A modest downturn within the Association of Gaming Equipment Manufacturers index of 17 publicly traded global gaming suppliers suggests investors continue to exercise caution going into fourth quarter earnings season. In January the index was down 1% with negative returns from a handful of US companies while top gains were from companies based outside the US, such as Australia's Ainsworth Game Technology and Italy's Lottomatica (GTECH).

Looking ahead, manufacturers are continuing to seek to improve their operational efficiencies and strengthen their balance sheets while still devoting resources to research and development. For example, in the last year, International Game Technology (IGT) ceased its operations in Japan and WMS poured capital into several new products. Nevertheless, Shuffle Master (SHFL) indicated in their latest annual report that the gaming market "both domestically and internationally remains highly uncertain."

Further cutbacks may occur in the near term as financial markets remain tight and consumer confidence hangs relatively low. Additionally, there will likely be a ramp-up period where operators first return stronger earnings and future indicators look favorable before once again heavily investing in expanding or replacing existing gaming equipment. With lowered operating costs as a result of the latest downturn, global gaming manufacturers have begun reporting positive earnings despite lower revenues. It is expected that revenues and earnings will likely rise at a marginal pace as improvements in the broader market take hold.

In International Game Technology's (IGT), latest quarterly report ending December 31st, revenue and operating income declined 9.8 percent and 15.5 percent compared to the same period in the prior year, respectively. With one of the largest funding levels in research and development, it continues to support product development at significant levels, contributing $51.7 million towards this effort, an increase of 13.9 percent over the same period in 2009.

While gaming manufacturers have begun to show improvement over the last year, a full recovery is going to be timed to casino operators' ability to return to previous capital expenditure levels, which may be several years away, along with global expansions. (E-02.11.11)

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