BYI: IF THERE WAS VISIBILITY IT WOULD BE A $45 STOCK

BYI could’ve done a better job of managing expectations but at least they are now admitting visibility is pretty low. Still, the core earnings power of the company appears quite large.

 

 

BYI preannounced so there weren’t any huge surprises in their FQ3 announcement last night.  However, we did walk away from the call feeling pretty good about their 2 year outlook.  While product sales and margins were pretty miserable and the fact that BYI basically admitted that they have no confidence at the moment to forecast their systems business, there were plenty of things to get excited about.  Namely:  Canada, Italy, Australia and New Zealand, gaming operations, BYI’s tender and debt refinancing… just to name a few.

 

Just Italy and Canada can boost BYI’s EPS by $0.33 cents ($0.40 cents if we assume 45MM share post tender) in FY12 and by as much as $0.60 in FY13 ($0.70 cents if you assume 45MM post tender).  That’s before taking into account a pickup in replacements, market share growth and margin improvement from the maturation of the Alpha 2 platform, growth in gaming operations, iVIEW DM, and other new markets.

  • Italy:  $23MM in revenues in FY12 and $44MM by FY13 assuming BYI can roll out 4,500 units with gross margin contributions of $17MM and $33MM respectively, which amounts to $0.20 in FY12’ and $0.39 cents in FY13 of incremental EPS
  • Canada:  We believe that Canada’s system contract is worth about $100MM of revenues that will be recognized over the course of the rollout which should take 2-3 years. Assuming a 3 year rollout, that’s over $8MM of incremental revenues per quarter.   While we don’t expect this business to have +70% margins like the rest of BYI’s system’s business since new installations tend to have lower margins than upgrades, software and maintenance revenues, even if we assume just 50% margins, this deal is worth at least $0.60 or $0.20 per year, plus some recurring revenue thereafter (usually 20% of the deal price).

 

1Q REVIEW

The most disappointing results of the quarter belonged to BYI’s Gaming Equipment segment.  Despite the pre-announcement, BYI’s gaming equipment sales revenue and gross margin still missed our estimate by $3MM and$5MM, respectively.

  • New gaming sales were $8MM below our estimate and margins were just terrible
    • New gaming machines were 700 below our estimate, with the entire miss on the international side.  Earlier in the year, the Company was pretty confident about growth in international sales
    • ASP’s were about 6% higher than we estimated
    • An obsolescence charge of $1.6MM impacted margins by 2.5%
  • Other gaming had its best quarter in 2 years, although we have little confidence that it’s a repeatable event since management didn’t provide a whole lot of color on the call aside from telling us that used sales and conversion kit sales were better this quarter
  • We estimate that BYI’s ship share of NA units was about 14%, the same as the last 2 quarters. We do feel pretty good that we will see their share tick up over the next 12 months by a few percentage points.  Once the platform is mature, we also believe that margins should get to at least the high 40’s.  Moreover, if BYI is able to get more traction in video slots with their new platform, this also presents a nice opportunity for them to grow their relatively small conversion kit business which carries margins in excess of 90%.
  • Systems sales continued to disappoint, despite the pre-announcement, but margins were fantastic… albeit a result of very few new installs and a higher mix of software and maintenance revenue. 
    • We estimate that next quarter systems sales should be at least $55MM vs. $47MM this quarter with the Galaxy Macau opening.
  • Gaming operations had a healthy quarter and great margins due to no jackpot payouts
    • The next two years should see some nice growth from this business
      • Acqueduct will have a partial opening in 1Q12 and add an estimated $10MM of revenues to BYI’s game ops business in F2012 and $16MM in F2013 which will benefit from a full year of operations with the entire facility open
      • We assume that Italian shipments will begin in F1Q202 and contribute $23MM of revenues in FY12 and over $40MM in F2013
  • SG&A was $5MM higher than we estimated
    • There was a $1.8MM bad debt charge in the quarter that was higher than normal for BYI

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