Pardon the length of this note, but we think BYI could be the next big thing. The story isn’t this past quarter or next quarter but we will give you the preview on both.
Thoughts
We’re not expecting much this quarter from BYI, nor are we expecting terrific guidance for FY2012. In fact, guidance will likely be heavily back end loaded with a range big enough to drive a truck through. The Street may be closer to the high end of guidance than the low end. How will investors react? Hard to say but this isn’t a call on the events of August 9th.
We believe BYI is a calendar 2012 story, which is to say we buy the back end loaded earnings outlook – before management even articulates it. Replacement demand is a big part of the long-term thesis but not over the intermediate term. Rather, BYI’s systems business should provide a huge boost to the bottom line beginning, in earnest, in FQ3. While we are below the Street for FQ1, we are well ahead for the back half. The stock trades at 14x our forward estimates while we expect EPS growth to accelerate, potentially at a 20% annual clip for 3-5 years.
Estimates
Our projection is that BYI’s FYE quarter will come in-line with consensus estimates of $203MM of revenues and $0.55 cents. As long as there are no big surprises in the quarter, we expect much of the call will be focused on the year and the opportunities ahead. Clearly, there is a fair amount of skepticism over the company meeting over consensus expectations, and part of the issue is the backend loaded nature of BYI’s opportunities. We’re below the street for F1Q12 but ahead for the back half of FY2012 given:
- Lack of new openings and expansions in NA in the September quarter
- Italy and Canada not hitting until the December or March quarter
- Full benefit of Acqueduct opening not until the December/ March quarter
- Full library of 50 Alpha 2 titles not available until calendar year end
Systems driving the intermediate growth
On the systems’ side we have identified over $230MM of announced systems new install contracts – over 75% of which we believe will be realized between December 2011 and June 2013. This amounts to an average of over $25MM per quarter. BYI’s current system’s run rate of $50MM/Q consists of over 70% upgrade sales to existing customers and recurring revenue. If BYI can maintain its current run rate of upgrade and recurring revenue, we believe that they should be able to achieve a $60MM run rate and even have some $70MM quarters.
Other growth drivers
In addition to new systems installation opportunities, iVIEW DM can potentially provide a new layer of growth for BYI. On June 14th, BYI announced that it reached an enterprise wide deal with CZR to install iVIEW DM across a number of properties. The first installation will occur at Horseshoe Hammond, which has 3,160 slot machines – of which roughly 50% (video slots) should be eligible for an iVIEW DM install. If BYI can deliver a compelling value proposition on the initial installs, they will have the potential to install iVIEW DMs across CZR’s portfolio of over 60,000 slot machines - of which roughly 50% could support an iVIEW DM without upgrading machines.
BYI’s gaming operations is also set to show compelling growth over the next two years. Their Italian units should start coming online late this year (in the December quarter). According to Lottomatica, there were roughly 23,000 VLTs in operation at the end of June in Italy – the vast majority of which were produced by Speilo and Novamatica. By the end of the year, they expect that 75% of the allotted VLTs to come online. LTO’s VLTs are generating approximately $260/day while the market as a whole is generating a daily win of roughly $245/day –both of which augur well for BYI’s 4,500 or so units which get installed as daily fee games. We estimate that once all the units are installed, they will generate about $40MM/year in revenue.
The slots at Acqueduct are also slated to open in two phases by the end of 2011/early 2012. BYI will get 50% share of the 4,500+ slots that are coming online, which we estimate will add roughly $14MM of annual revenue to BYI’s gaming operations business. This is before we take into account the success of Cash Spin and iDeck.
Lastly, BYI is poised to gain market in the game sales market as more Alpha 2 content comes online. By the end of the year, BYI expects to have 50 Alpha 2 titles available. The June quarter will be the first quarter of shipments to Australia, and if their games perform well, BYI should be able to ship at least a 1,000 units a year into that market. Even excluding Canada, we estimate that new openings and expansions should grow by 40% YoY in 2012. We also estimate that replacements should increase by at least 15% YoY. All of this bodes well for BYI’s product sale opportunities.
When you add this all up, BYI should be able to hit the $3 annual earnings bogey over the next 18 months.
FQ4 estimate detail
We expect BYI to report $203MM of revenue and $0.55 of earnings.
Gaming equipment sales of $68MM at a 45% gross margin
- 3,900 new unit sales at an ASP of $15.5k
- 2,700 NA machine sales (primarily replacement sales) and 1,200 international unit sales
- “I think we would expect to see some seasonal increase in the number of replacements going into Q4.” Replacements last quarter were ~2,220
- $7.2MM of parts, conversion and other sales
- “I think we’re certainly focusing on used game markets these days. It’s something that, from an international perspective, we haven’t really focused on over the last couple years, so I would see some increases in used games going forward.”
- Last quarter game sale margins were negatively impacted by 300bps of “write-offs related to the warranty of older technology platforms”. Adjusted for the write downs, margins would have been 45% - 46%
- Margin guidance from the last call: “I think they’ll be in the mid-40 neighborhood. You have to remember we did just release… the Pro Curve, and the V32 is now out in the Pro series, which will put a little bit more pressure on our margins in the upcoming quarters… Longer-term, we expect to bring margins back to the low to mid-50s”
Systems revenue of $53MM at a 73% gross margin
- BYI should be able to recognize the Galaxy Macau contract which we estimate was worth about $8MM in revenues
- “iVIEW DM, and the Elite Bonusing Suite continue to generate strong customer interest… combined with our strong pipeline and industry leadership position, should result in increased systems revenues in the coming quarters.”
Gaming operations revenue of $82MM at 70% margins
- Over the last 4 years, there has been an average 11% sequential increase in gaming operations revenues from 3Q to 4Q
- “Cash Spin continues to perform well. Deployment of Vegas Hits has now gone past 550 units, and is currently our best-performing premium game. We recently released Cash Wizard, our first Pro Series ALPHA 2 premium game. The total orders for Cash Wizard, including those already installed, has now crossed the 700 mark.”
- “We are very well-positioned to continue our solid growth in the WAP and Premium market segments.”