08/12/11 08:27AM EDT

I guess we were right to worry about FY12 guidance but this is well below what we expected. Don’t expect our estimate to go there though.

Meet and lower is what we expected, but not this much lower.  Below is management’s guidance for FY2012:

BYI: BAGS OF SAND - sandbags

“At least” $2.15 for FY2012?  Thanks for those two words of comfort.  While sympathetic to current BYI shareholders, we really like the setup for would be investors.  This is a complete sandbag – nothing less.  We scrubbed and scrubbed and we can only get down to $2.40.  Our guess is that the real guidance should’ve been “at least $2.40”.  And to throw salt in the wound – or icing on the cake for new investors – JPM slapped a downgrade on the stock this morning cause it’s now a show-me stock.  This stock could trade with a 2 handle this morning implying a 12x forward 12 month P/E on what we see as a bad case estimate.  Ridiculous but opportune. 

Look, we are pretty certain the gaming supply business will exhibit very strong long-term growth.  What’s really attractive about BYI though, is they have a near term growth driver beginning in the back half of FY12 the other guys don’t have.  I’m talking systems and it is visible.  So even if replacement demand takes another year or two to materialize – mathematically it has to at some point – BYI begins its growth cycle much sooner.  Please see our 8/3/11 note “BYI 4Q POSTVIEW” where we laid out the back ended loaded FY2012 and the systems visibility.

The quarter was actually decent and we didn’t see much in there that was disconcerting – one reason why we don’t buy into the $2.15 number.  Here are some observations from the quarter:

FQ4 Takeaways

  • Despite dire outlooks for the coming fiscal year, it appears that replacements were over 13k units this quarter – up about 20% YoY.  For the first half of the 2011 we estimate NA replacement units were 28.4k, up about 12% YoY while new and expansion units were down 31% to just over 5k units.
  • The only real disappointment this quarter was the low game sales margin for BYI and higher than expected SG&A.
  • For gaming operations at least, we know that licensed titles have about a 10% lower margin than in house themes, so the explanation of lower margins on game sales isn’t complete BS. Nonetheless, we have taken down our margin assumption for game sales in FY12
  • It looks like BYI garnered NA market share of about 18% - although we won’t know for sure until ALL reports – but 18% is a lot better than 14% the last few quarters, and that’s before a full game library is available for Alpha 2
  • Other quarterly observations:
    • Game sales :  North American units were a little better, international a little worse, pricing much better
    • Game Ops was spot in line with our estimate
    • Systems was above our estimate
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