BYI delivers a high quality Q in the face of many hurdles. Outlook is even better.  



As we wrote about in our 10/06/11 note “BYI: WE'VE GOT THAT GOOD FEELING”, we thought BYI would finally beat the Street.  While EPS was in-line with our estimate, it exceeded consensus and the quality was even better than we expected.  BYI printed a high quality beat despite the lack of a replacement cycle pick up and new openings/expansions.  There were a few cents of negative FX impact but BYI was still able to beat the street – and meet our expectations.   With the toughest quarter of the year out of the way, the path to better results is becoming more visible indeed.


BYI’s $195MM of revenue exceeded our estimate by 2% and EPS was spot in-line.  The biggest upside to our revenue came from gaming equipment sales.  Gross margin of $124MM was also 2% ahead of our estimate with the most upside coming from systems and some downside coming from gaming operations margins.  Read on for more detail.




Gaming equipment sales of $64MM was 5% higher than we estimated due to more units sold in NA and a higher ASP

  • New units sold came in 149 ahead of our estimate – with all the upside in NA.  Almost all of the 2,345 units sold were replacement units.  It does appear that BYI gained share although we won’t know the extent until the other suppliers report their results.
  • Margins were light but that was well telegraphed by the company

Systems sales came in 1% above our estimate and margins were almost 4% better which isn’t entirely surprising.  Given the lack of new openings, most of what is being sold is software driven which provides much higher margins.  As revenues pick up in Systems for the balance of the year, we would expect margins in the low 70s.

  • We estimate that every unit hooked up to a BYI system is earnings of almost 48 cents of recurring revenue per day.  Once the DM’s in their backlog start getting installed, there should be decent upside to that number.

Gaming operations revenue was 1% better than we estimated but margins were 3% lower.  Lower margins are at least partly attributable to a higher mix of WAPs which carry lower margins.  Most of the new WAPs are licensed titles and also have jackpot funding expenses.  Not that they should apologize since the absolute dollar contribution from these units is still very high.


Other stuff:

  • SG&A, R&D,  D&A, and net interest expense were all in-line with our estimate
  • SG&A should tick up next Q with the inclusion of G2E which usually adds a few million dollars of expense




TODAY’S S&P 500 SET-UP - October 27, 2011


Keith take on the today’s news from Europe – if you gave me the press release (that’s effectively rolling out as more a game of chicken than anything else this morning), I would have probably stayed short the SPY! The headline the media is rolling w/ of 1-1.4T can be any # really because all the Eurocrats are doing is slapping theoretical leverage multiples on the agreed baseline number. No ECB or IMF backstop here – just hopes that they can get the IMF to start to coordinate before they have to make Mario Draghi fold (ECB) to the political will.  Mechanically, here’s what happens next for these insolvent banks: 1st they have to tap the public market to raise equity (good luck); then, if that doesn’t work (ie stocks fall), they tap their national government; then EFSF is “last resort.” This will take time and a lot of marked-to-market risk on the front end of this floater (hey Deutsche Bank, want to do a secondary?). Stay tuned


As we look at today’s set up for the S&P 500, the range is 32 points or -1.29% downside to 1226 and 1.93% upside to 1266. 




Yesterday, Keith sold long-term Treasuries (TLT) and booked the gain in the SHORT (SPY). 









  • ADVANCE/DECLINE LINE: +1839 (-3818) 
  • VOLUME: NYSE 1109.06 (+9.98%)
  • VIX:  29.86 -7.32% YTD PERFORMANCE: +68.23%
  • SPX PUT/CALL RATIO: 1.63 from 1.94 (-16.23%)




TREASURIES: 10yr yield not confirming a TREND breakout for growth either; i'd need to see a close > 2.39% for that

  • TED SPREAD: 41.46
  • 3-MONTH T-BILL YIELD: 0.02%
  • 10-Year: 2.23 from 2.14    
  • YIELD CURVE: 1.95 from 1.88


MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Net export sales
  • 8:30am: GDP, est. 2.5%, prior 1.3%
  • 8:30am: Personal consumption, est. 1.9%, prior 0.7%
  • 8:30am: Jobless claims, est. 401k, prior 403k
  • 9:45am: Bloomberg Consumer Comfort, prior (-48.4)
  • 10am: Pending home sales, est. 0.3%, prior (-1.2%)
  • 10am: Freddie Mac 30-yr mortgage rates
  • 10:30am: EIA natural gas storage, est. 87, prior 103
  • 11am: Kansas City Fed, est. 8
  • 1pm: U.S. to sell $29b 7-yr notes


  • EU leaders set 50% write down on Greek debt, boosted rescue fund to EU1t ($1.4t) at crisis summit
  • Greek PM Papandreou said the govt. will likely buy shares in some Greek banks as a result of a planned write down of the country’s debt
  • JP Morgan discouraged by Fed on potential share buyback: WSJ
  • Kodak lenders send board letter on fiduciary duty in asset sale
  • Warren Buffett will be featured speaker at Chicago-area fund-raiser to benefit President Obama’s re-election bid
  • Texas Gov. Rick Perry plans to bypass some Republican presidential debates
  • Obama meets with Czech Republic Prime Minister Petr Necas

COMMODITY/GROWTH EXPECTATION                                             


COMMODITIES: squeezes in oil, copper and gold all look complete - every one of these (were not short any) failing at their TAIL lines.





  • Dreamliner Passengers Enjoy Humid Cabin, ‘Whispering’ Engines
  • Olympus Stock Surges as Kikukawa Quits, Woodford Heads to FBI
  • Ferrari Fetches $3.6 Million as Lamborghini, Aston Martin Stall
  • Sony Buys Ericsson’s Stake in Phone Venture for $1.5 Billion
  • Apple Converges With Chipotle as Companies With Low-Risk Returns
  • Nintendo Predicts First Annual Loss in 30 Years on Yen, 3DS
  • Frank Gehry Looks to Asia for Projects as U.S. Growth Slows
  • German Forgers Face Prison for Scam Worth More Than $22 Million
  • Nokia Starts Marketing Blitz to Win Customers to Lumia Phone
  • Japan’s Retail Sales Fell More Than Expected in September
  • Amazon’s Apple War Costs Investors $13 Billion as Net Misses
  • Costco Seen Gaining Holiday Sales as Shoppers Skittish: Retail
  • Toyota, Ford Cut Production as Thai Floods Disrupt Supplies
  • PPR Gains Most in 18 Months After Revenue Exceeds Estimates
  • Green Mountain Falls After Tilson Comments on SEC Probe
  • Jeronimo Martins Chooses Colombia as Its Second Market Abroad
  • PPR ‘Vigilant’ After Quarterly Sales Beat Analyst Estimates
  • Groupon IPO Said to Ask Triple Amazon’s Price-to-Sales Ratio
  • William Hill 3Q Rev. Up 2%; On Track for FY Expectations
  • Woolworths First-Quarter Revenue Rises 4.9% on Grocery Demand




EURO – squeeze right up to the most painful point of hedge fund resistance; forced stop losses and covering right here and right now should continue; but if the TAIL (1.40) and TREND m(1.42) lines can’t be eclipsed, this could be a generational short selling opportunity when we look back on it.          






CAC – in terms of the levels that matter – every one of the major squeeze markets has rallied right to TREND line resistance; for the CAC, which I think is the most important one of the basket because of their bank exposures, TREND line resistance = 3411; so watch that and SPY 1266 (TAIL).







Japan September retail sales (1.2%) y/y vs cons (0.1%). Bank of Japan maintains interest rates at 0-0.1%.








The Hedgeye Macro Team

Howard Penney

Managing Director


In-line with our estimate but above the Street. Story coming together; visibility improving.



“Our investments of recent years are beginning to pay off with good revenue growth across all three divisions and strong
customer interest in a variety of our new games and systems products” 


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




  • “We signed several large contracts recently which have improved our long-term visibility, allowing us to better gauge the back half of fiscal 2012. “The large contract wins of late have resulted in the highest value of systems deals closed in our history, but there are still several months of planning to be done on a few of these implementations before we begin to generate meaningful revenues. With the increased visibility, we are comfortable establishing an upper end to our Diluted EPS expectations for the remainder of fiscal 2012. Accordingly, we now expect fiscal 2012 Diluted EPS of $2.20 to $2.45.”
  • “During the quarter, we allocated free cash flow to a number of sources including our gaming operations footprint through incremental wide-area progressive placements and build-out of units for Resorts World New York, debt reduction, repurchases of our common stock, and the acquisition of MacroView Labs"
  • “This quarter represents the 16th quarter in a row that we have repurchased stock. Since June 30, 2011, we purchased approximately 1.2 million shares of common stock for $36 million at $29.07 per share, of which $31 million was in our first quarter.”
    • $64MM available under the terms of the credit facility for buyback basket for FY12' and $116MM under the share purchase plan authorization
    • Once leverage falls below 2x there the restriction on buybacks falls away. BYI's current Adjusted Leverage Ratio is 2.04x as of 9/30/11
  • Game sales: 3,399 devices at an ASP of $16.6k
    • ASP's increased "primarily as a result of product mix and an increase in ASP from international sales"
    • International units were 31% of total new unit shipments vs. 29% last year
    • Gross margins declined to 44% "primarily due to higher costs for the initial production runs of the Pro Curve and Pro V32 cabinets, which were released in the back half of fiscal 2011, as well as higher costs due to the mix of royalty-based new-unit game sales and conversion-kit sales."
  • Gaming operations revenue growth was "driven by placement of new premium games throughout the quarter and the performance of the Company's linked progressive systems installed base and lottery systems installed base"
    • “We placed 120 incremental wide-area progressive units during the quarter"
  • System revenue growth was "due to increases in software and services and maintenance revenues"
    • Record maintenance revenue of $18MM
    • Gross margin increased to 76% due to "change in mix of products sold and an increase in maintenance revenues. Specifically, hardware sales were 28% of systems revenues, and software and service sales were 33%, as compared to 38% for hardware and 23% for software and services in the same period last year."
  • "SG&A increased $6 million primarily due to increases in payroll, regulatory and legal, and other infrastructure expenses to support key new markets and an increase in bad debt"



  • Very excited about their systems backlog which provides them with several years of visibility.  Early revenues from this backlog will be largely software driven.
  • They had a $2MM FX loss in the quarter compared to a gain last year
  • Nearly all of the units sold in NA were replacement units.  Believe that they had 19-20% ship share.
  • Continue to expect game sales margins to increase slightly throughout the year
  • Betty Boop and Money Ball drove increases in WAP units
  • Since G2E, they received orders from several customers where BYI's games are very under-represented.  Interest in competitive replacements in systems has picked up.
  • Pro-Series cabinets made up 75% of their WW shipments this quarter
  • Average win per day of BYI's WAP units reached record levels
  • Second Phase of Acqueduct is expected to open in a few months
  • Continued delay in the Italian approval process is their only disappointment this quarter
  • Completed 9 major go-lives this quarter (mostly international) and 17 major upgrades
  • Seeing a significant increase in customer demand for customer services
  • Majority of their iVIEW sales were DM
  • Signed major contracts with Sun International and BCLC which will help drive revenues in F13' and beyond



  • Systems business margins vary greatly based on hardware mix. Continue to feel like low 70-75% is a good range for systems.  iVIEW DM sales has margins of 50-65%. 
  • Centrally determined systems hook ups have been decreasing - why?
    • 9,000 system connections through iVIEW in Mexico. Had a customer convert those units - which are at a very low daily fee.  Don't expect any more events like that.
  • Acqueduct - added 1,200 units in the F2Q; December Ph2 should double their load and add another 1,200 units for them.  Their share is 6.25% of win.  Think that it should be even better than Yonkers and should be more profitable than their other NY business.
  • Grease - April; Michael Jackson - June release timing.  
  • Seeing a greater optimism coming their way from customers. 
  • Step up in promotional activity and discounting around the show? 
    • The promotional environment has been tough for a few years now.  They have tried not to be too promotional.
  • Will continue to look at M&A over the near term but really focused on execution of core business
  • Working on reducing the cost of the Pro-Series cabinets.  Think that they can improve margins by 100-200bps over the next 2 quarters. Over 5 quarters, they think they can get to high 40's margins.
  • R&D: They may have some incremental R&D investment from new product lines.  R&D is down to 12% of revenues. Even though R&D spend growth should continue, they do expect revenues to grow faster.
  • Need to sell more conversion kits to get to +50% margins
  • Systems competitive state hasn't really changed but BYI is a lot more competitive within the space than before.
  • Pricing plays less of a role in systems selection than game sales
  • Pro-Curve - have 3 titles out and 17 in the pipeline
  • Expect the % of licensed titles to trend down going forward on game sales 
  • Have a very small contribution from Italian modeled for F12' but still very positive on that market for '13
  • Assume that they will have some upward tick in ship share.  Remain fairly cautious on replacement market size. 
  • There were only 10,000 new openings and expansions in calendar '11 but that should double in calendar '12
  • Do expect gaming operations to continue to grow YoY in F2012
  • Change in guidance is due to more overall visibility, more clarity on systems, more visibility on Alpha 2 client feedback and success of WAP rollout
  • They assume they can purchase another $30-40MM of stock for the rest of the year but it's not really embedded in their guidance
  • New openings share has been trending upward over the last year or so.  Have 2 separate WAP links so they aren't  really cannabalizing their existing WAP link
  • G2E expenses to be in the December quarter.  Had a little less bad debt in SG&A this quarter vs. last but there was nothing unusual.
  • Expect an improvement in game sales margins over the 44%
  • If not for the uptick in taxes and FX issue (3-4 cent adverse impact), their EPS would have been 5 cents better
  • Demand for iVIEW DM has definitely picked up.  For some customers the implementation takes a while; for others, it takes a few weeks.  iVIEW DM is much better positioned than IGT's Sb Window.
  • Their games in Australia are doing very well but they are still going through some regulatory issues
  • Ohio is moving along; IL is moving along slowly - probably 13' revenue opp; MA is moving along slowly but will take several years to generate revenue; FL is too hard to call.  Gaming ops continues to be a growth area and they are still relatively under-represented in NA currently - regardless of new market roll out. 


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Today’s EU Summit Agreement: Nada

Positions in Europe: Short EUR-USD (FXE)

Today’s statement from the EU Summit confirms our position that the Eurocrats wouldn’t reveal anything close to the market’s hope of a “Bazooka” to address the region’s sovereign debt and banking imbalances. Now it appears France’s Sarkozy will be kneeling at China’s doorstep (followed by Germany) over the next two days to plead for funding.  A mismanaged European soap opera this is indeed…


In fact, today’s decision concluded so little that it will likely be weeks before we get some form of a concrete resolution(s). [For our position going into today see our post on 10/24 title “European Risk Monitor: At the Halfway Point? No Chance.”]   


To read the mere 3-page conclusion of today’s meeting click on the link below. (You may need to copy and paste the link into your browser to view):


A few pressing items that are clearly missing or not appropriately defined in today’s statement include:

  • Bank Recaps -- How much must European banks raise to recapitalize themselves? No measures were offered in the very likely case that not all banks can accomplish this. If the market is going to feel comfortable with this “plan”, there will need to be firm mandates on the size, scope, and timing of these recapitalization, as well as secondary plans should the banks not be able to accomplish the recap themselves. What are the nationalization strategies? How will the EFSF contribute to support banks when such measures aren’t clearly outlined, and more importantly, the facility is undercapitalized to support banks and sovereigns across the region at its present level?  The web of cross-country exposures and derivative impact makes answering these questions all the more difficult.
  • EFSF -- Is the EFSF going to be enlarged? And how? Through ECB contribution, member states posting more collateral against the EFSF, increased IMF contribution? We’re of the opinion that so long as the ECB is not going to directly support bolstering the EFSF, we don’t see any hope of expanding the facility in short order, unless the Chinese ride in on a white horse. The most recent example is the grave effort it took (months) for member states to ratify the July 21st EFSF, which didn’t even boost the current size of the facility.

Interestingly, Germany’s Bundestag approved the expansion of the EFSF today, however the mandate stated that the EFSF cannot be financed via the ECB and the ECB will no longer need to buy bonds on the secondary market. We’re left scratching our head on the first point. To the second, it’s clear that the ECB expected the SMP (bond purchasing program) to be temporary. However, and while the SMP cannot solely blanket sovereign risks (think Italy and Spain in particular), it’s in no one’s benefit for immediate termination of this facility.   

  • Greek Haircuts --There’s still no specific guidance on the haircut international lenders should assume: 21% (as proposal 3 months ago) or closer to the 50-60% range supported by the German camp and whispered by the IMF this morning?

Any haircut on Greek debt will be a technical default, so it’s clear Eurocrats will push out and tip-toe around the subject to define it in all terms other than what it is to shield issues around the constitutionality of a default within the Eurozone. Remember, there’s no specific language that provides guidance for debt default/”forgiveness” in any of the major treaties.   


Matthew Hedrick

Senior Analyst


In preparation for LVS's 3Q earnings release tomorrow, we’ve put together the recent pertinent forward looking company commentary


Post Earnings Commentary - DB AG/ UBS/ CLSA Conferences and LVS Investor Day



  • “There was a general consensus that the company should consider – seriously consider paying a dividend in 2012. We would expect to make any announcements regarding a dividend sometime in 2012."
  • “A significant amount of capital requirements were going out over the last number of years...are going down.  We do have an annual cash requirement of somewhere around $300 million to $400 million for maintenance of our buildings and things like that to keep them competitive, which we now have the cash to do.”


  • “We haven’t seen any indicators of any slowdown in Macau.  Obviously, it’s hard to say that business is going to continue to go at 45% to 50% growth rates.”
  • [Typhoon impact] “It had absolutely zero negative impact on our business.”
  • “The Conrad and Holiday Inn will open sometime by the end of the first quarter of ‘12.  That will be 600 Conrad rooms and 1,200 or so Holiday Inn rooms, and one casino and a full complement of VIP space with about 100 some-odd tables in VIP, a little bit more than that.  The second phase will open at the end of the third quarter, which will be 2,000 Sheraton rooms.  And that would be with another casino, the second casino on the plan.  And then the next stage, sometime early ‘13, will be the last 2,000 rooms of the Sheraton complex, the Sheraton Tower building.  And that is on schedule to open as we speak; no changes have been made in that.”
  • “We’re going to have approximately 450 junket tables by the completion of Sands Cotai, which means it’s an extraordinary amount of tables to have.  And so the goal is to first sit down with the top-tier junkets.  We’re trying to stay focused.  There’s a lot of junkets in Macau.  Our first goal is to resurrect those relationships and convince them we’re sincere about this.”
  • [Four Seasons Co-op] “We believe that we will get an approval on a co-op basis.  In other words, a share basis and then a strata basis that we will be required to put a percentage of the rooms into a hotel pool.  If I had to guess today, I would guess at about 10% and we are asking for permission to take the top four floors of the Four Seasons and convert them to VIP space.  So, when you look at the business model, it’s really the best of all worlds in that we not only get a recurring cash stream on the VIP rooms, but we get to monetize about two-thirds of the building in terms of the assets through a co-op share purchase program.  The 10% of the rooms, which would be probably about 30 rooms, we will need those in any event to service properly the VIP rooms that we’re adding to the Four Season’s top floors.”
  • [ROIC on Cotai projects] “We really target a return on invested capital on most of our development projects north of 20% ($800MM)”


  • “There is no capacity issue in the VIP segment of our business in Singapore.  There’s plenty of tables and there’s plenty of room to accommodate people.”
  • “Capacity is in play on the mass slot side, probably three shifts a weekend on Friday, Saturday and Sunday.  So there is capacity in the sense we get that 80% occupancy on the slot machines, which in essence is truly a capacity constraint situation.  There are days when you’re winning $2.5 million in slot machines in Singapore that capacity is certainly a concern – ETG and slot.  There is no problem in the mass table side, which is the other huge piece of our business.”


  • “We’ve added a 300-room hotel there, a shopping mall that will open this fall and an event center that will open next spring.”


Q4 Conference Call:


  • “The opening of lot 5 is still on target for the end of quarter one next year...The property will also open with a variety of retail offerings, more than 300,000 square feet of meeting space, 11 food and beverage establishments, along with 106,000 square foot casino and VIP gaming areas.  The opening of what we are calling lot 6A... is on track for the third quarter of 2012.  Along with its casino, the opening of lot 6A will include most of the 13.7 million square foot complexes remaining dining, entertainment, retail and meeting facilities.”
  • [VIP initiatives in Macau] “Together with those ongoing efforts, we have now accrued and are embarking on a $125 million capital expenditure campaign, which will help us complete the hardware part of the process.  These capital investments will be used for a variety of projects, several of which will be completed ahead of Chinese New Year in 2012.”
  • “Our mix doesn’t change a lot, we’re still running, the great majority obviously is about four to one in favor of junket.  But as our goal is to not be our direct business but not soften the junket side as a result of favoring VIP.  In the past, we were premium focused.  We want very badly to encourage strong relations with the major junket people in Macao.  We are trying to emphasize if a customer wants to come direct, they can.  I think David figured out that if we want to service both ends of the spectrum, we don’t want to lose our junket perspective." 
  • [Promotional environment after Galaxy Macau] “I think there is more end-up competitions in the town in general.”
  • [Tables in sites 5 & 6] “I think you can estimate comfortably 200, 200 in each and that about 120, 130 in the Plaza for now.”



  • “Demand is quickly starting to outpace supply at Marina Bay Sands, and ADR and occupancy are continuing to rise.”
  • “We still have a couple of more big events coming with Louis Vuitton opening in September and two more nightclubs and about another 30 or 40 retail stores.  So, we’re not a 100% open even yet and we don’t have the subway coming as well, which comes in January or February of ‘12.”
  • “So, essentially, whoever submits for one property will -- the junket of that will be able to work essentially for both properties”


  • “We’ve got a good convention calendar the rest of the year.  That allows us to manage those cash and comps a little better.  I think there is still some upside for us in that area.”
  • “I think generally Vegas market in July, in total, has been pretty good.  I’m hearing from the other competitors that it’s been pretty good.  And I think our performance in July will be above what the expectation levels is for what people are saying about Las Vegas.”


Commodities were mixed over the last week; as the dollar moved lower, grains, dairy and proteins were varied in their respective reactions.  Corn, wheat, coffee, beef, milk and chicken wings all went higher while broilers, cheese, soybeans and pork all declined. 





Coffee prices gained over the last week but have largely been coming down quarter-to-date which has improved investor sentiment for coffee retailers like SBUX, PEET, DNKN, THI, and MCD.  While prices are down almost 20% quarter-to-date, coffee retailers are going to take some time to work through inventory purchased at higher prices so in-store prices will likely remain high for consumers.


Wheat and corn prices going higher is a negative for companies exposed to protein costs – particularly beef as other supply/demand dynamics continue to support price.  In particular, WEN, TXRH and RUTH continue to experience pressure from elevated beef prices.  The trend could last for at last another year, according to some analysts (see “summary” below).


SAFM and TSN, and the broader food processing space, would benefit greatly from a prolonged step-down in grain prices.  We know from the SAFM Investor Conference last week that the company purchased 30-50% of their corn and soybean meal needs through March 2012 during the recent dip.


Chicken Wing prices resumed their move higher and, per our note published on Monday, we expect significant inflation in wing prices starting in 1Q for BWLD.













  • Coffee has risen over the last week as speculation mounts that rains in producing regions of Central America and also Vietnam will impact exports.  Rain in Vietnam has pushed back the schedule for the crop while downpours in Central America may result in crop losses of as much as 1 million bags, according to Archer Consulting, a Brazil-based firm.
  • The gain last week in wheat prices was partially driven by the dry weather in the most drought-affected areas of Texas and Oklahoma that some believe will lessen the prospects of newly planted U.S. crops before winter.  At the same time, Russian competition and concerns over the global economy are weighing on prices today.
  • Corn traded lower over the week as positive reports from the harvest in Illinois came back positive.  Across the growing regions of the U.S., though, yields are highly variable and demand has been reacting to recent dips quite quickly.  Finally, data from the CFTC shows that speculators increased their net-long positions during the week ended 10/18.
  • Cattle herds are likely to continue to shrink for at least another year, according to Cattle-fax analyst Kevin Good, cited on  This year’s drought has exacerbated the declined and, should this trend continue next year it would be bullish for beef prices.
























Chicken (Broilers)





Chicken Wings















Howard Penney

Managing Director


Rory Green





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