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BYI: THANKFULLY NOT A FISCAL 2011 STORY

Fiscal 2011: the good - gaming ops, the bad - timing.

 

 

BYI posted a sloppy FQ2 which we think was expected by the investment community.  North American ship share remain around an estimated 14%, consistent with FQ1.  Gaming operations was pretty much in-line.  The unit growth in the installed base bodes well for future growth.  As we pointed out in our preview, we were worried about the timing of software sales.  Indeed, software sales came in $4m below our revenue projection.  This segment remains BYI’s lumpiest and most difficult for analysts to model.

 

BYI lowered guidance to a range of $2.00-$2.15 from $2.05-2.30.  We are not too concerned with the lower guidance as BYI was not a fiscal 2011 story.  The primary culprits for the lower guidance was Italy, which is looking more like a revenue sharing model rather than straight sale and regulatory delays of around 1 quarter, and Canada system sales which were pushed out until fiscal 2012.  Neither of these issues is too disconcerting.  Revenue sharing is usually preferred as it provides a higher margin and smoother and longer-term revenue stream.  Our fiscal 2011 estimate is now $2.11.

 

It’s no secret we like the long term outlook for the slot suppliers:  huge growth off of trough replacement and significant number of new markets.  What is particularly appealing about BYI’s position is:

  • Ship share gainer – given the new technology platform and introduction of new games on that platform, we think BYI gains sequential share each quarter from its current and artificially low share of 14%.  In the absence of a pick-up in replacement demand which would lift all suppliers, ship share may be a focus in stagnant domestic environment.
  • Participation – BYI doesn’t seem to have the IGT or WMS issues in this segment.  BYI should be a market share gainer here as well.
  • Lower valuation/expectations – BYI appears to trade at a 15-20% discount to the peer group. 

THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP - February 3, 2011


Equity futures are trading slightly below fair value following yesterday's weak internals which saw major indices close all but flat.  As we look at today’s set up for the S&P 500, the range is 19 points or -0.92% downside to 1292 and +0.53% upside to 1311.

 

 MACRO DATA POINTS:

  • 8:30 a.m.: Net export sales, commodities
  • 8:30 a.m.: Non-farm productivity, est. 2.0%
  • 8:30 a.m.: Jobless claims, est. 420k, prior 454k
  • 10 a.m.: ISM Non-Manufacturing, est. 57.1, prior 57.1
  • 10 a.m.: Factory orders, est. (-0.5%), prior 0.7%
  • 10:30 a.m.: EIA Natural Gas, est. (-187), prior (-174)
  • 8 p.m. Fed’s Kocherlakota speaks in Minn. (Topic similar to Jan. 11 speech)

EARNINGS/WHAT TO WATCH:

  • Dunkin’ Donuts CEO Nigel Travis told CNBC co. may “do something like an IPO” in the future. Sees “no pressure” to do it immediately.  In statement, Dunkin’ reports prelim. fiscal 2010 rev. up 7% to $575m to $580m, global system-wide 2010 sales up 7% to $7.7b, same store sales up 2.3%
  • Gunfire erupted in Cairo’s Tahrir Square early today as supporters of President Mubarak battled with demonstrators. Europe’s Cameron, Merkel and Sarkozy demand immediate regime change in Egypt.
  • Nippon Steel and Sumitomo Metal Industries plant to merge to form world’s second-largest steelmaker behind ArcelorMittal.
  • Bank of America is said to be near an agreement to sell its Balboa insurance unit to Australia’s QBE Insurance. 
  • SharesPost to publish first report on value of Groupon, 10 a.m.
  • Ameriprise (AMP): 4Q op EPS miss
  • BMC Software (BMC): 3Q adj. EPS miss
  • Cadence Design  (CDNS): Sees 1Q EPS 8c vs est. 6c
  • Green Mountain Coffee (GMCR):  Sees 2Q adj. EPS 38c-42c, est. 34c
  • GT Solar International  (SOLR): Raised 2011 EPS view
  • Hartford Financial  (HIG):  4Q EPS beats est.
  • News Corp. (NWSA): 2Q EPS, Rev. beat; evaluating alternatives for MySpace
  • Shutterfly (SFLY):  Sees yr EPS $1.16, est. 98c.
  • Southern Copper (SCCO): 4Q EPS beat
  • Visa  (V):  Reaffirmed view for 2011 rev. 
  • Yum! Brands  (YUM): 4Q adj. EPS, rev. beat

PERFORMANCE:


The XLP and XLY remain broken on TRADE - 7 of 9 sectors positive on TRADE and 9 of 9 sectors positive on TREND.

  • One day: Dow +0.02%, S&P (0.27%), Nasdaq (0.04%), Russell 2000 (0.34%)
  • Month-to-date: Dow +1.26%, S&P +1.39%, Nasdaq +1.85%, Russell +1.91%;
  • Quarter/Year-to-date: Dow +4.01%, S&P +3.69%, Nasdaq +3.67%, Russell +1.60%
  • Sector Performance - (8 sectors down and 1 up): - Financials (0.78%), Utilities (0.55%), Healthcare (0.34%), Consumer Spls (0.38%), Materials (0.16%), Industrials (0.31%), Consumer Disc (0.29%), Energy (0.08%), Tech +0.18%

  EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: -197 (-2159)  
  • VOLUME: NYSE 933.47 (-14.72%)
  • VIX:  17.30 -1.87% YTD PERFORMANCE: -2.54%
  • SPX PUT/CALL RATIO: 2.35 from 1.21 (+94.52%)

CREDIT/ECONOMIC MARKET LOOK:

Treasuries were weaker for a third straight session.

  • TED SPREAD: 16.44 +0.406 (2.531%)
  • 3-MONTH T-BILL YIELD: 0.16% +0.01%      
  • YIELD CURVE: 2.85 from 2.87

COMMODITY/GROWTH EXPECTATION:

  • CRB: 343.80 +0.48%  
  • Oil: 90.86 +0.10% - trading +1.12% in the AM
  • COPPER: 454.40 -0.07% - trading +0.29% in the AM  
  • GOLD: 1,329.97 -0.90% - trading +0.26% in the AM  

COMMODITY HEADLINES:

  • Blaming it on the traders....Commodity traders in the European Union may face restrictions including position limits under proposals from the European Commission aimed at curbing excessive price volatility. 
  • Inventories at Cushing, Oklahoma, the delivery point for New York-traded West Texas Intermediate oil, increased 667,000 barrels to 38.3 million, the highest level since the department started keeping records at the storage hub in 2004.
  • Natural gas futures climbed for the third day in four in New York on forecasts of below-normal temperatures in the Midwest that would boost demand for the heating fuel. 
  • Cash premiums for corn and soybeans shipped this month to terminals near New Orleans rose relative to Chicago futures after a Midwest blizzard threatened to hinder grain sales and transportation. 
  • As Australia’s worst floods caused as much as $20 billion of damage to eastern states, 3,000 kilometers (1,900 miles) to the west farmer Pete Mills is battling a Chinese mining company for water after a decades-long drought.  At stake is the output of the country’s biggest wheat- growing state at a time when global food shortages have pushed prices to records. The drought has already prompted the government of Western Australian state Premier Colin Barnett to cut its economic growth forecast for the year to June 30 to 4%, from 4.5%

CURRENCIES:


Dollar gains vs majority of counterparts while euro holds gains vs yen on speculation ECB will signal willingness to tackle inflation at meeting today.

  • EURO: 1.3788 -0.25% - trading -0.19% in the AM
  • DOLLAR: 77.158 +0.12% - trading +0.04% in the AM 

EUROPEAN MARKETS:

  • FTSE 100: (0.41%); DAX: (-0.12%); CAC 40: (1.14%); IBEX: (-1.18%)
  • European stocks slide as gunfire erupts in Cairo and political turmoil in Middle East spreads to Yemena and ahead of the ECB's monetary policy meeting.
  • Europe economic news was constructive.
  • Declining sectors lead advancers 15-3 with construction (1.4%) and healthcare (1%) leading fallers and technology +0.3% and telecom +0.2% heading gainers.
  • Jan Final Services PMI
  • France 57.8 vs prelim 57.1
  • Germany 60.3 vs prelim 60.0
  • EuroZone 55.9 vs prelim 55.2
  • UK Jan services PMI 54.5 vs consensus 51.4

ASIAN MARKTES:

  • Nikkei (0.25%); Hang Seng, Shanghai Composite closed for Lunar NY
  • Markets finished mixed, in a tight band, following a tepid performance by Wall Street.
  • Egyptian turmoil dents confidence...
  • Gains for basic materials producers boost Australia’s S&P/ASX 200.  Insurers rose after Cyclone Yasi caused less damage than feared.
  • Japanese stocks fall for first time in three days. Panasonic drops 3.2%, leading consumer stocks lower after 3Q net income misses estimates. Exporters were sold on a strong yen.
  • Markets in China, Hong Kong, South Korea, Singapore, Taiwan and Vietnam are closed for the Lunar New Year.


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BYI F2Q 2011 CONF CALL NOTES

Sloppy quarter and lower guidance. Our low confidence in this Q was confirmed but long-term positive outlook remains intact.

 

 

"I am pleased with the acceptance of our recent innovation, including the new ALPHA T platform, the strength of our new gaming operations products, and the interest in our iVIEW DM player-centric networked gaming system. We continue to see excellent growth opportunities for Bally in Canada, Italy, Australia, Mexico, New York, and selected other U.S. and international jurisdictions."

 

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

 

 

HIGHLIGHTS FROM THE RELEASE 

  • "During the second quarter, we purchased approximately 475,000 of our shares for $18 million"
  • "Calendar 2010 represented one of the toughest environments for replacement and new game sales. As we look towards calendar 2011 and beyond, we expect to see both an improvement in replacement demand and jurisdictional expansions."
  • "Our lower than normal revenue levels in the first half of fiscal 2011 have not been fair indications of our backlog, pipeline, and win-loss ratio levels, all of which continue to remain strong. Our competitive strength and positioning in Systems have never been better. The commercial rollouts of iVIEW DM and ELITE Bonusing Suite products are now beginning to take shape."
  • ASP's for new unit sales of $15,244 (+7% YoY) "primarily as a result of product mix and sales of Pro Series cabinets with ALPHA 2 technology."
  • Lower GM's on gaming equipment "due to higher costs for the initial production runs of the Pro Series cabinets."
  • Lower new unit sales due to "continued sluggish North America replacement market and fewer new openings and expansions during the quarter."
  • "New unit sales to international customers were 34% of total new-unit shipments"
  • Systems "maintenance revenues increased to a record $16 million"
  • "The effective tax rate for the three months ended December 31, 2010 was 20 percent, which benefited from certain discrete items including the retroactive reinstatement of the U.S. research and development tax credit to January 1, 2010 and conclusion of the IRS audit for 2003 to 2005."
  • 2011 Guidance:
    • "Diluted EPS from continuing operations to $2.00 to $2.15 (down from $2.30), which includes $0.89 per diluted share earned during the first half of fiscal 2011. This Diluted EPS guidance range continues to assume a challenging North American replacement market, as well as limited new casino openings and expansions during the period."
    • "Total systems revenues of $205 million to $215 million, including systems maintenance revenues of $63 million to $65 million."

 

CONF CALL NOTES

  • First quarter ASP's included some custom sales. Over 1/2 of quarterly shipments were Pro Series cabinets.
  • Systems revenues were at the lower end of their expectations.  Systems have been impacted by longer decision making by their customers. Have signed commitments for 2/3rds of their 2H2011 systems revenues.
  • 35-36% tax rate for the balance of FY2011
  • Inventory increased as a result of an increase in new materials, the new Pro Series capital, and the Italian units due to be shipped later this year
  • Have a backlog of 500 units for Vegas Hits game
  • 2,305 of their units sold were to clients in NA - 78% were replacement sales
  • Estimate their NA shipshare at 17%. Their MD units are on a leasing model and therefore impact their shipshare.
  • Continue to focus on international expansion opportunities. Expect approval to sell their games in Australia within 30 days. 
  • In Italy, most of their units will be recurring revenues
  • 75% of their domestic sales were video product
  • Their first Alpha 2 games will ship this quarter
  • Getting great feedback from customers on their new Pro Series cabinet
  • Sense some optimism from their customers but remain cautious on replacement sales for FY2011
  • Excited about FY2012.  Think that the IL situation is a delay, not a cancellation
  • Acqueduct should open in the summer of 2011
  • iVIEW DM and Bonusing suite products are at a stage where the major challenges are behind them. Thinks that they have reached the tipping point for server based gaming.  Expect a good portion of their systems revenue growth to come from international sources (which have more than doubled over the last 3 years)
  • Continue to gain traction with small casinos to their windows based system
  • Reasons for the 15 cent guide-down:
    • Canada revenues won't begin until late Calender 2011
    • Lower systems revenues
    • Deferral of Italy due to some regulatory delays as well as more recurring units. They expected that 1,800 units would be for sale in FY2011 (40% of their total games). However, given the stronger yields, most of their games will be recurring revenue with very little profit in fiscal 2011

Q&A

  • Thought that Canada systems business would begin to be recorded in F4Q11
  • Their EPS range does assume a buyback of $20MM/Q
  • They are finding that the larger deals are taking longer than expected to execute. No deals have been lost; they are just taking longer to execute. The delays aren't price related but boards are taking longer to approve projects.
  • The Canada system deal hasn't been signed yet - and they don't expect signing for a few more months
  • They are confident in signing some more iVIEW DM deals over the next 90 days and should see revenues from that in the March Q
  • Interest in DM is much stronger than the interest they had in regular iVIEW
  • Reduction in their guidance range is due to far fewer uncertainties. Reduced the systems guidance mostly due to Canada and because of a slightly weaker 1H11.
  • A signed commitment on systems means that its a done deal but it could slip, timing-wise
  • They included the 5 cent gain from the R&D tax credit
  • No caps on their new WAP games
  • No change in their R&D budget
  • Not many Cash Spins have been placed internationally.  They have sold it in a few markets because you can't do participation in many markets.
  • The Vegas Hits backlog is domestic only
  • When will they have critical mass in their Alpha 2 titles? - 1/3 of shipments were the new cabinet and would expect that % of quarterly shipments to increase going forward. By the June quarter they should have a critical mass of games.
  • Had a sizable order for new units just recently. Feel pretty good about their guidance.
  • Washington and Mexico drove some of the additions to their gaming operations install base
  • Gun Lake was in the quarter and shipped the balance of their Cosmo units this quarter- most of Cosmo were shipped last quarter.
  • 505 new units - 78% were replacements
  • Acqueduct - will be July- October opening ... could be in 2 installments. Will not be in this fiscal year.
  • Total capex this year will be up year over year.  Games ops capex was $44MM almost 2x what it was in 2010 due to Cash Spin deployment and Italy games.

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