Gaming industry continues downward spiral

Apr 17, 2008 7:53 PM

by David Stratton | First quarter results for U.S. gaming operators slipped about 2%, solidifying concerns that the gaming industry has been affected by the slowing economy, according to a report released by Goldman Sachs yesterday.

"We recently lowered our 2008-2009 gaming estimates and are now 5% below consensus for 1Q2008 and 5% below for full year 2008," said Goldman Sachs analyst Steven Kent, who authored the report. "We expect 1Q2008 results to come in closer to our estimates and miss consensus as operators face a slowing U.S. and the equipment companies are likely negatively impacted by lower participation revenues and a slow replacement cycle."

Kent added that he expected 2008 and 2009 full-year forecasts to come down and for gaming stocks to trade flat-to-down during the reporting period.

With revenues across the U.S. casino industry down about 2% in the first quarter, casino operators are expected to respond with cost-cutting measures, Kent said.

There will also be an impact on existing and future projects, such as delay, postponement or outright abandonment, which will be the focus of an upcoming Goldman Sachs report.

The slowdown of casino gaming has had an effect on equipment manufacturers.

"We think the March quarter expectations for the equipment companies have been ratcheted down and the focus will be on the June and September quarters, which still show an acceleration in profits," Kent said. "Slowing participation revenues and replacement sales could tone those quarters down."

Participation revenues, in which manufacturers receive a percentage of a slot machine’s intake, comprise about 53% of IGT’s total revenues; it accounts for 26% of Bally’s and 35% of WMS’s total revenues.

Kent predicted the downturn could continue well into 2009, but that the expected roll-out of server-based gaming next year should provide a boost for manufacturers.