Introduction to International Game Technology PLC
International Game Technology PLC (IGT PLC) filed their most recent annual financial report with the U.S. Securities Exchange Commission (SEC) on March 8, 2019. IGT is one of the largest gaming manufacturers in the world.
I review IGT’s annual financial report for valuable insights each year. I do this for all our interest in IGT, from slot machine manufacturing to their casino operating systems. Why? Because knowledge of significant changes and trends in the gaming industry allows us a glimpse into the future of slot machine gambling in the U.S. and abroad.
This post has the following sections:
- Introduction to International Game Technology PLC
- Overall Risk Factors for IGT PLC
- Overview of Slots Manufacturer IGT PLC
- Machine Gaming
- Sports Betting
- Commercial Services
- Summary of International Game Technology PLC
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Overall Risk Factors for IGT PLC
Every company’s annual SEC report has the legal requirement of providing easy-to-read statements. These reports include details of the company’s financial performance as well as, an important element for you and I, their so-called forward-looking statements.
Reviewing these forward-looking statements allows you and I to learn from the best minds in the business. We discover all their thoughts on the current condition and immediate future of the gaming industry.
Each year around mid-March, slots manufacturer International Game Technology PLC files their annual financial report for the previous calendar year. Because IGT is an international company with its headquarters not based in the U.S., this annual report is a Form 20-F rather than the more usual Form 10-Q for U.S.-based companies.
I mention these form numbers so you know which to look for. Companies generate a lot of financial reports every year, for various reasons, but a Form 20-F is what you want. Look for it on either the SEC website or at IGT PLC’s webpage for Investor Relations.
IGT’s Form 20-F for the fiscal year 2018 is available for download at Investor Relations. It’s only 175 pages this year, down from 267 pages last year. The bulk of the report is many tables of standard financial data as well as other necessary sections which are not the focus of this blog article.
Again, our focus is their forward-looking statements, all easy-to-read as required by the Private Securities Litigation Reform Act of 1995. These statements include known and specific economic and political risks to IGT, but not as a profit forecast. IGT intends to provide a clear understanding for investors of the current financial condition of their company within the context of a global market.
Let’s start reviewing them. At first glance, IGT has some interesting overall concerns. A new risk this year comes from its largest shareholder. IGT now has a single shareholder owning over 50% of the stock. As of February 28, 2019, De Agostini controls the company with an economic interest of 50.64%.
As majority shareholder, De Agostini may make decisions which all other stakeholders may disagree. The power of a majority stakeholder includes influencing a change of control and different business combinations such as:
- Potential mergers
While De Agostini now has a 50.64% controlling interesting in IGT, they also have a group of other stockholders loyal to them. De Agostini has even more than a controlling shareholder because of this additional loyalty voting structure. Altogether, they control 67.23% of the total voting rights.
The risks associated with having a controlling stockholder with the support of other stockholders is uncertainty. What will these stockholders decide to do with the direction of the company? With more than 2/3 control, there is much they could do.
There is also uncertainty regarding the tax consequences of a loyalty voting structure. No guidance exists which directly addresses this situation. Details are on page 18 of the report.
Other risk factors relative to the economic risks of doing business globally include, but not limited to:
- New tariffs
- Severe natural events disrupting operations
Political risks include:
- Political instability
- Change in regulations and enforcement policies
- Political unrest, such as war or acts of terrorism.
Specifically called out in the financial report is uncertainty due to the United Kingdom’s exit of the European Union, i.e., Brexit. IGT is based in Italy, a member of the E.U. The company is headquartered in London, meaning it has a significant business presence in the U.K. Brexit is a less than ideal situation for IGT.
Another risk to the company is a large customer base in certain business segments, such as 34.9% of company revenues coming through the gaming control commission of Italy. IGT depends on this income revenue. If Italy makes significant changes to its gaming regulations, the dependence may negatively impact IGT revenue and profits
Similarly, IGT’s top 10 customers outside of Italy accounted for 17.5% of its total revenues in 2018. This dependence could result in company revenue reduction, business, prospects, and operations if IGT loses any one of these significant customers.
More year-to-year potential business risks include:
- Penalties for failure to perform obligations of current contracts
- Inability to complete and integrate future acquisitions for future growth
- Lower revenues due to a slowdown in the lottery and gaming markets
- Reduced demand and level of play due to changes in social mores
- Being unable to protect intellectual property may harm its ability to compete
- Inability to license intellectual property from third parties to compete in the market
- Third-party intellectual property infringement claims against IGT
- Adverse effects of a highly competitive environment
Proliferationof gaming destinations including online
- Aggressive price competition from other enterprises to gain market share
- Legal challenges to awarding significant contracts
- Consolidation among gaming equipment and technology companies allowing them to better compete through increased scale and efficiency
Entryof new competitors into the internet gaming market due to low costs of entry
- Consolidation among casino operators with capital spending cutbacks
- Less overall leisure time and discretionary spending by players
createsother forms of entertainment as competition
- Inability to develop and manage frequent introductions of innovative products and respond to technological changes in the gaming industry
- The illegal gaming market negatively affects business
- The use of social media including negative commentary
Legal and compliance risks include:
- Changing enforcement of the U.S. Interstate Wire Act of 1961
- Extensive and complex governmental regulations as applied to operations
- Investigations by gaming jurisdictions due to adverse finds or negative publicity
- Failure to comply with the E.U. General Data Protection Regulations (GDPR)
- Increased gaming regulations due to negative perceptions and publicity
- Risk exposure to compliance with anti-corruption laws and regulations
- Recent and future changes to
U.S.and foreign tax laws
- Unfavorable outcome to pending legal proceedings
Other areas include operational and financial risks. These risks include attracting, retaining, and motivating IGT personnel in a competitive market. Further, hazards include maintaining their supply chain, cybersecurity, and failures of business technology.
Overview of Slots Manufacturer IGT PLC
If IGT seems familiar to you, they should be. Perhaps you’ve seen a few of the 343 versions of their popular Wheel of Fortune slot machines? But they also provide more.
We are interested in their slot machine manufacturing business. Of course, we are. But IGT also provides other business solutions for the gaming industry of which we should be aware.
IGT’s software operating systems control slot machines in a casino from a central computer server. Further, their lottery distribution systems are relevant to those states with video lottery systems (VLTs).
International Game Technology PLC has its headquarters in London with facilities in Providence, Las Vegas, and Rome. IGT’s over 12,000 employees at the end of 2018 remains roughly the same number since the end of 2016.
The company’s portfolio of products and services include:
- Management services
- Online and instant lottery systems
- Instant ticket printing
- Electronic gaming machines
- Sports betting
- Commercial services
IGT’s four corporate business segments are:
- North America Gaming and Interactive (NAGI) with $1.0B in revenue
- North America Lottery (NALO) with $1.2B in revenue
- International with $820M in revenue
- Italy with $1.8B in revenue
From their balance sheet, International Game Technology PLC has total assets of just over $13.6 billion and total equity of $2.75 billion attributable to IGT PLC. Total revenue in 2018 was $4.81 billion. Since the end of 2017, total assets decreased by 10% while total equity increased by nearly 17%. Revenue dropped only 2.2%.
International Game Technology PLC began in 2014, although it was initially the shell company Georgia Worldwide Limited for its first seven months of existence. The parent company name change occurred after purchasing the original International Game Technology from GTECH. No public takeovers had occurred before 2019.
International Game Technology PLC has five categories of products and services:
- Machine Gaming
- Sports Betting
- Commercial Services
IGT PLC has more than 100 lottery systems customers worldwide, including with 37 of the 45 U.S. lotteries. The company supports over 450,000 lottery devices worldwide and provide secure processing systems capable of up to 500,000 transactions per minute.
Lottery services from IGT PLC include:
- Licenses and facilities management contracts
- Lottery management agreements
- Instant ticket printing contracts
- Product sales and services contracts
Most of the company’s revenue comes from licenses and management contracts. These contracts include designing, installing, and operating the lottery system and retail terminal network for five to ten years. Contract extension options are one to five years.
Many contracts include providing additional services for instant lottery ticket games such as marketing, automated validation, inventory, and accounting. In return, IGT PLC gets either a fixed fee or a percentage of sales of all instant ticket games.
IGT PLC also gains revenue from lottery management agreements based on lottery game performance metrics as well as a percentage of ticket sales. Deals include lottery systems and day-to-day activities along the lottery supply chain. These activities can be:
- Collecting wagers
- Managing accounting office functions
- Running advertising and promotions
- Operating data transmission networks and processing centers
- Training staff
- Assisting retailers
- Supplying games materials
Instant ticket contracts provide revenue based on a fixed price per ticket or a percentage of ticket sales. Printing contracts last two to five years with contract extension options. Government-sponsored contracts may be either exclusive or non-exclusive.
A primary contract results in a complete end-to-end production process from concept development to production and shipment. Such agreements include supporting marketing and research. If a secondary contract, printing functions as a backup service and alternate product source.
International Game Technology PLC invested in a state-of-the-art printing press which became operational in February of 2018. By early 2019, IGT PLC had instant ticket printing contracts with 27 U.S. states and 25 customers in international jurisdictions
Product sales and services contracts include constructing, selling, delivering, and installing lottery systems and equipment, along with related services and software. In these contracts, the lottery authority is responsible for lottery operations. IGT PLC also provides equipment and services contracts to expand existing lottery systems. Case-by-case negotiations determine the revenue from sales and services
International Game Technology PLC’s machine gaming business category is all about slot machines, including their design, development, manufacturing, and distribution. Revenue from regulated gaming markets includes fixed fee, participation, and product sales contracts. IGT PLC holds more than 450 global gaming licenses.
Machine gaming includes physical hardware such as the slots cabinets and electronic systems such as the operating software with its game theme. IGT PLC’s primary competitors for machine gaming include Aristocrat, Konami, Novomatic, and Scientific Games.
International Game Technology PLC offers machine gaming products and services, which include:
- Gaming machines and game content
- Video lottery terminals (VLTs) and amusement with prize machines (AWPs)
- Gaming management systems
Physical gaming machine cabinets provide land-based casino operators with maximum functionality, flexibility, and player comfort. Developed game themes match local gaming regulations, market dynamics, and player preferences. Overall, IGT PLC designs gaming products for player appeal and entertainment.
IGT PLC’s games are either premium games or core games. Premium games are two types of progressive slot machines: wide-area and multi-level.
Wide-area progressives are machines linked across several casinos or jurisdictions. Multi-level progressives link to other machines within the casino as well as offers different levels of jackpots
Core games are non-progressive machines. These machines are slots with a video reel, slots with a mechanical reel, or video poker machines. Core machines are usually sold but occasionally leased.
Other types of games include:
- Centrally-determined games
- Class II games
- Random number generated and live dealer electronic table games
Centrally-determined games are games connected to a central server that determines the game outcome. Class II games are electronic video bingo games found in tribal casinos as well as South Africa. Electronic table games include baccarat and roulette
IGT PLC’s machine gaming revenue primarily comes from premium, i.e., progressive, game content and cabinets. Services fees include percent wagered, net win, or fixed daily fee.
International Game Technology PLC offers video lottery terminals (VLTs), VLT central systems, and VLT games worldwide. The company also offers amusement for prize machines (AWPs), low-denomination gaming machines, at retail outlets in Italy and Europe.
Casino management systems offered by IGT PLC are comprehensive. IGT PLC offers infrastructure systems and applications for all areas of the casino including:
- Casino management
- Customer relationship management
- Patron management
- Server-based gaming
These casino operating systems included customized applications for:
- Player messaging
- Tournament management
- Integrated marketing and business intelligence modules
The modules include analytical, predictive, and management tools for maximizing casino operational effectiveness. The server-based applications include electronic game delivery and configuration of slot machines.
These solutions allow casino operators the opportunity to increase profits. Why? Because, with these tools, casinos can enhance the playing experience, including by connecting players interactively.
This enhancement creates operational efficiencies for the casino and, therefore, higher gaming revenue. How? Because casino operators are now able to advertise to patrons with in-screen messaging while they are playing a slot machine.
Casino management systems include providing two mobile solutions. First, IGT PLC offers an App to players, which allows a cardless players club loyalty program.
Rather than receiving promotional offers by email or mail flyer, players can receive comp offers via smartphone notification. This solution provides casino operators with instantaneous and direct access to players.
The second mobile solution is for casino employees. This application drives casino efficiencies by improving casino floor monitoring and decreasing response time to player needs. Three solutions exist for various needs, including mobile apps for hosts, slot attendants, and floor managers.
As I’d also mentioned in last year’s review post, IGT PLC clearly states these gaming management systems are for “maximizing casino operational effectiveness … with opportunities to increase profits.” See page 23 of the
For slot machines, increasing casino profits means controlling the odds of winning. If they’d meant to say increasing gameplay, they would have. They didn’t. By that single word choice, profits instead of gameplay, they signal to casino operators what they are offering.
Sometimes, in addition to analyzing statements provided, it is worth considering what is missing. Yes, something is missing from this annual financial report when compared to last year’s report.
What’s missing from this financial report is any mention of real-time business analytics. Last year, it was there. This year, it’s gone.
In other posts, I have discussed how difficult it would be to have real-time business analytics. These reports are accurate to the best of their knowledge. That’s a legal requirement.
If they took out the wording about real-time business analytics, it’s because they can’t do it. IGT PLC can’t mislead customers that way in annual financial reports submitted to the SEC without getting in serious trouble.
I have no doubt they are fast. But, fast is not the same as real-time. Some of my winning slots strategies depend upon casinos not yet using real-time analytics.
Once they do become real-time, it’ll negatively impact one or two of my strategies, perhaps significantly so. Someday a slots manufacturer will achieve real-time analytics. When that happens, we’ll have to look for a replacement advantage to win at slots. But today is not that day.
The company category for sports betting products and services is new this year to International Game Technology PLC. Sports betting was a minor business opportunity, as reported in last year’s annual report.
Why? Because IGT PLC earned little revenue from sport betting in Italy and Europe. This year, it’s a major business category because the U.S. sports betting market has gotten underway. In May of 2018, the U.S. Supreme Court removed the federal ban on sports betting.
However, any gaming activity, including sports betting, requires appropriate state gaming regulations. Some states prepared for the lifting of the sports betting ban. Other states are still working on updating their gaming regulations.
In any case, the
Last year, the digital category of products and services from International Game Technology PLC was Interactive and Social Gaming. Such iGaming enables gameplay via the internet for real money (interactive gaming) or for fun (social gaming)
Social gaming solutions are in partnership with DoubleU Games. Being social gaming, players spend real money but cannot win it. By many interpretations of gaming, social gaming is not gambling and, therefore, not illegal.
IGT PLC is a mostly business-to-business provider of their digital products and services. Italy is the exception, where the company acts as both an internet gaming operator as well as a mobile casino operator.
The competitors to digital products and services are from other operators, including 888 Holdings,
Because of their in-depth knowledge of lottery technologies, International Game Technology PLC offers innovative commercial services. These products and services leverage their distribution and secure transaction networks.
With this infrastructure in place, the company offers high-volume processing of commercial transactions including:
- Prepaid cellular telephone recharges
- Bill payments
- E-vouchers and retail-based programs
- Electronic tax payments
- Stamp duty services
- Prepaid card recharges
- Money transfers
These business services are primarily outside of the U.S. and Canada. In Italy, tobacco shops, bars, petrol stations, newspaper stands, and motorway restaurants commonly use these commercial retail services.
Summary of International Game Technology PLC
International Game Technology PLC is a world leader in the gaming industry, including slot machine manufacturing of physical cabinets and game themes. By reviewing IGT PLC’s latest annual financial report, we learned of company risks from their forward-looking statements.
This financial report for the fiscal year 2018 has taught us that IGT PLC has a single stockholder, De Agostini, with a 50.64% controlling interest in the company. Combined with other stockholders, De Agostini leads a group having an astonishing 67.23% control over total voting rights. This company takeover is indeed a risk well worth knowing.
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