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International Game On and On and On

By Nathan Slaughter – Updated Nov 15, 2016 at 6:08PM

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The slot machine maker tops expectations for the third straight quarter.

A few bells and whistles sounded Thursday morning following the third-quarter earnings release of slot machine maker International Game Technology (NYSE:IGT). Let's crowd around to see what shareholders have won. Well, the stock is up about 4% at the moment, not exactly a jackpot -- but much better than a loss.

For the period, total revenues climbed 6% to $612 million. Meanwhile, net income was essentially flat at $114 million, but earnings rose to $0.33 per share thanks to 22 million fewer diluted shares outstanding. Just like last quarter, and the one before, IGT has managed to stay slightly ahead of earnings estimates.

The company shipped about 23,500 machines during the period, about 600 fewer than in last year's third quarter. However, demand for premium products has been on the rise, which helped average revenue per unit jump to $12,600 from $11,400. As a result, overall product sales rose 8.4% to $297.6 million.

As the crippled Gulf Coast market slowly regains its footing, IGT will continue to fill replacement orders. On Thursday's conference call, management noted that the company shipped 3,000 slots to the region last quarter. Roughly half of those went to MGMMirage's (NYSE:MGM) Beau Rivage resort, where nearly three out of every four machines on the casino floor are manufactured by IGT.

On the international front, product sales climbed 20% to $110 million, despite a modest drop in unit volume. Much of that growth was attributable to a 40% increase in parts, gaming systems, and other "non-machine" sales, which now account for about one-third of the company's total product revenues.

Aside from selling slot machines and other gaming devices, IGT now generates slightly more than half of its revenues from its rapidly expanding -- and more profitable -- gaming operations. The company has 46,200 machines installed in casinos around the world, an increase of 1,800 from the second quarter, and around 7,700 more than at this point last year. With those machines spitting out recurring revenues of about $76 every single day, IGT reported record gaming revenues of $315 million for the third quarter.

The company's installed base of leased machines continues to grow, and after the recent addition of 3,800 units in 36 locations throughout Mexico, the total now stands at 11,700. These machines typically generate lower revenues per day, but carry higher margins. This shift, coupled with the increasing popularity of penny and other low-denomination games (which generally pay out a smaller percentage to gamblers), has helped year-to-date gross margins in the gaming segment expand from 52% to 58%.

In what is supposed to be a lull until the next upgrade cycle for server-based slots, IGT is more than just treading water. More importantly, though, the next few years look even more promising. From tribal casinos in Oklahoma to racinos in Pennsylvania to dazzling new mega-resorts in Macau, growth opportunities for IGT and rivals like WMSGaming (NYSE:WMS) abound in previously untapped markets around the world.

Few would call the stock cheap at this point, but sometimes you just have to pay to win.

For related Foolishness:

Fool contributor Nathan Slaughter owns shares of IGT, but none of the other companies mentioned. The Fool has an ironclad disclosure policy.

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Stocks Mentioned

MGM Resorts International Stock Quote
MGM Resorts International
MGM
$30.05 (-1.83%) $0.56
International Game Technology Stock Quote
International Game Technology
IGT
$15.43 (-3.38%) $0.54

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