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IGT: In Search Of The Next Jackpot


Few companies have managed to stack the odds in their favor as successfully as International Game Technology (IGT). Over the past decade, as demand soared for new slot machines -- in Indian casinos, riverboats, and splashy new Las Vegas resorts -- IGT hit the jackpot. Of the 800,000 slot machines now in place at U.S. and Canadian casinos, about 70% were sold by the the Reno (Nev.) company. IGT earned a record $488 million on sales of $2.5 billion in 2004 -- another year of the kind of double-digit growth that helped it secure the No. 18 spot on BusinessWeek's annual list of the 50 best-performing large companies.

But nobody's luck runs forever. Even America's gargantuan appetite for gambling has its limits. IGT's chairman and CEO, Thomas "T.J." Matthews, jolted investors on Jan. 20 when he announced that the company's domestic slot-machine shipments had fallen 35%, to 14,700 units, in its first quarter, ended Dec. 31. Matthews said earnings for the rest of this year would probably be flat, at around $1.35 per share. IGT's share price tumbled $3.50, or 10%, in one day, as investors digested the challenges facing the company. A big industry conversion to coinless slot machines has largely run its course. Fewer states are opening their doors to casino gambling. And IGT's competitors are coming at the market with renewed vigor.

Matthews, 39, is determined to get IGT back in the money. A Las Vegas native with a keen interest in math, he helped develop the technology behind IGT's Wheel of Fortune slot machine. That machine, with its ability to connect to other devices to deliver multimillion-dollar jackpots, has been the most profitable one-armed bandit in history. IGT has long been an innovator: It was the first to market video-poker machines, in the 1970s. It was an early adopter of technology that in the 1980s replaced the old mechanical spinning reels with digital chips. More recently, IGT led a push to replace coin-based machines with ones that spit out paper receipts that can be used at other machines or redeemed for cash. That saves casinos the cost of counting coins and increases the frequency of play.

A HIT IN JAPAN

To get back on track, Matthews says he'll focus on new types of games, international sales, and developing business beyond traditional slots. "We find that the real value is in creation," Matthews says. "We're spending $140 million this year on research and development. Our next biggest competitor is spending $50 million."

The industry is getting much more competitive, though. With some half-million coinless slot machines now in place, industry slot sales are expected to fall 12% this year, says Deutsche Bank Securities Inc. Regulatory approvals for slot machines in New York, Pennsylvania, and other states have come slower than expected. Today the big growth is in penny and nickel slots, which offer 20 or more chances to win on each spin. By placing more bets with lower denomination coins, gamblers can win smaller but more frequent payouts. A recently revived WMS Industries Inc. (WMS) and Australian up-and-comer Aristocrat Leisure Ltd. got an early start in this segment. But IGT has kept its game designers busy. At the Global Gaming Expo last September, it introduced more than 180 new games, of all types, nearly twice as many as in 2003.

IGT is making inroads overseas, where sales volume jumped 73% in the first quarter on the strength of new Japanese games. But Matthews is also pushing into casino-management software, such as a system to customize machines to each customer so that bonus rounds and other promotions pop up when a gambler inserts his frequent-player card.

Much like a frequent slot player, IGT ran into a cold streak. Now, Matthews must prove to investors that his plan is worth another tug of the handle.

By Christopher Palmeri in Los Angeles


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