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NA shipments were weak but everyone knew that. The miss was driven by the black box that is systems and international shipments.

The bottom line is that BYI missed consensus and while it doesn't change our long-term outlook for the sector, a miss is a miss.  The good news is that systems sales and international shipments drove the miss and they are notoriously lumpy and difficult to model.  That is why annual guidance for fiscal 2011 (ended 6/30/11) is still in-line with consensus estimates.  However, with the back half EPS higher than the first half, BYI is now a show me stock that has to deliver to regain credibility.

There seems to be something lost in communication between BYI’s executives and the investor community in terms of guiding to appropriate expectations for FQ12011.  BYI suggested that absent some slippage of systems revenues into 2Q, their results were in-line with their expectations, which seems to have been around $0.42 vs. the Street at $0.46.  I suppose therein lies the problem – because “the Street”, we included, has no real way to model systems revenues outside of company guidance and the company provides little color on international box sales.  Hence, the miss versus our estimate for the quarter.

So let’s start with the BAD stuff this quarter

  • Systems:  they missed our revenue number by $11MM and our gross margin number by $7MM
    • Was anyone was thinking $40-handle here? – only once has BYI reported a systems quarter under $51.5MM since September 2007 ($47MM in June 09).  So if mid 40’s was management’s expectations, they certainly didn’t communicate that, especially when guiding to 5% growth in FY2011.
  • Game equipment revenues missed our expectations by $3.4MM and gross margin by $2MM
    • We’re probably in the minority here but they actually exceeded our unit expectation to North America by 50 units but International shipments were more than 500 units below our estimate
    • While we didn’t count any Maryland units in the Q, its good to know that they were participation shipments which will benefit future quarters
    • BYI provides very little color on international shipments which makes it difficult to model on a quarterly basis.  The only guidance we saw was shipping more units to international markets in 2011 than 2010 given that 1/3 of their shipments to Italy will be for sale and their entrance into Australia.  Both Italy and Australia are heavily weighted to the F4Q2011.

The Good

  • Gaming operations
    • Apparently Cash Spin is doing so well, some will argue that that is what prompted the timing of WMS’s lawsuit
    • Despite a sequential decline in footprint, gaming operations achieved a record quarter
    • Exceeded our estimate by $1MM on revenues and $1.5MM on gross margin
  • Despite the miss, the FY2011 guidance range of $2.05-2.30 still bookends the Street at $2.23 and us at $2.27

Other thoughts

  • They didn’t try to save the quarter by cutting SG&A or R&D, both of which came in above our estimate (by $2MM in aggregate)
  • D&A was very low though – we thought that the net new premium placements would cause D&A to start growing but maybe it is just due to their overall base shrinking and perhaps them investing their capital more wisely.