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.


Another big Q for a Macau operator.  Galaxy Macau on schedule


“The third quarter was another record quarter for GEG, outperforming the market with outstanding gaming growth and strong results from all of our businesses. Our absolute focus on “World Class, Asian Heart” service and meeting the particular needs and tastes of Asian customers has enabled StarWorld to continue to lead the market. The Macau market continues to grow very rapidly and infrastructure projects in China and Macau are expected to maintain this growth and attract a new type of visitor to Macau, who will stay longer and, as well as gaming, look to enjoy entertainment and leisure facilities. The accelerated roll-out schedule of Galaxy Macau™ will enable the Group to fully capture this surging demand. Galaxy Macau™ remains on budget and on schedule to open in early 2011, a time at which we see an exceptional window of opportunity to introduce a large and truly Asian destination resort to the rapidly growing Macau market. The fit out of the property and recruitment of property staff signals the project’s transition from the construction phase to the exciting preopening of the property.”


-Dr. Lui Che Woo, Chairman of Galaxy Entertainment Group




  • Galaxy Entertainment Group reported record EBITDA up 115% YoY to HK$616MM; StarWorld reported record EBITDA up 161% YoY to HK$568MM - 9th consecutive Q of growth
  • StarWorld VIP win% in 3Q was 3.1%,compared favorably to 2.3% in the third quarter of 2009
  • StarWorld EBITDA margin of 21%, lower than the 23% in Q2
  • StarWorld RC Volume rose 69% YoY to HK$137BN; VIP Revs up 129% YoY; Mass Revs up 35% YoY; Slot Revs up 67% YoY
  • "Galaxy Macau™ is the only new resort destination set to open in Macau until at least the end
    of 2011"
    • Accelerated opening with 1,400 rooms
  • $1.9BN Cash on Hand; total debt increased from $3.4BN to $4.8BN QoQ 



  • Mass volume $1.8BN, up 20% YoY
  • City Club EBITDA $43MM beat company projection of  $20-25 EBITDA per quarter
  • Galaxy Macau will have 50 F&B outlets
  • Thru Sept 30, have invested a little over $7BN in Galaxy Macau


  • October trends: should be record month for Macau market; StarWorld held very poorly
  • StarWorld EBITDA margin declined in Q3 due to different mix of business in VIP (rev share/RC share arrangements)
  • Have completed recruitment of Galaxy Macau mgmt team
  • Have not started the hiring of mass workers
  • Galaxy Macau marketing plans: launched newsletter and expanded awareness through social media outlets; advertising program and travel agency programs doing well in Guangdong province
  • Galaxy Macau
    • VIP/Mass table mix: 2/3 mass, 1/3 VIP
  • Capex invested: $1.6 BN in Q3; remaining capex for Galaxy Macau: bulk will be in 1Q/2Q 2011
  • Departure of Galaxy Macau executives: don't worry


We were way above the Street for Macau and Singapore and they blew us away. We will have commentary in an upcoming post.


"We are incredibly pleased to report that records for revenues, adjusted property EBITDA and adjusted property EBITDA margin were achieved during the third quarter of 2010. Strong revenue growth and increases in operational efficiency in Macau and outstanding results at Marina Bay Sands in Singapore contributed to substantial margin expansion and industry-leading financial performance overall.  We are therefore extremely proud to deliver an all-time quarterly record of $334.6 million of adjusted property EBITDA for our Macau operations, with both The Venetian Macao and Four Seasons Hotel Macao and Plaza Casino delivering substantial revenue and adjusted property EBITDA growth and margin expansion. In Las Vegas, increases in gaming volumes and hotel revenues allowed us to deliver $58.3 million of adjusted property EBITDA during the quarter."

"In Singapore, Marina Bay Sands, which just completed its first full quarter of operations, generated the highest quarterly adjusted property EBITDA and EBITDA margin from any single property in the history of our company. Marina Bay Sands produced $241.6 million of adjusted property EBITDA and an EBITDA margin of 49.7% during the quarter. Both gaming volumes and visitation to the property have continued to trend upward since our opening, and we are gratified by the overwhelming reception the property has received. One example of that growth is the increase in average daily adjusted property EBITDA of over 275% from May to October. We are proud that Marina Bay Sands has already enhanced Singapore's reputation as an international business and leisure destination. Looking ahead, we are confident that Marina Bay Sands will provide an ideal platform for strong growth and outstanding returns for our company."


- Sheldon Adelson, chairman and CEO



  • Annualized EBITDA run rate now in excess of $3BN, higher than the previous target for $3BN EBITDA for 2011
  • Net revenue will increase 12% from Sept to Oct
  • EBITDA climbed by more than 73% from the beginning of June to the end of September; and the trend continues into October where they are on pace to grow an additional 31% from September to October.
  • Low hold negatively impacted revs by 20MM for MBS
  • MBS
    • GGR has increased to 126% since May reaching 8.4 million per day in October; that's an annualized run rate of 3.1 billion. Rolling volumes have increased 182% since May to reach 168.3 million per day in October. At that rate, 42 billion annually approximately. 
    • GGR from our mass tables and slots increased 49% since May to reach 3.2 million per day in October and an annual run rate of 1.2 billion. Non rolling drop increased 21% since May to 9.6 million per day in October; an annual run rate of 3.5 billion. Slot handle increased 165% to reach 18.3 million per day in October; that is 6.7 billion annual. 
    • The slot WPD increased 43% since May to reach $517 per unit per day so far in October. Annual run rate is approximately $450 million.  
  • Strong Golden Week for Sands China; run pace for October will be a record
  • Completion of Bethlehem hotel next spring
  • Very judicious and prudent in lending credit in S'pore
  • Continue to focus on EBITDA as metric of performance; want people not to focus on market share
  • 35%-40% EBITDA share of Macau market
  • $3.2 BN in excess cash; about $6BN if including unused revolver




  • EBITDA for Oct for MBS: up 40% from Sept EBITDA
  • GGR 8.4 MM per day in October - annualized rate 3.1BN.
  • Rebate: 1.2%-1.3%
  • Retail - still not completely open, but most stores (ex. LV) will be open by end of year; run rate going north. Only delay is health club/spa.
  • Customer mix: the top high-rollers are very diverse e.g. (Laos, Cambodia)... but Singapore, Malaysia, and Indonesia customers still largest portion; HK and China also well-represented.
  • Still understaffed in terms of target of 8,400 people; so payroll expense will increase.
  • Mass market and slot play will increase as participation in hotel increases; big Indian promotion in January;
  • Table/slot capacity: still have more room to add tables/slots; focus on adding private gaming rooms (VIP); enough capacity in mass market; 
  • Receivables: very conservative; a couple of hundred million in receivables; 12% reserved.
  • Junket operators: Adelson thinks only those who have no track record will get approved (i.e. not Macau-style junket reps)
  • Chinese currency impact: helped by stronger S'pore $, expect positive impact to continue into 2011 
  • Gross Revenue share going forward: will be equal; focus on high-end of the market (Genting doing very well on the mass side)
  • Could hit $2BN EBITDA in 2012
  • Local S'pore: 38% of total customers
  • 25,000 customers on average
  • High 90% occupancy in MBS during the weekend; 80s in the weekdays
  • In 2012, subway system will open, which will help the retail side
  • Did have Mainland China customers during Golden Week
  • Depreciation will creep up in 4Q
  • Rolling tables: 110
  • Non-rolling tables: 500

Other Questions

  • FS EBITDA margin: high % of high-end win; approaching Sands Macau #s; expecting property improvements and adding amenities to FS.
  • Sites 5 & 6: still on target; budget remained same; still looking 4Q 2011 for phase 1 opening; but will know in 30 days if that is still a feasible date given # of workers; all contracts have been resolved;
  • Sands Macau: most affected by competition on the peninsula; have already paid back the cost of the property.
  • Japan--interparty draft is moving forward, should be submitted to Diet by February.
    • 2 casino sites: Tokyo and Osaka
    • currently, 12-13k pachinko parlors
  • Receivable reserve account: 42% against gross casino AR
  • Expansion of McCarran airport impact: additional capacity will not have any impact; lift is the single most important factor; 800,000 less passengers coming into airport this year;
  • FS Apartment Sale - hope they will get approval soon; "about to get it"; will bring in up to $1.4BN
  • Vegas environment for 2011: group bookings are strong; group rates still weak - ADR $180-$190 for 2011; $200 ADR for October, though; doesn't expect big numbers in 2011
  • LV promotional environment: still very competitive; believes gaming and hotel promotional environment has gotten worse and will continue to worsen; LVS will cut back on offers to protect brand; will cut to 10% from 15% for % of promotion.
  • Govt may lower tax rate in Macau in the future
  • Oct visitation so far is normal
  • annualized sales/sq ft in 3Q dropped 25% in Macau retail sales.
  • Will keep direct VIP business where it is: 25%
  • Capitalized interest: 32MM; will go up in subsequent quarters due to construction in Macau

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Missed due to international shipments and the black box that is systems. We'll have more commentary in an upcoming post. 



"Delays in certain decisions and the unfavorable timing of some go-lives related to our systems resulted in lower than normal quarterly systems revenues; however, we continue to see strong growth opportunities in systems. We are well positioned to capitalize on our innovation in new products and our investments in new jurisdictions in 2011."

- Richard M. Haddrill, the Company's Chief Executive Officer



  • "During  fiscal 2011 We have already purchased 826,000 shares of common stock for $27 million, $22 million of which was in our first quarter"
  • Sold 2,823 gaming devices at an ASP of $15,685
    • Units missed expectations "driven by fewer new openings and expansions during the period and a continued sluggish North America replacement cycle."
    • International shipments were 823 or 29% of total
    • ASP increased primarily due to mix
    • "Gross margin increased to 49 percent from 48 percent last year, primarily due to improved manufacturing efficiencies and improved material costs related to production of our ALPHA Elite(R) cabinets, including our popular V32 cabinet, and lower royalty expense."
  • Gaming operations was the sole bright spot in this earnings release with revenues of $79MM. Driven by better premium placements. Cash Spin had over 1,200 units installed.
  • Systems missed big due to timing of go-lives. Margins were good at 73% though due to a high mix of products sold and maintenance revenues which reached $15.9MM
  • FY2011 Business Update:
    • Lowered EPS guidance to $2.05 -$2.30 (took down high end by 10 cents)
    • Assumes no Illinois sales due to delays
    • "The Company continues to expect that its Diluted EPS from continuing operations in the second half of fiscal 2011 will exceed the first half."
    • This guidance considers a continued challenging North American replacement market, as well as the assumption that the Company will begin to see meaningful revenue from the Italy VLT market in the second half of fiscal 2011, although the timing in this market is subject to change due to potential delays resulting from regulatory and other unforeseen issues.
    • "Reiterated fiscal 2011 guidance for systems revenues of $220 million to $235 million, but updated the systems maintenance revenues component to $63 million to $65 million."


  • Expect that 2H earnings will be at least 60% of total EPS for FY2011
  • Game sales:
    • ASP's benefited from sales of certain custom games
    • 2,000 to NA: 1,763 were replacement sales
    • 230 units were shipped to Maryland but were on participation so they weren't included in the game sale units
  • Gaming operations:
    • Driven by the continued placement of premium gaming like Cash Spin and Digital Tower Series
    • Haven't released Cash Spin internationally yet
  • Systems:
    • Systems revenue will be back half weighted in 2011
    • Seeing increased interest in iView DM due to their new applications
    • Customers have been taking longer to make purchasing decisions
  • Leverage ratio continues to remain way under 1x
  • Expect increased ship share starting in calendar 2011
  • Games in Maryland are earnings 150% of floor average - New Alpha Pro-Series. With iDeck, think that their games will do even better.
  • Have received approval for iDeck and have recently started shipping Pro-Series cabinets with iDeck installed
  • Expect placing games in Italy in 1H calendar 2011
  • Also expect to start selling into New South Wales early in calendar 2011
  • Given the delays in IL, they are now not expecting to ship any games to that market in FY2011
  • Don't expect to see any meaningful pick up for replacement spending in calendar 2010 but are cautiously optimistic that spending will increase in calendar 2011
  • Systems is focused on the development of systems applications that will enhance customer revenues
    • USpin Bonus
    • Bally Command Center
  • Expect to see a real benefit to game sales as they launch Alpha 2 games on their new cabinet this month


  • What percentage of their systems guidance is in signed orders?
    • Had expected a weak systems quarter in Q1. Risk is that 2-5MM can slip from Q to Q.. which is what happened this quarter - one order got delayed.
    • Second quarter will be better than first but not as good as 3rd & 4th quarter
  • Patent suit by WMS?
    • They were surprised by this since the product was first released 2 years ago
    • Feel like there is no financial risk to them 
  • Unit sales / Maryland?
    • If MD units were for sale vs. participation, they would have earned 2 more cents
  • Can't quantify the IRS benefit yet - but it's not included in guidance
  • Cabinets are Pro Series - 20% of the cabinets shipped in the quarter.  There were no Alpha 2 titles ready, but the Alpha 2 processor is available
  • More cautious on Alabama, more optimistic on Acqueduct
  • Did they ship games to Cosmo?
    • Shipped just under 50% of their units; rest will ship this quarter
  • International sales?
    • No new openings in Asia
    • Mexico wasn't as active as it was in the past
  • Gross margins impact of Alpha 2 rollout going forward?
    • 20% of domestic were new pro-series cabinet - did have some impact
    • Doesn't see margins going more than 50-100bps below current levels
  • Acqueduct isn't included in their FY2011 scenario - can open as early as April and as late as June. Even if it opens in April, the revenue contribution won't be material since it's participation
  • Internet gaming, how does BYI think about it?
    • View it as an extension of their systems business
    • An opportunity for them to license content and enhance customer's marketing capabilities to customers online
  • Canadian RFP process?
    • Expect a decision on the systems RFP within the next 60-120 days
  • Why did rental and daily fee games decrease?
    • Some rental games came out but premium games increased
    • Some of the rental games were converted to purchase games (V32's)
  • The go-live that slipped will be in the December quarter- that was the difference in the expected earnings but still below where analysts were
  • The more recent positive vibes from customers are on games mostly but should carry over into systems... just a modest pickup though in mood
  • Gross margin decline for game operations - typically 70-74% range - just depends on jackpots related to WAP games

SKX: Laughter in Beaverton

We’ll see what they have to say on the conference call. But here’s an excerpt from our 10/12 report (Toning Footwear – A Year Later, What’s Next?) showing how the company’s expectations for Toning sales were simply too high. The primary reason? People buy in units, not in dollars. With every other brand coming out with Toners at price points less than half of where SKX is selling, only bad things can come.


There’s a lot of laughter in Beaverton right now.  


“In looking at Skechers’ share of the industry in 2010 and gradual deterioration thereof, we assume the brand will account for ~45% of the domestic market in 2011 compared to ~60% in 2010. With price deterioration, cost inflation, and margin degradation, we estimate that incremental  Shape-up margins will come in closer to 20% in 2011 from 25%-30% EBIT in 2010. The combination of share loss and compressed incremental margin is likely to reduce 2011 EBIT dollars by $40-$75mm. That’s on an base of what we estimate to be ~$170-$200mm of Shape-Ups related EBIT in 2010.  In order to simply keep EBIT dollars flat, we’d have to assume that either: 1) Skechers maintains 60% share of the category, or 2) the domestic toning industry would have to grow 50%-75% in 2011 to $1.7-$2.0Bn. For many reasons, this simply will not happen. This has yet to be reflected in consensus estimates assuming mid-to-high single digit EBIT and earning declines in 2011 – we’re shaking out down 30%.”


SKX: Laughter in Beaverton - SKX Toning EBIT 10 27 10


SKX: Laughter in Beaverton - SKX S 10 10



Isolated Curiosities

This note was originally published at 8am this morning, October 27, 2010. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Clouds are not spheres, mountains are not cones, coastlines are not circles, and bark is not smooth, nor does lightning travel in a straight line.”

-Benoît Mandelbrot


To say Benoît Mandelbrot lived a great life would be an understatement.  The recently deceased Sterling Professor of Mathematial Sciences at Yale University had the opportunity to follow and study his passion his entire life and, as a result, his contributions to the field of mathematics were vast.


Most interesting to our Hedgeyes was Mandelbrot’s work on fractals, which underscore many of our own market models.   In fact, Mandelbrot actually coined the term fractal in his consummate work, The Fracatal Geometry of Nature.  He also did what many academics actually have a hard time doing, he extended his academic studies into the more practical areas. According to our friends at Wikipedia:


“Although Mandelbrot coined the term fractal, some of the mathematical objects he presented in The Fractal Geometry of Nature had been described by other mathematicians. Before Mandelbrot, they had been regarded as isolated curiosities with unnatural and non-intuitive properties. Mandelbrot brought these objects together for the first time and turned them into essential tools for the long-stalled effort to extend the scope of science to non-smooth objects in the real world. He highlighted their common properties, such as self-similarity (linear, non-linear, or statistical), scale invariance, and a (usually) non-integer Hausdorff dimension.”


Mandelobrot passed away at the age of 84 years after more than 60 years of pursuing his passion.  He was one of the most celebrated mathematicians of the last 50 years and won innumerable awards for his work, including:  the Wolf Prize for Physics in 1993, the Lewis Fry Richardson Prize of the European Geophysical Society in 2000, the Japan Prize in 2003, and the Einstein Lectureship of the American Mathematical Society in 2006.  Most interestingly of his awards was perhaps that fact that he has an asteroid named after him:  27,500 Mandelbrot.


As it relates to financial markets, his primary contribution was determining that price changes in “financial markets did not follow a Gaussian distribution, but rather Lévy stable distributions having theoretically infinite variance.”  In addition to his study of financial markets, he also had an idiosyncratic character that was near and dear to our hearts. So much so in fact, that he actually gave himself his own middle initial, “B”, which actually did not stand for anything.


So in memory of Professor Mandelbrot and chaos theorists everywhere (especially our Harvard friend at a well known money management firm in Canada), we are going to focus on only 3 important global macro events this morning as it relates to managing risk, which are as follows:


1.  The Election – As many of our subscribers know elections are near and dear to our hearts and the upcoming midterm election is one we’ve been very focused on. (If you would like to trial our research and to see some of proprietary election analysis, please email  In fact, we are on record saying that we are more bullish for Republican chances than our friend Karl Rove.   For us, though, it is not about politics, but is simply math.  As the math stands now, and excluding races that are “too close to call”, the Republicans will win 233 seats in the house (a majority) and will win 45 seats in the Senate.  We believe that turnout could be the wildcard and slide many of the “too close to calls” to the Republicans as many poll internals show a highly motivated Republican base.  The primary implication of this is that the Republicans will likely implement immediate budget cuts, which, according to reports this morning, could be as much as $100BN as soon as January.  While in the short term a decline in government spending may hurt GDP, in the longer term deficit reductions will put the U.S. economy on a more stable path of growth.


2.  Greek Deficits – If you don’t think that government numbers can be wrong or revised lower, well now you know.  Greek deficits this morning were revised higher to 15% of GDP as, shockingly, tax revenues were worse than expected.  As we’ve been saying for months, sovereign debt issues in Europe will rear their ugly heads again and obviously Greece is at the forefront of that again this morning.  We’ve highlighted this point of Interconnected Global Risk in the Chart of the Day below, which highlights that credit default swaps in Europe are making higher lows. As these CDS spreads increase, we are likely to see equity markets act inversely to those spreads widening.


3.  U.S. Dollar – The U.S. dollar is appreciating this morning (not a sentence we have been used to typing over the last few months) on the back of Wall Street Journal reports that while Quantitative Guessing will likely be implemented on some level, it won’t be the “shock and awe” type that many proponents of Krugman Kryptonite were hoping would be implemented.  It seems Chairman Bernanke may actually be listening to some of his colleagues at the Fed like Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, who said Monday that more expansive monetary policy was a "bargain with the devil."  Indeed.  The most immediate term impact of a stronger dollar is likely a correction in those commodities that are priced in dollars.


Just like Mandelbrot, many of the fine folks at Hedgeye have left higher paying jobs to pursue their passion. This passion is the art and process of producing objective and real-time investment research, which we believe is Hedgeye’s core competency.  We aren’t always right and we aren’t always popular, but we passionately believe in what we do and we thank you for your support. 


Yours in risk management,


Daryl G. Jones

Managing Director


Isolated Curiosities - brots

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