08/11/11 05:25PM EDT

With the stock down on guidance - a major sandbag in our opinion - this stock could get interesting.




“The highlight of Bally’s fiscal 2011 was the positioning we accomplished for the future.  We grew gaming operations revenue by 11 percent and established a strong base of innovative games going forward. We also successfully commercialized two major new product lines, our ALPHA 2  gaming platform, and the iVIEW DM  floor-wide network. Further, we invested in key new customers and markets, such as Australia and Italy, which should provide good revenue and earnings growth in the current and future years.”

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


  • $214MM of revenue and $0.56 of Adjusted EPS (adding back a $0.05 debt extinguishment charge)
  • Game sales:
    • 3,829 new gaming devices sold at an ASP of $16,719
    • International sales: 27%
    • "ASP of new gaming devices increased by 9 percent ... primarily as a result of product mix, including sales of Pro Series cabinets with ALPHA 2 technology and release of the Pro Curve."
    • "Gross margin declined ... primarily due to higher costs for the initial production runs of the Pro Series V32 and Pro Curve, which were released in the back half of fiscal 2011, as well as higher royalty expenses due to a higher royalty-based mix of new-unit game sales and conversion kit sales."
  • Game ops:
    • Linked progressives: 1,059
    • Rental & daily fee: 14,315
    • Lottery: 8,350
    • Centrally determined: 50,754
    • "We placed more than 500 Cash Wizard games, our first ALPHA 2 premium game with a spinning-wheel bonus, and we began reinvesting in our wide-area progressives in the June quarter"
    • Launched: Betty Boop's Love Meter, Money Vault, Hammerhead
    • "Gross margin increased to 72 percent... due to increases in participation and rental revenue which had little associated variable costs and lower jackpot expenses."
  • Systems:
    • $17MM of maintenance revenue
    • "Gross margin declined slightly to 73 percent .... primarily as a result of the change in mix of products sold, partially offset by an increase in maintenance revenues."
    • "Hardware sales were 42 percent of Systems revenues, and software and service sales were 29 percent, as compared to 35 percent for hardware and 37 percent for software and services in the same period last year."
  • "SG&A increased to 28 percent of total revenues... primarily due to increases in payroll, regulatory, and other expenses to support key new products and markets and an increase in bad debt expense."
  • FY2012 Update:
    • "The Company expects fiscal 2012 Diluted EPS to exceed $2.15 and, as a result of seasonal trends, expects first quarter fiscal 2012 Diluted EPS to exceed $0.40."
    • Tax rate: 36-37%
    • "Gaming equipment margin improvement over the fiscal year, and continued weakness in the replacement cycle."
    • "Assumes the Company will begin generating revenues from Canadian system procurements, the Italian VLT market, and Aqueduct in late calendar 2011, which will accelerate during calendar 2012."


  • Customers' businesses are now improving
  • Annual diluted EPS was in line with guidance given last quarter when adjusting for tender and debt extinguishment costs
  • Nearly all their units sold in NA were replacements
  • They estimate their share was 19% vs 17% last Q
  • Began shipping Pro-Curve this quarter which contributed to their high ASP in the quarter 
  • Anticipate similar growth in maintenance revenues in FY12'
  • FY tax provision were positively impacted by the IRS settlement and reinstatement of the R&D tax credit and their Indian R&D facility
  • Had $200MM of liquidity and $150MM remaining under their stock repurchase plan
  • Inventory increase is due to Italian inventory build which they expect to begin to deploy later this year
  • Replacement game sales were the best in 6 quarters for BYI
  • 77% of their domestic sales were video slots. Pro Series was 72% of their shipments this quarter
  • Playboy Hot Zone was a hot seller this quarter
  • Pro Series continues to gain traction domestically and internationally
  • High ASPs were driven by Pro Series sales
  • Majority of their games sold were royalty based titles which carry lower margins (same for their conversion kit sales)
  • Completed 10 major go-lives this quarter - 7 of which were competitive replacements.  Galaxy Macau also went live this quarter. Roughly 50% of the installments were in small casino.  They have 64% share in Macau systems share. Their table view product had over 30% share
  • This quarter was one of their biggest systems 'wins' quarter.  Due to a seasonably low number of go lives in the F1 they expect low systems revenues in the September
  • BYI is the leading US Italian slot supplier
  • Canada revenue recognition should start in 6 months
  • FY outlook:
    • Guidance impacted by higher tax rate and continued investment in initiatives which won't hit until the end of the year. First half of the year will be one of investment and back half one of harvesting


  • Canada contract still isn't signed but expect timing should still be intact
  • View on buybacks?
    • Want to leave dry powder for customer financing and Italy/Aqueduct capex
    • Other than that expect to be opportunistic in buying back their stock
    • Italy and Aqueduct capex:
      • 5,400 units in Italy at $7.5-8k
      • Aqueduct - 50% of the units at roughly the same cost ($7.5-8k)
  • $1.97 is the normalized earnings rate for FY11 as an apples to apples comparison their guidance ($0.22 cents of tender, $0.05 debt extinguishment costs, $0.12 of higher tax rate expense)
    • SG&A will grow slightly next year (4Q run rate)
  • Think that they can get 10% cost reductions on the Pro-Series. Expect margins to slowly increase over the next 4 quarters and return to normal in FY13
  • If not for the turmoil in the markets today there is no reason to assume any uptick in replacements although they are assuming for a small uptick in shipshare, small uptick in game ops due to their good game content and Aqueduct/Italy opportunity. Timing of Italy and Canada are also difficult to project
  • iVIEW DM could be a rocket ship or a slow growth driver
  • If you calendarized their FY12 4Q you'd get to a really healthy number
  • Performance of Pro-Series are very strong
  • Margins on boxes vs. other revenue?
    • Used games aren't a material contributor to their revenues
    • The largest impact in the quarter was that more of their cabinets and conversion kits were heavily weighted towards royalty themes
  • iVIEW DM margins should be north of 50% - so above most hardware margins but below their software margins. However, the iVIEWs will drive the sale of software bonusing applications which have really high margins
  • Jump in progressives is due to Betty Boop and Money Vault. Made a consious effort to reinvest in their WAP network and will showcase more exciting product during G2E
  • September quarter is a seasonally weak quarter in generally - so it's not a good time for new orders and system installations since its a busy quarter for them.  Also G2E is early this year
  • New South Wales - shipped 100 units this quarter
    • Will start selling into more markets there soon. They are excited about the market and expect to do better as the year progresses.
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