International Game Technology PLC

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

International Game Technology PLC (IGT) is a global gaming company that designs, develops, manufactures, and distributes a variety of gaming solutions, including lottery, gaming machines, and digital gaming systems and services.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

IGT’s business is diverse. It’s primarily a B2B business, selling to governments and casino operators, but there’s a B2C element of gaming and sports betting via their PlayDigital segment.

Business Overview

IGT operates through three main segments: Global Lottery, Global Gaming, and PlayDigital.

  • Global Lottery: This segment provides a range of lottery solutions, including lottery systems, services, and game content to government-sponsored lotteries worldwide. This segment is their most mature, most stable, and predictable revenue producer.
  • Global Gaming: This segment develops and provides gaming machines, content, and related services to gaming operators globally. This sector is affected by business cycles and is heavily dependent on new casino openings, upgrades, etc.
  • PlayDigital: This is IGT’s newer digital gaming and sports betting segment. This segment is directly to consumers, and is highly volatile, with a high degree of growth potential.

Revenue Distribution

Looking at the segmented data for the year ended December 31, 2022, we see that:

  • Global Lottery generated $2,696 million in revenues, 55% of total revenues
  • Global Gaming generated $1,452 million, accounting for 30% of total revenues.
  • PlayDigital, accounted for $728 million of revenues, accounting for 15% of total revenues. The company’s product sales are relatively small, $137 million vs the service sales at $4,739 million.

The majority of IGT’s revenue comes from providing gaming services rather than sales, making it a more service oriented model.

The revenue is driven primarily by recurring revenue streams from multi-year contracts with lottery and gaming operators.

  • Growth in Digital Gaming: The online gaming and sports betting market is expanding, driven by technological advances and increasing adoption by consumers, who are using their mobile phone for everything. This is the area of greatest growth potential for IGT.
  • Regulation and Compliance: Gaming and lottery industries are heavily regulated. Changes in regulatory requirements can significantly affect IGT’s operations.
  • Global Expansion: There is a growing trend of increased global expansion in emerging countries. The opportunities for gaming growth in emerging markets are huge, but they also require a lot of capital.
  • Focus on Sustainability: More and more companies are focusing on sustainability. IGT is also moving forward to improve its sustainability programs.
  • Mergers and Acquisitions: The gambling and lottery market is consolidating, with major players making more mergers and acquisitions. This has led to a more competitive playing field.

Competitive Landscape

IGT faces competition from other gaming equipment manufacturers, lottery systems providers, and digital gaming platforms. Some of its major competitors include:

  • Scientific Games (Light & Wonder) is a competitor in the lottery space.
  • Aristocrat is a rival in gaming machines.
  • Flutter Entertainment and DraftKings are competitors in digital and sports betting.
  • Konami is another competitor in the manufacture of slot machines.
  • Many smaller companies also provide equipment or services to the gambling industry.

IGT has a lot of competitors in all their different segments, creating a highly competitive market.

What Makes IGT Different?

  • Global Reach: IGT has a wide-spread global presence that gives it a strong position in the market.
  • Integrated Solutions: IGT offers full suite of solutions across land-based and digital, creating more value for its customers by offering them a one-stop-shop solution.
  • Deep Industry Experience: IGT has a long history of supplying to lottery and gaming industry. They have deep industry connections and experience of supplying products and services in the industry.
  • Intellectual Property: IGT holds a strong portfolio of patents and other intellectual property which are major assets.

Financials In-Depth

Let’s delve into some key financials:

Revenues: As of their latest report in September 2022. IGT has total revenue of $4.228B. The revenue for the year ended December 31, 2021, was 4.09B, showing a growth of approximately 3.3% year over year. Over the past few years, revenues have been mostly flat.

Profit Margins: As of December 31, 2022, IGT’s operating margin was 25.4% . The company’s operating margin increased year-over-year. The gross margins are higher for the lottery segment.

Returns on Capital: IGT’s return on invested capital (ROIC) figures have a moderate range, around 10%. They should try to improve the efficiency of their invested capital.

High returns on capital and growth are what drives value in companies, and IGT does not have very high returns on capital.

Balance Sheet Health: IGT is a decently leveraged company, with debt making up a significant portion of their capital structure, however this is mostly in their core segments that have higher amounts of debt, it is less leveraged in the digital business. They have good liquidity with $826 million in cash and cash equivalents. They do have a substantial amount of goodwill and intangibles from acquisitions.

IGT seems to be very healthy in terms of its balance sheet, and has good liquidity, but could use some balance sheet improvements by paying down some debt.

Moat Rating

Rating: 2 / 5 Justification: IGT has some characteristics that act as moats.

  • Strong customer relationships and contracts: IGT has long-standing relationships and contracts with governments and casino operators, creating a level of switching cost and stability in revenue. This will make it slightly difficult to start as a competitor with limited or no connections.
  • Intangible assets: IGT has a lot of patents, licenses, and other intellectual property for its games and technology which acts as a moat. This is an advantage over the competition.
  • Economies of Scale: Although not extremely wide, IGT’s global size and distribution network allow them some economies of scale over smaller companies, which can create a cost advantage.
  • Barriers to Entry: Gaming and lottery industries are heavily regulated, which creates barriers for new entrants. However, IGT’s business model is becoming more commoditized because they are not the end producers of the games but providers of platforms for others, and they don’t have very high returns on capital. Therefore, their moat rating is 2/5.

Risks That Could Harm the Moat and Business Resilience

  • Technological Disruption: This is probably the biggest risk, due to the speed at which new technologies are changing the gambling industry. IGT has been transitioning their business towards more digital and they have to keep doing so in the future or else they may fall behind.
  • Changing Regulations: The gambling industry is heavily regulated. Changes in regulations, such as stricter rules or new taxation could negatively impact the company.
  • Economic Downturns: Since IGT serves casino operators and lotteries, their business is tied to the consumer economy. Economic recessions will negatively affect the people playing games, affecting the revenue.
  • Competition: The company faces a highly competitive field with a lot of competitors in all its segments. This creates margin compression, lower growth and less overall stability for the business, thus impacting the value of the company.
  • Acquisition Integration Risks: IGT has grown through a lot of acquisitions and some recent acquisitions seem to be expensive and not producing as much returns as they are valued at, if those acquisitions do not perform as expected, that could cause the company severe losses.
  • Leverage: As a highly leveraged company, with substantial amounts of debts and pension liabilities on its balance sheet. IGT is vulnerable to interest rate hikes and if they are unable to pay their debts, they could become less competitive.

However, the diversification of IGT operations, across lottery, gaming, and digital, and a stable base of recurring revenue from contracts, will help it withstand any downturn and give it higher resilience against external shocks, like new regulations, new competitors or a major economic downturn.

Understandability Rating

Rating: 3/5 Justification:

IGT is moderately easy to understand, given its diversified business portfolio. Their revenue breakdown seems pretty straightforward between the lottery segment, the gaming segment and the digital segment. What is difficult for an outsider to understand is all the accounting items and their impact on performance.

Conclusion

To conclude, IGT is a gaming business with some moats, however that moat is constantly being challenged by fast-moving technology and competitors. The company has high but unstable returns on invested capital. The business as a whole is moderately easy to understand, and has an acceptable balance sheet with high, but manageable debt. I believe that IGT is not very attractive as an investment.