GAMING: Too little, too late for sinking slot maker? - Business

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Sep. 22, 2008
Copyright © Las Vegas Review-Journal

GAMING: Too little, too late for sinking slot maker?

By HOWARD STUTZ
REVIEW-JOURNAL

CUTS TO THE CORE INDUSTRY

The resort industry has been hit with layoffs and staff reductions this year.
Hotel-casinos operated by MGM Mirage, Station Casinos and the nongaming Trump International Hotel & Tower have reduced an unspecified number of positions in customer service-related job categories.
Plans by slot machine maker International Game Technology to eliminate at least 500 jobs now hits the manufacturing side of the gaming business.
Brian Gordon, a partner in Las Vegas-based financial adviser Applied Analysis, said manufacturing jobs are just 2.9 percent of the Southern Nevada economy and 4 percent of the overall state economy.
"What's troubling is that while they are not casino jobs, they are still jobs related to our core industry," Gordon said. "For the sector, it's a rather small share."
IGT employs roughly 3,000 workers at its corporate headquarters in Reno.
The company has about 1,000 employees at its secondary headquarters in Las Vegas. IGT expects to finalize the job cuts by November with the reductions taking place Jan. 5
_{HOWARD STUTZ/REVIEW-JOURNAL}

An International Game Technology worker uses a forklift July 19 to move a slot machine carousel sign at the company's manufacturing plant in Las Vegas. The slot maker's shares have lost more than 60 percent of their value since February.
Photo by John Gurzinski.

International Game Technology Chief Executive Officer TJ Matthews speaks at a round-table discussion Nov. 15, 2006, at the Global Gaming Expo at the Las Vegas Convention Center. Matthews has told employees that layoffs are coming as part of a companywide restructuring.
Photo by Clint Karlsen/Review-Journal.

International Game Technology parlayed pop culture into prosperity earlier this decade, making slot games themed after TV shows such as "I Dream of Jeannie," "Laverne & Shirley" and "I Love Lucy."
Review-Journal file photo

It was late September 2003 when slot machine giant International Game Technology graced the cover of the New York Times Magazine. The lengthy Sunday profile touted the company's success in placing a vast collection of games based on once-popular television shows and celebrities inside casinos.

The IGT machines, manufactured in Nevada, feature some 62 licensed titles, including "Gilligan's Island," "I Dream of Jeannie," "The Beverly Hillbillies," "I Love Lucy" and "Laverne & Shirley."

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Casinos cleared room on their floors for thousands of the machines. IGT's stock price skyrocketed, revenues flowed and profits soared.

Somehow, in the past year, IGT has lost its way. The slot maker has been hobbled by the slumping economic conditions that have beleaguered the gaming industry.

Since February, shares of IGT have lost more than 60 percent of their value on the New York Stock Exchange. During the same period, analysts said the company has lost market share to slot machine rivals Bally Technologies and WMS Industries.

IGT is now making changes to reduce expenses and reverse the trend.

Last week, news leaked that Reno-based IGT could reduce its 5,400-person work force anywhere from 9 percent to 18 percent. Many on Wall Street believe IGT should refocus its efforts on game content that will help casinos attract customers.

"While we are pleased that IGT is starting to take the right steps to right size its cost structure in light of the current environment, it may not be enough to offset a top line slowdown," Macquarie Capital gaming analyst Joel Simkins told investors a day after IGT informed employees through an e-mail that it would be reducing staff by Jan. 5.

Simkins, who has been critical of IGT recently, said the company needs to scale back its efforts to develop a server-based gaming system and return to its core slot machine business in order to sell more games. He said the company's video slot machines are not as popular as games being developed by other slot makers.

"IGT appears to be focusing on developing more innovative content to offset market share losses," Simkins said. "We are concerned that it could be on the verge of permanent displacement of share to its key rivals."

IGT Chairman and Chief Executive Officer TJ Matthews told employees in his e-mail that layoffs were part of a companywide restructuring. Although it was unclear how many positions would be lost, some analysts speculated that IGT could cut anywhere from 500 to 1,000 positions, including many spots in the company's engineering division.

Deutsche Bank gaming analyst Bill Lerner said IGT should have taken cost-cutting steps a year ago when the fortunes of slot makers began to sag. Casinos are not changing out older slot machines at the same rate that games were being replaced earlier in the decade.

"Layoffs, while as unfortunate as they may be at this time, make a lot of sense for this company," Lerner said. "During this tough economic environment, IGT needs to decide what is the right size this company needs to operate."

Stifel Nicolaus gaming analyst Steven Wieczynski said the layoffs shouldn't come as a surprise to IGT investors and could be considered welcome news.

"IGT's cost-cutting program will position the company in a better state so once the domestic slot market turns, revenues should flow to the bottom line at a quicker pace," Wieczynski said in a note to investors.

In his e-mail, Matthews told employees the number of layoffs will be determined by how many employees accept a recently offered buyout program. IGT spokesman Ed Rogich said all company divisions are being reviewed.

Analysts said IGT needs to reduce costs because revenues have declined. For the first nine months of fiscal 2008, IGT's selling, general and administrative expenses are 18 percent of the company's revenues, which are almost $1.9 billion, down 5 percent from 2007.

During 2003 and 2004, IGT's revenues soared as casinos replaced older slot machines with games featuring ticket in-ticket out cashless technology. Those same costs on the IGT balance sheet were between 12 percent and 13 percent of revenues.

"That's the figure the company needs to bring down," Lerner said. "That's why the layoffs are happening."

Some analysts were not critical of the millions of dollars IGT has spent in the past few years toward the development of server-based gaming, which is considered the next wave of slot machine technology. Conceivably, server-based gaming would allow casinos to change their games and payouts on slot machines linked by a central server.

In April, IGT announced an agreement to provide a server-based gaming system to Aria, MGM Mirage's 4,000-room hotel-casino that serves as the centerpiece of the $9.2 billion CityCenter development. Aria is expected to open in December 2009. In June, the company spent $76 million to acquire a European slot machine rival which was viewed as acquiring a key piece of the server-based puzzle.

Lerner said the company's return on its server-based investment could begin in 2010, especially after the system at Aria is implemented.

Wieczynski agreed with other analysts that IGT needed to refocus its research and development efforts on new game content, as it did to gain great success early in the decade.

"IGT has been under pressure from competitors who have improved their game content," Wieczynski said. "We continue to believe in the potential for server-based gaming but recognize that this concept will not be an overnight success like ticket in-ticket out (technology)."

Contact reporter Howard Stutz at hstutz@reviewjournal.com or 702-477-3871.

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Please enter your name Name: Please enter your email Email: Please enter a comment COMMENTS : (word count limit is 300) You have reached the maximum number of words allowed Current Word Count: Note: Comments made by reporters and editors of the Las Vegas Review-Journal are presented with a yellow background. Slots of Dumb wrote on September 23, 2008 09:26 PM: Why do you need a user's manual? You hit the spin button and if u win it tells u. I like how people look at all of the help screens. Good luck losers. Gaming Girl wrote on September 22, 2008 02:54 PM: It's funny how people in these state are so down on gaming. People gamble in hopes of that big win, which is why a lot of people also "play" the stock market. You don't think risking your hard earned pennies on Wall Street isn't just as addictive as the corner slot machine. I work in gaming and have for 15 years and when I do play a slot machine which typically means I have company in town I play WMS games. IGT started losing their luster when they lost Tom Baker. TJ was also more concerned with Anchor employees than IGT employees; to bad he didn't pay more attention to those individuals who brought IGT so high in the market the employees who were there when IGT bought Anchor! Maybe layoffs should start with the newest acquisition and work its way through all the previous acquisitions until they have the IGT core. IGT has lost many good employees because of the mismanagemet. casinocon wrote on September 22, 2008 01:47 PM: I've been saying it for years -- IGT lost their edge to WMS, which developed much more interesting games. I've walked into the Suncoast a couple of times when NO ONE is playing the Indiana Jones bank of IGT machines -- that was one of their hot new slots at the Global Gaming Expo last year. Their eBay themed slots have tanked as well. IGT ruled the slot industry for a few choice years, but Williams came after them with both guns blazing, and overtook their market share. In this economy slot players like myself are losing too much money and opting to stay home and watch TV, a movie, or play computer games. All slot manufacturers will feel the pinch, but IGT the most. I need a new drug. DMCVegas wrote on September 22, 2008 01:21 PM: LOTS of things are addictive, and most certainly Gambling isn't the worst thing. People even have obsessive hobbies that do more damages to finances and personal relationships than gambling. Hey just look at all the "shop-o-holics" out there who get themselves into tens of thousands of dollars of credit card debt. But still I don't hear you or anyone else screaming that Shopping Malls are detrimental to our communities... Interestingly enough, the IGT slots of old TV shows are in fact pretty popular with older folks down in Biloxi. Biloxi is NOT Las Vegas. It's clientele are FAR older, and those things do tend to resonate with the demographic better down there. Obviously no one here has worked in and around the gaming industry down in the South judging by the ignorant comments here. Furthermore, yes, the Gaming industry does a whole lot of good for Biloxi and the gulf coast. Obviously, you've never been there. Gambling isn't the biggest industry in Mississippi. That's actually forestry. Following that, it agriculture. Either you grow some types of nuts, or you work in a slaughterhouse preparing poultry (where do you think all that chicken comes from?). On the coast you have the choice of working in the shipyards that don't offer much work and consistantly lay people off anyway, being a long shoreman handling bananas (of course Huricane Katrina did some significant damage there to put people out of work), or you plead to get some sort of minimum wage job in the service industry. Casinos have done allot to bring money into people's households that wouldn't otherwise have had anything. Getting back onto the subject. IGT put out some impressive machines, yes. But their themes don't resonate with everyone, everywhere. They invested far too much into manufacturing those machines. Anonymous wrote on September 22, 2008 01:11 PM: I am amazed at some of the comments I see here in response to articles like this. Do any of you making comments read or watch business news? Good lord, the enitre world economy is suffering! Of course IGT is going to make adjustments, it has to! I see some pretty ignorant comments being made here and particularly from so called "ex-eployees" who were likely walked out the door for incompetence based on the statements made here! There is NO connection to the state of our global economy and slot machines! Individuals suffer with financial problems and many of those are do to gambling but for as for some of the comments below, these people are so lost from reality... by the way readers, IGT does not set the payouts or how "tight" a machine is... THE CASINOS DO THAT! Oh, and the casinos are regulated by the gaming comissions! Idiots who blame a company for the end users inability to control themselves are the ones that should be taken out back a beaten about the head and shoulders. It is entertainment! If it does not entertain you.. LEAVE! Tom Best wrote on September 22, 2008 11:41 AM: IGT was getting their head handed to them by other progressive manufacturers, like Aristocrat and WMS. So instead of improving their existing products, they went to server based slots. At the casino I go to, the older slots, like lobster mania and shrimp mania, are being replaced with machines mostly made by Aristocrat. The exception is at Stations, where they figure that locals are too stupid to know the difference. Wrong... ex gambler wrote on September 22, 2008 10:57 AM: IGT is tanking because their slot machines belong in the toilet tank. With the advent of Ticket-in Ticket-out, machines have become so tight they are no longer fun to play. Who wants to throw $20.00 into a machine and lose within 5 minutes? Ever since Stations went totally ticket-in ticket-out, we no longer go there. Their machines are so tight, I think they want to pay the mortgage off early at the players expense. Most casinos are financially challenged because of managements greed and now they are laying off service employees to save their million dollar bonuses. Edward L wrote on September 22, 2008 10:27 AM: Libby is correct. Gambling is a nasty, addictive product. I've had to break up with 2 girlfriends, both totally broke due to the slots. No CHOICE there. Lindsey, you're living in a dream world if you think those casinos in Biloxi are good for the economy-they are only good for Harrah's and their ilk. Yes, they provide some minimum wage tip dependent jobs, but since Miss. is a sh**hole, they allowed casinos. Lindsey Smith wrote on September 22, 2008 09:41 AM: Wow, Libby. I can't believe can try to blame gambling for the current economy. How can you compare gambling to interest rates and gas prices? People have a CHOICE when it comes to gambling, if thats what they choose to to and how much they want to spend. We don't have a CHOICE on how much we want to spend on gas. Whether it is an 'addiction' or not...there are ways to stop. Gambling actually HELPS the ecnomy and brings $ into those states! Why do you think Biloxi had to open casinos after Katrina so quickly?? Do some research... Cummings wrote on September 22, 2008 09:27 AM: Who wants to play games that require a users manual to learn?? and who wants to blow a bunch of money learning to play the game? Read All Comments