shows a scant $1.7 million increase in Gaming Ops. revenues and a $.8 increase in expenses. Included in that we know that there is revenue (and expenses) from 1,100 Jeopardy machines and the roughly $3 million in increase in the $1 NV Megabucks Jackpot. Perhaps discouraging. But to the rescue, comes the knowledge that all of the other "MegaJackpots" have done poorly indeed and there is less revenue from Delaware, so while the net increase in revenues was only up $1.7 million, the mix has most assuredly changed. Some quick computations and then some analysis.

  "Assume $20 million distributed this Q, that gives SLOT about $75 million in cash on the Balance Sheet and another $20+ plus million in the jv or about $5 million less than the $100 million I forecasted for the end of the FY."

Last Q the JV showed $16.2 million in "net" to each partner on, say an average 4,500 (4,100 + 4,900 / 2) games. An average of about $39.50 per machine per day. Using the same per day amount and an average of 5,300 games (4,900 + 5,700 /2) the jv number would appear to be just over $19 million.

Ok, does $19 million work??

Well, if we take the $1.7 million increase reported and adjust for an increase of say $2.5 million from Jeopardy, $2.8 million increase from the jv and $3 million from the NV MegaBucks, that means the other MegaJackpot games lost ground to the tune of $6.6 million. But Delaware reduced their payments to vendors for machines, which would impact revenues, but not expenses, and I'm guessing around $1.6 million hit to IGT from that (I heard $30,000 a day savings to the State of DE, so for 91 days in the Q that's $2.7 million and I guessed IGT has 60% of the slots, for $1.6 million). That means a net reduction of $5 million. Seems pretty reasonable to me, given that Jeopardy has to be cannibalizing, as does the NV MegaBucks, and let's not forget CSDS's new WAP and ALLY came out with theirs this Q also.

So, SLOT's portion looks like it can be somewhere around $2.5 - $3 million or maybe $.12 to $.15 in increased eps impact. Assume a flat to slightly down stand alone, a net increase in the casino for this Q, flat Route, increased SG&A, depreciation and "other expenses", and I think we'll see the $1.40's for SLOT for this Q. Probably just barely (maybe only $1.38 or $1.39???), but certainly no problem whatever with analysts $1.33, IMHO.

"I am humiliated beyond words at my miscalculation. I doubt I'll ever be able to post on these boards again. Sorry to those who relied on my forecast. Especially those on other boards. My life is ....

Ok, I'm over it."

 

Ok, and now my favorite (kind of like dessert) ------ CASH. I love this cash stuff. So, we said last Q there was $56.5 million in cash on the Balance Sheet and roughly $20 million in the JV (SLOT's portion). Assuming 1.40 in eps, I'm at around $24 million in cash from ops and say, $5 million in investments in new games, etc., for a net cash increase of $19 million (WOW, what a coincidence, the same number as the jv revenue. But since SLOT only gets cash from the jv when it makes distributions, met cash increase from SLOT's stand alone ops is probably around zero). Say the jv has roughly $5 million in quarterly depreciation ($2.5 million to SLOT), that's a total increase in jv cash to $42 million (SLOT's share). Assume $20 million distributed this Q, that gives SLOT about $75 million in cash on the Balance Sheet and another $20+ plus million in the jv or about $5 million less than the $100 million I forecasted for the end of the FY. I am humiliated beyond words at my miscalculation. I doubt I'll ever be able to post on these boards again. Sorry to those who relied on my forecast. Especially those on other boards. My life is ....

Ok, I'm over it. So, $100 million and no debt (LOL). Assume, the jv does not grow a bit over the next year, but stays flat and the cash from ops from all other sources covers internal expenses at SLOT. THIS COMPANY WILL GENERATE ANOTHER $100 MILLION IN CASH BETWEEN NOW (two weeks ago, actually) AND NEXT JUNE 30TH, AND HAVE A CASH BALANCE OF $200 MILLION DOLLARS ON ITS BALANCE SHEET. Sorry for yelling, but I could not help myself. Ok, even given that I'm always wrong in my forecasts, the number has got to be $150 million, even if everyone just went on vacation (but, I hope they won't). I absolutely do not believe that between now and this time next year that cash will not be used for an acquisition and I personally can't wait for the conference call to hear someone ask about the acquisition philosophy/strategy. This company is, as I have said many times before, a veritable ATM machine. I love it!!!!

Finally, $70 for this stock??? What a joke. Why Mr. S. Fulton and friends don't do an LBO of this company is beyond me. With nearly $9 a share in cash in the company and doing $8 to $10 per share a year with no sweat, he could buy the remaining 8+ million shares for $90 per, and be a 100% free and clear owner in fewer than 5 years with $150 million in annual cash flow and no analysts and no reporters and no internet chat boards(LOL). Compare that to a YHOO or AOL with no cash, no eps, and a 40 or 50 year earn out. The market is a funny thing indeed.

Just my opinion.

Ken


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